Late Payments: Public Enemy Number One

15 July 2010 (Last Updated July 15th, 2010 18:30)

Across Europe, the public sector is notorious for failing to pay its medical device suppliers on time. But, asks John Wilkinson of Eucomed, is legislation the right solution, and can it make a difference?

Late Payments: Public Enemy Number One

Paying bills on time is a seemingly straightforward activity that generally does not require extensive pan-European legislation. As individuals everyone signs contracts for goods and services and the majority pays up on the due date, which is usually between zero and 30 days unless an extended credit deal is being used.

But during a recession, late payments tend to increase in the business-to-business (B2B) environment. Banks become less willing to finance working capital as they might have done in more economically buoyant times, and businesses may need to buy time to restructure their debts in the face of falling revenues. There is some justification: it is, after all, better for creditors to take some of the strain in difficult times rather than pushing companies over the edge into bankruptcy, precipitating the loss of money and jobs.

Data from credit management services provider Intrum Justitia acknowledges the rising tide of debt across Europe, and that 60% of late payments is due from the public sector.

This is likely to be of little surprise to medical technology companies, many of which could be considered a 'poster child' for the worst excesses of late payment by governments or government institutions.

Payment behaviour

Overdue bills in Greece are running at 700 days late or more. In Italy and Spain the average is in excess of 200 days and, generally, the situation across Europe is getting worse rather than better. However, this is no recent phenomenon; it is a fixed pattern of payment behaviour that has continued for many years. It can deteriorate in times of financial crisis and improve in times of economic boom, but it never really goes away.

"Hospitals pay late because they in turn are not being reimbursed on time by the health systems that oversee them."

Within even the most unreliable economies there are beacons of good practice and the chronically afflicted. There are also paragons of virtue: governments that already pay on time and have made moves to pay even more rapidly. They recognise the pressure on businesses, particularly small enterprises, and have taken positive steps to pump liquidity into the system by shortening contract payment periods and paying suppliers quickly.

This is a natural, simple and sensible way for governments to respond to the credit crunch and the lack of liquidity in the system. Those governments are to be lauded and do not need legislation to encourage them to observe the contracts that they or their agents have signed.

Medical technology – special case?

Some 80% of the market for medical technologies is in the public sector, and a significant slice of the private sector activity is publicly funded – so the way that the public sector behaves is crucial to the wellbeing of the industry and its ability to improve people's health.

The causes of late payments are varied and it would be over-simplistic to describe all late payers in the same way. However, in many cases, failure to pay on time is due to administrative inefficiency.

B2B relationships are increasingly characterised by slick, largely automated order-to-payment processes: the order is placed; the stock is picked, shipped and delivered; the customer acknowledges receipt; and the payment is automatically triggered on the due date.

Sadly, this sort of IT infrastructure does not exist in much of the public sector and the whole process is a series of paper transactions that are costly and time-consuming. And, if the correct pieces of paper are not in the right place at the right time to trigger a payment, they are also prone to failure.

Legislative pressure would, perhaps, help to encourage inefficient public sector organisations to invest in better systems and remove the labour-intensive bureaucratic processes that persist.

Late payments may also be the result of poor fiscal planning by national governments. Hospitals pay late because they in turn are not being reimbursed on time by the health systems that oversee them, and if it is a choice between paying the staff or delaying the payment of suppliers, then the choice is not difficult.

Payment dilemmas

Sometimes hospitals are paid on time, but the amounts being paid do not reflect the real cost of performing services. Many European countries have turned to Diagnosis Related Groups as a means of managing costs within the system, so that a hospital gets a single fee for each patient that it treats with a particular diagnosis. However, these can easily be reduced by governments without considering the real cost of performing a treatment, leaving a hospital obliged to treat patients but with inadequate funding to perform the treatment properly.

"Intrum Justitia acknowledges the rising tide of debt across Europe, and that 60% of late payments is due from the public sector."

One of the reasons that hospital groups are resisting calls for legislation that obliges them to pay on time is that they do not want to find themselves impossibly trapped between suppliers and payers.

The dilemma is understandable, but policy or legislation that does not address the issue is missing the point and will encourage governments and hospital systems to perpetuate the structural problems behind some of the current late payment issues.

Perhaps the most troubling cause of late payments is where governments wilfully plan to delay payments because they can do it more easily with medical technology companies than other suppliers or creditors.

This constitutes a gross distortion of the public finances and creates hidden liabilities on the economy of the country, which are stored up for the future and can have profound effects on patients in the future.

Medical technology companies are vulnerable to delays in payments for two reasons. Firstly, and in common with several other types of government suppliers, the public sector is often an overwhelmingly large customer and in some cases it is the only customer. As such, the supplier will find it difficult to pursue normal legal channels to recover debt for fear of being discriminated against in future commercial dealings. This is the predominant reason for ensuring that the public sector is the main target for future legislation.

Secondly, there is a significant ethical dimension to the work of medical technology companies. If a business has customers who will not pay, the normal remedy is to withdraw supply. But medical technology companies are in the business of treating patients – some of whom would die without timely and effective treatment – and will not wish to take any action that puts patients in jeopardy.

Long-term fallout

While withdrawing supply or suing a customer for payment are rarely remedies that the medical technology industry would wish to pursue, there are likely longer-term implications for the uneven position in Europe at present.

The vision behind the European Community is couched in terms such as equality, equity and solidarity, all of which point towards building a more homogeneous and fair society. Regional funding is designed to target those who are perceived to be the most disadvantaged, and initiatives to address health inequalities are central to the work of the European Commission's Directorate-General for Health and Consumers.

The fact that there is a gap of more than a decade between the life expectancy of people living in the EU's most advantaged and disadvantaged communities is not something that anyone would be proud of.

On a wider scale, the enormous backlog of payments due to the medical devices sector constitutes money that could be invested in other areas; beyond R&D, new technologies require heavy investment in training if they are to be used safely and effectively. If patients and health systems are to continue to receive the full benefits of new treatments that have transformed lives for so many EU citizens, they must treat suppliers with respect and not as a source of cheap finance.

Areas for investment

"The real problem concerns late payment versus agreed contract terms rather than absolute restrictions to contract terms."

There is no doubt that companies will invest in areas where customers reward their innovation, and delay introducing new technologies in countries or to customers that they do not expect payment from.

New technologies are usually in short supply when they are first introduced and companies need to demonstrate user traction if they are to continue to benefit from the support of their investors, making it is an easy decision to launch new products in 'good' countries and leave the 'bad' ones until much later. This could mean that a citizen in one country may not be able to benefit from a ground-breaking (and life-transforming) technology until several years after citizens in a neighbouring country.

The industry has and will continue to invest in clinical education, which is naturally targeted at health systems that have the will to invest in the medical technology that a company is researching and developing. Late payments are a small but significant disincentive to invest in the infrastructure of poor paying countries.

Ultimately, the downgrading of sovereign debt in some countries may force medical technology companies to review the quality of the debt, even write off a proportion as credit ratings deteriorate. This could create a spiral of issues and lead to wholesale disinvestment in certain regions. This would not be because companies do not wish to do business or help patients; just that the challenges in terms of corporate governance would have become too great.

What is the solution?

During the past two years there has been extensive dialogue about the revision of the EU Late Payments Directive. The latest position has been agreed by a cross-party consensus in the European Parliament and is being reviewed by the member states prior to a vote in Parliament due in June 2010.

The proposals contain many encouraging elements, and no-one doubts the huge endeavour that has taken place to address the failures of the previous legislation. But there are still significant hurdles to be cleared, and it remains to be seen if the new legislation will plug the loopholes that have allowed some member states to ignore the spirit and the letter of the existing directive.

Areas for change

Two issues are outstanding. The first is that the scope of the revision was expanded to include B2B transactions and set a level playing field across public and private sectors. Although there are small and medium-sized enterprises struggling to collect payments from larger corporate entities, there is a real danger that the Late Payments Directive will get tangled up with broader contract law and the freedom of businesses to contract with each other on whatever terms they see fit.

"There are B2B transactions that require more flexibility than the 60-day maximum."

There are undoubtedly B2B transactions that require more flexibility than the 60-day maximum contained in the proposal. From the perspective of the healthcare sector this may not be a big issue as companies tend to contract to pay in 30 days. The real problem concerns late payment versus agreed contract terms rather than absolute restrictions to contract terms. The public sector is the main target, and there is a danger that the inclusion of B2B relationships will be a bridge too far for some member states.

The second area for change is the special latitude introduced for hospitals. Although the magnitude of the problem seems to be disproportionately high in the healthcare sector, this part of the proposal is disappointing. Although hospitals funded by the public finances face challenges, giving them a partial let-off is not a reasonable position. Understanding and dealing with the root causes is what is needed and this is best served by putting the pressure on the end of the chain rather than by removing it.

Everyone understands the real difficulties that exist, especially in challenging economic times, but if the medical technology industry is to play a full role in supporting the development of sustainable, high-quality healthcare for the future, an equitable level playing field is required.