The Russian Medical Technology Market.

The Russian Medical Technology Market. Opportunities and Challenges for Swiss Companies. The Russian Medical Technology Market. 1

Content Leader: MEDITEX Science & Technology Center, LLC Tel. +7 499 611-17-83, +7 985 926-73-18 Fax +7 499 611-17-83 E-mail: ntc@meditex.info www.meditex.info Project Coordination: Julie Bächtold Swiss Business Hub Russia Embassy of Switzerland Kursovoy Pereulok 7, Moscow 119034 Tel. +7 495 642 64 68 Fax +7 495 225 88 42 julie.baechtold@eda.admin.ch www.eda.admin.ch/moscow Publisher: Medtech Switzerland Wankdorffeldstr. 102 P.O. Box 261 3000 Bern 22 +41 31 335 62 41 contact@medtech-switzerland.com www.medtech-switzerland.com Project Management: Jonas Frey (Medtech Switzerland) Patrick Dümmler (Medtech Switzerland) Editor: Sarah Moyle (Medtech Switzerland) While this report is intended to provide an overview of this specific market and its opportunities at the time of its edition, each individual manufacturer, exporter or company may have to conduct their own analysis to get a better understanding of the possibilities and opportunities available to them. You are encouraged to explore and develop your opportunities based on research and in-depth analysis. Readers should take note that Medtech Switzerland does not guarantee the accuracy of any of the information contained in this report, nor does it necessarily endorse the organizations, associations, companies and individuals listed herein. Readers of this report should verify the accuracy and reliability of the information contained herein before making a business decision. Medtech Switzerland 2011 2 The Russian Medical Technology Market.

Objectives and data base This report focuses on the Russian medical devices and medical products sector. Objectives of the report: To reveal relevant market intelligence for distribution to Swiss medtech companies; To facilitate the strengthening of the Swiss medtech industry with information derived from the report; To increase the efficacy of Swiss medtech export to Russia. The report covers the period from 2009 to 2010 (outlook until 2015) and is intended for Swiss medtech manufacturers and suppliers. Research sources used in the making of this report include the following: federal statistic reports; customs statistics data; information from the legal and regulatory framework; expert interrogation results; scientific and technical literature; analytical overviews; internal data of Meditex; data from medical industry corporations, holding companies, organizations and associations; state procurement data; others. The Russian Medical Technology Market. 3

Contents Objectives and data base...3 Contents...4 foreword...6 CHAPTER I INTRODUCTION INTO RUSSIA...7 1.1. General data...7 1.2. Business environment...8 1.2.1. Political structure...8 1.2.2. Law in Russia...9 1.2.3. Economic environment...9 1.2.4. Foreign trade...10 1.2.5. Competition regulation...10 1.2.6. Business entities...10 1.2.7. Tax system...10 CHAPTER II RUSSIAN HEALTH CARE ENVIRONMENT...11 2.1. Russian healthcare system...11 2.1.1. Healthcare Development Concept 2020...12 2.1.2. Regional level...12 2.1.3. Local (municipal) level...13 2.2. Healthcare financing system...13 2.2.1. Mandatory Medical Insurance (MMI)...14 2.2.2. How Healthcare Facilities are Financed...14 2.3. Relationship of patients, providers, and payers...15 2.4. Healthcare providers...15 2.5. Decision makers...17 2.5.1. State Health Care Service...18 2.5.2. Parallel systems...18 2.5.3. Public procurement within hospitals...18 2.6. Healthcare policy: Current and future federal and regional investment programs into healthcare infrastructure...19 2.7. Most common diseases and causes of death and injury...21 2.8. Opinion leaders...23 4 The Russian Medical Technology Market.

CHAPTER III RUSSIAN MEDICAL TECHNOLOGY MARKET...24 3.1. Size and growth rates of the Russian medical technology market an overview...24 3.2. Medical equipment market criteria forecast...27 3.3. Devices, consumables and medical equipment in Russia...29 3.3.1. Facts and figures for devices...29 3.3.2. Major Russian medical companies and market share estimates...31 3.3.3. Major non-russian corporations in Russia...33 3.3.4. Orthopedic equipment...33 3.3.5. Demand for Pharmaceutical and medical technologies... 34 Medical industry development strategy...35 CHAPTER IV REGULATORY AND REIMBURSEMENT ENVIRONMENT...37 4.1. Product classifications and necessary licenses for importation and distribution of medical equipment and medical devices...37 4.2. Approval process for new products, compliance issues... 38 4.3. Possible penalties... 40 4.4. IP protection and patent issues... 40 4.5. Medical devices purchase and reimbursement... 40 4.6. How to influence decision makers...42 4.7. Marketing and distribution channels for devices/consumables and equipment...43 4.8. Considerations for market entry...43 CHAPTER V USEFUL CONTACTS...43 5.1. Government agencies...43 5.2. Trade and industry associations... 44 5.3. Trade shows... 44 5.4. Publications, journals...45 5.5. Service providers (specialized lawyers, consultants)...45 5.6. Marketing and distribution partners...45 The Russian Medical Technology Market. 5

FOREWORD The current Russian medical devices market is not large (about 2,5 billion EUR, 2010), but it s potential makes it very attractive for investment. The total market growth rates for the last 10 years have exceeded 10 percent annually with medical industry analysts predicting steady growth for the next five years. The Russian medtech market is attractive for several reasons: the economy has expanded rapidly, per capita gross national income is substantially greater than in most other emerging markets, and the medical technology market is maintaining double-digit growth rates. In addition, the Russian government appears to be increasingly aware of the importance of boosting state investment in healthcare. However, multinational companies will have to overcome substantial hurdles in order to capitalize on the opportunities that exist in the Russian medtech market. Currently several legal challenges stand in the way of immediate and easy foreign entrance into the Russian medtech market. In general, Russia is aligned with basic international and European legal standards in IP, device approval, and tech transfer procedures. To date however, there remain seminal differences in both the general legal perspective and specific handling of IP and regulatory issues when compared to Switzerland. In short, Russia does not have a developed legislative basis for the medical device market. A comprehensive Medical Devices Law has been discussed over the past five years in parliament, but has not been adopted. As Russia pushes to advance laws and standards, the legal environment is likely to change rapidly and could pose challenges for foreign companies seeking to navigate through the system. Furthermore, legal and legislative governance in Russia may be biased in favour of Russian companies and is likely to endorse future legislation that could be potentially unfriendly to foreign companies seeking to enter the market. Seeking device approval can present its own challenge and may require an alliance with a Russian consultant or legal entity. Currently there are a number of regulatory documents including orders and instructions issued by the Ministry of Healthcare and Social Development, regulating different aspects of the licensing, registration and certification processes. Establishing a direct Russian partnership in the legal sector is advantageous in making sure compliance with the regulatory and licensing laws are followed correctly, as well as to ensure that sudden changes to the laws are tracked and observed accordingly. The state registration licensing and certification processes needs to be reformed to become less lengthy, less expensive and more transparent before foreign companies could exist in Russia independently. In this report we have included a glossary and suggest the careful reading of the term Medical Device before continuing to the report in whole. While this report uses terms which are considered common in the Swiss medical technologies industry, it is important to note that identical terms in Russia, and in this report, may not have an identical meaning as it is understood in Switzerland. The general meaning of the word hospital for instance does not always imply a stocked and up-to-date medical facility. Many Russian health outposts lack basic equipment and may have only one doctor or nurse present some days of the week. In addition, this report does not make a distinction between the words medical device, medical equipment, and medical technology, and will use these terms interchangeably and with inclusion of consumables and possibly some pharmaceuticals. Raw data that available for this report did not allow us to make fine distinctions between different sectors of the biomedical and device industries. Getting reliable and more detailed data remains a challenge. Despite these challenges however, Russia offers the possibility of a massive opportunity. While Russia may lack many of the operational conventions that Western Europe and the U.S. ascribe to, it does offer a sizeable incentive through the existence of an enormous population coupled to a hopeful government. The amount of money that the Russian Federation has described in its new health initiatives is significant and likely to be forthcoming due to its mandatory medical insurance laws. Every market around the globe has its own challenges and rewards which demand flexibility and diligence from foreign companies seeking entry. We hope that this report will provide the reader with a general overview of the current economic and political climate in the Russian medical technologies sector and motivate further investigations into the breadth of possibilities that Russia offers. Medtech Switzerland, November 2011 6 The Russian Medical Technology Market.

CHAPTER I INTRODUCTION INTO RUSSIA With 17 million km2 of surface area, the Russian Federation is the largest country in the world, extending over much of the northern part of Eurasia. To the west, it borders Ukraine, Belarus, Poland and the Baltic countries; to the north, Finland, Norway and the Baltic republics; and to the south, Georgia, Azerbaijan, Kazakhstan, Mongolia, China, and North Korea. Russia has a coastline on three oceans: the Arctic, the Atlantic and the Pacific. It is rich in natural resources, having major deposits of oil, natural gas, coal, timber, and an assortment of minerals. Figure 1. Russia on the globe map. 1.1. General data Figure 2. Subjects of the Russian Federation The Russian Medical Technology Market. 7

The Russian Federation comprises 83 regional entities (named, Subjects of the Russian Federation), which are grouped into eight Federal Districts and governed by the President s envoys. There are 11 cities with a population of over 1 million people: Moscow (the capital), St Petersburg, Novosibirsk, Nizhny Novgorod, Ekaterinburg, Samara, Omsk, Kazan, Chelyabinsk, Rostov-on-Don and Ufa. Figure 3. Map of Russia. Resident population and GD P Table 1. Resident population Year Total population (in population distribution Population dist. as a % of total population millions) urban rural urban rural 2009 141,9 103,7 38.2 73 27 2010 141,9 103,7 38.2 73 27 (Source: ROSSTAT) Table 2. Life expectancy for Russia, 2 010 2 015 Years Low variant forecast Medium variant forecast High variant forecast Males and Females Males Females Males and Females Males Females Males and Females Males 2010 68,5 62,5 74,6 69,4 63,4 75,4 69,6 63,7 75,5 2011 68,6 62,6 74,7 69,9 63,9 75,9 70,0 64,2 75,8 2012 68,8 62,8 74,9 70,2 64,2 76,1 70,5 64,6 76,2 2013 68,9 62,9 74,9 70,5 64,6 76,3 70,8 65,0 76,5 2014 68,9 63,0 75,0 70,7 64,8 76,5 71,2 65,4 76,8 2015 69,0 63,1 75,0 70,9 65,0 76,6 71,5 65,8 77,1 1.2. Business environment Females (Source: ROSSTAT) 1.2.1. Political structure Russia is a democratic federal state based on the rule of law and a republican form of government. State power in Russia is divided among the executive, legislative and judicial branches. Executive power is exercised by the Government, which contains a prime minister, deputy prime ministers and ministers. For the most part, the president is legally distanced from all branches of power, though less distance exists with the executive branch. 8 The Russian Medical Technology Market.

The legislature consists of the bicameral Federal Assembly, which includes both the State Duma (the lower house, or parliament) and the Federation Council (the upper house). The State Duma drafts legis lation, performs constitutional amendments and can file an impeachment motion against the president. The Federation Council approves or rejects laws adopted by the State Duma and appoints high court judges. The judicial branch included the three highest courts: the Supreme Court, the Constitutional Court and the Supreme State Arbitrazh Court. The Supreme Court is the highest judicial body for all lower courts. It considers civil, criminal and administrative cases. The Constitutional Court ensures that new laws and decrees do not contradict the constitution. The Supreme State Arbitrazh Court is the highest court for commercial disputes. Additionally it supervises the lower Arbitrazh courts and issues clarifications on interpretations of the law. 1.2.2. Law in Russia The Russian legal system is based on statutory law rather than case law. The main legal acts are the Constitution, federal constitutional laws, federal laws, presidential decrees, governmental regulations, and laws of regional constituents of the Russian Federation. The Constitution recognizes the norms of international law, international treaties and agreements with Russia as part of the domestic legal system. If an international treaty or agreement ratified by the Russian Federation establishes rules other than those established by domestic law, the rules of the international agreement apply. 1.2.3. Economic environment Economic policy in Russia is primarily aimed at social, political and economic stability, as well as furthering the development of the institutional structure of the market, and economic diversification. In response to the global economic crisis the Russian government, together with the Central bank, has developed an anti-crisis stimulus package aimed at minimizing and mitigating the scale of the crisis. Main factors of Russia s success: 1. Oil and gas prices 2. Russia s size and hidden resources 3. Russia s resilience 4. Growing: GDP per capita (highest of BRIC) Middle class and disposable income SME sector Business and consumer lending Figure 4. Russian economic parameters, 2 010 (Source: Meditex, 2011) The Russian Medical Technology Market. 9

The business environment in Russia has been steadily improving since the transition from a centrally controlled planned economy to a free market economy, though the economic crisis has had a significant impact on the business climate. In recent years, many reforms have been implemented, the tax system has become fairer and more transparent, Russia has become increasingly integrated with global markets, and customs have improved appreciably. The main problem, especially for small companies, is the availability of financial resources, the commercialization of science-intensive developments and the support of exports. RUB 28 billion was allocated to supporting measures for small- and medium-sized businesses in 2009 2010. 1.2.4. Foreign trade Russia s main trading partners are Germany (turnover USD 39.9 billion), the Netherlands (USD 39.9 billion), China (USD 39.5 billion), Italy (USD 32.9 billion), Belarus (USD 23.4 billion), Ukraine (USD 22.9 billion), Turkey (USD 19.6 billion), the US (USD 18.4 billion), France (USD 17.1 billion), Poland (USD 16.7 billion), Japan (USD 14.5 billion), and Finland (USD 13.1 billion). 1.2.5. Competition regulation The government regulator of market competition policy in Russia is the Federal Antimonopoly Service (FAS). Its primary objective is to ensure compliance with antimonopoly regulations as described by Russian competition law. As a general rule, price controls, where companies must set prices in accordance with state tariffs, exist for natural monopolies such as electricity, gas and railways. In addition, special price regulations have been established for certain other goods and services, including pharmaceutical products and alcoholic beverages. If a company is seen as dominating a market, its prices may also be subject to the control of the anti-monopoly authorities (FAS). 1.2.6. Business entities Companies setting up operations in Russia commonly find themselves in circumstances where a formal legal opinion is required for basic issues that in Western countries would be resolved very easily and usually free of charge. These legal roadblocks can be difficult to navigate and can dramatically change the feasibility of a deal. Foreign investors sometimes underestimate the need to follow important guidelines which can have serious consequences when doing business in Russia. Understanding the basic principles of the legal framework may save considerable time and expense if a future projected business structure (commonly accepted elsewhere) is not advisable or even possible in Russia. Foreign investors can choose from a number of different forms of business representation in Russia ranging from Russian legal entities to representative offices and branches of foreign legal entities. Russian legal entities may be established in various forms, including joint-stock companies, limited liability companies and partnerships. Representative offices of foreign entities are strictly limited to conducting only liaison and support functions. Branch offices are free to perform all of a foreign entity s activities. Many investors opt for branch offices at the outset because these entities are able to engage in any kind of commercial activity, are easier to establish connection with, and are subject to less onerous reporting requirements than other representative Russian companies. However, for many investments including joint ventures and production plants, a Russian legal entity may be better suited to an investor s needs due to issues connected with licensing, customs and privatization of state property, 1.2.7. Tax system The Russian tax system is relatively new and many tax concepts and issues that are standard in most market economies are just beginning to emerge in Russia. The Tax Code of the Russian Federation summarizes the general tax principles, rights and obligations of taxpayers and tax authorities, as well as describing taxes payable and other provisions. The Federal Tax Service, which is responsible for collecting taxes, is subordinate to the Ministry of Finance, which has overall responsibility for collecting state budget revenues and for setting tax policy. Other tax law enforcement bodies include the Federal Agency for Economic and Tax Crimes under the Ministry of Internal Affairs, which is responsible for investigating tax crimes. The Russian tax system revenues fund three budgetary tiers: federal, regional and local. All taxes are legislated at the federal level, although regional and local authorities have the power to set (or reduce) rates and establish procedures for regional or local taxes. Lower-tier authorities cannot grant concessions with respect to taxes governed by a superior authority (i.e., regional authorities cannot grant concessions on federal taxes). 10 The Russian Medical Technology Market.

Figure 5. Russian Tax system RUSSIAN TAX SYSTEM Federal taxes Regional taxes Local taxes Corporate profit tax; Value-added tax; Excise taxes; Personal income tax and Obligatory Social Insurance Contributions; Mineral resources extraction tax; Payments for the use of natural resources; Water tax. Property tax; Transport tax; Tax on gambling. Land tax; Individual Property tax. CHAPTER II RUSSIAN HEALTH CARE ENVIRONMENT 2.1. Russian healthcare system The Russian healthcare system has radically changed since the 1990s. Government initiatives to reform the healthcare system and to open up the economy have caused a rapid growth in the Russian healthcare industry. Essential changes in legislation and the Russian Constitution have occurred such as the 1996 Mandatory Medical Insurance (MMI) act which requires that all citizens receive the right to free health care. After a number of federal and regional laws which have transformed the Russian healthcare system, the government is still working on other healthcare policy documents with emphasis on increasing technology, greater primary care, measures to combat high mortality rate, construction of cardiology centers, and transition to insurance-based healthcare. In 2006, the national project Health was launched to improve the country s healthcare system through improved funding and healthcare infrastructure. This plan not only helps to equip hospitals and clinics with advanced, high-end equipment and ambulance systems, but also aims to build new medical centers, as well as launch nation-wide vaccination programs and free health checks. Importantly, the new initiative opens new possibilities for private-public cooperation including foreign participants. The government has been working on developing international cooperation on healthcare issues by establishing new rules for the medical technology and devices markets and enhancing the role of information management in healthcare system. Figure 5. Healthcare system in Russia Health care system State Insurance Private business The legal basis for health care reform at the federal level is provided by a variety of legislative acts (codes, federal laws), presidential decrees, decisions and proposals of the Government of the Russian Federation, and orders of the Government and of the Ministry of Health and other ministries. The legal base at the regional level is provided by legislative acts enacted by the regional governments. The Russian Medical Technology Market. 11

The main acting law in healthcare is titled Fundamentals of the Russian legislation on citizens health protection (FRLCHP) (1993). The goals of FRLCHP are: 1. to determine the responsibility and com petence of the Russian Federation and the Subjects of the Russian Federation in enacting citizen s health protection according to the Constitution and federal laws, and 2. to determine the responsibility and competence of local governments in terms of supporting and enacting citizens health protection. The law regulates all entities involved in the citizen s health sphere, including business activities, activities of involved institutions and organizations, and state, municipal and private systems of healthcare. It also determines the citizen s own rights in the healthcare sphere and determines the professional rights, duties and responsibilities of medical and pharmaceutical workers, as well as sets up guarantees for their social support and success. When requesting and receiving medical aid, the patient has a right to: 1. Choose a doctor This includes selecting a general practitioner (family doctor) and a specialist. The patient must consider his/her health insurance agreement when making the selection. Access to pre - ven tative care must also be in compliance with patience insurance agreement 2. Patient privacy Information concerning patient requests to seek medical aid, the patient s own personal health conditions, diagnosis, and other private health-related information that was obtained during his\her examination and treatment must be kept private. 2.1.1. Healthcare Development Concept 2020 The new legislation goes beyond the traditional focus on health-care delivery to include issues relating to population health. New focus on topics such as goals for reducing mortality in the working age groups, lowering rates of injuries and alcohol poisoning, and reducing infant and maternal mortality are now included. The legislation also highlights the need for effective action against socially determined conditions such as drug addictions, smoking, hazardous drinking, sexually transmitted diseases, tuberculosis, and AIDS. The Russian government has emphasized expanding new technologies, widening primary care, reducing the length of stay in the hospital, improvement of management, introduction of new systems of payment for facilities and individual providers of services, construction of cardiology centers, and transition to insurance-based healthcare. The major priorities for reform include: 1. Closing the gap between formal commitments to the population and implementing these commitments with available resources, 2. Shifting the current health structure towards greater reliance on integrated primary care, 3. Adopting payment schemes in the healthcare sector that encourage more cost-effective therapeutic choices, and 4. Modernizing the current system of Mandatory Medical Insurance. One the most interesting statements in the new government provisions is the goal to increase the size of insurance premiums to the Mandatory Medical Insurance system (MMI) both for employed and unemployed individuals. An additional point of interest is the proposed transfer to a single channel financing model (via MMI). This change would group fees for medical services with all expense items connected with the maintenance and activity of the corresponding healthcare facilities. With introduction of the single-channel financing model, the medical insurance organizations will become in effect buyers of medical services, signing contracts with providers of medical services and effectively being in charge of the purchasing of medical services from the medical organizations and entities. 2.1.2. Regional level Prior to the 1993 when legislation establishing a mandatory medical insurance system was introduced, regional governments had full control of regional funds for healthcare. Following implementation of the obligatory medical insurance however, regional governments lost a portion of this control to the newly established territorial MMI funds. Due to an incomplete implementation of the health insurance system however, regional and local governments currently retain a significant role in its management. Regions are responsible for ensuring compliance with federal programs. Particular focus is devoted to oversight of general facility quality control including monitoring of infectious diseases which is defined as being of high social priority. Regional governments are not required report to the Ministry of Health with regards to their management of the medical facilities. Following decentralization in the early to mid-1990s, Regional governments have enjoyed considerable autonomy within their administrative units. Regional healthcare facilities usually include one hospital (with approximately 1000 beds), a children hospital (approx. 400 beds) and an outpatient clinic. Regions additionally often maintain specialized healthcare facilities such as the infectious disease department, a tuberculosis clinic, a psychiatric department as well as others. About a quarter of primary care facilities and over 70% of diagnostic centers are regional. 12 The Russian Medical Technology Market.

2.1.3. Local (municipal) level In many larger cities local or municipal authorities are the primary bodies enforcing the reform process, while in rural areas the central district hospital chiefs have had to assume this responsibility. Following the 2003 law On general principles of organization of local self-government in the Russian Federation, municipal level governments do not have to report to the Federal or Regional level governments but do have to comply with Ministry orders. This poses a problem for health policy since districts do not have to comply with regional level health reforms or other policies, and are only obliged to provide statutory healthcare services within their jurisdiction. In practice, many regions and districts have developed a negotiating procedure so that the local governments remain within the regional Ministry of Health sphere of in fluence. Urban districts (cities) typically have a multifunctional city hospital for adults with about 250 beds and a city hospital for children with about 200 beds. In addition, there are hospitals for emergency care, a 700- bed specialized hospital for infectious diseases and tuberculosis, maternity hospitals, mental and psychoneurological hospitals (of which a few are at the regional level), and other hospitals for people who require round-the-clock care for chronic conditions. Most primary care facilities, independent polyclinics, and some diagnostic centers are municipal. In the case of rural districts, institutions typically include a central hospital with approximately 250 beds which may also serve as a polyclinic. Some districts may have a smaller hospital with about 100 beds. There may be independent polyclinics (not part of a hospital), small polyclinics or ambulatories and health posts staffed by health care professionals. 2.2. Healthcare financing system The support for individual medical aid is financed by the MMI funds according to the Mandatory Medical Insurance program as well as the additional funding bodies at and below the level of the Russian Federation. Through a multi-source funding approach, the Program can offer free medical aid to the citizens of the Russian Federation. Figure 6 illustrates the main financial flow of the Russian healthcare system and is based on the Healthcare Development Concept of the Russian Federation until 2020. Figure 6. Healthcare financing in Russia According to the federal legislation, the financial support of federal healthcare institutions is an obligatory expense of The Russian Federation. The financial support of the activities of municipal healthcare institutions is an expenses obligation bound to the municipality. The Russian Federation is also mandated to financially support medical specializations such as dermatology, tuberculosis clinics, drug abuse centers, cancer clinics and other specialized medical institutions as The Russian Medical Technology Market. 13

is dictated in the Constitution. Funds allocated at the federal level from the federal budget go mainly to the Ministry of Health and Social Development, which in turn are used to finance clinical staff and employee training, research and public health activities, and high cost treatments. Funds from the local budgets go to the local health authorities to finance the same activities as the federal government but at the local level. In addition, local budget funds finance contributions for the non-working and non-paying portions of their respective populations. These payments are to be made on a per capita basis which is agreed upon at the regional level and which cannot be below the average contribution made by employers for each worker. 2.2.1. Mandatory Medical Insurance (MMI) In June 1991 the Law On Medical Insurance of the Citizens of the Russian Federation was adopted. The changes concerning healthcare financing were as follows: 1. Employers transfer insurance premiums for MMI from their employee s salaries; 2. Insurance premiums are collected along with taxes; 3. Insurance premiums for MMI in the unemployed population are paid by the state at the expense of the regional budgetary resources; 4. The conditions associated with receiving care and the allowable volume of care per person is defined in the framework of the MMI and must be confirmed by the government. For regional MMI programs, conditions of care and volume are adopted by regional authorities but must comply with the MMI and governmental guidelines. The cost of insurance premiums is established in accordance with the adopted MMI programs; 5. In addition to mandatory health insurance, Voluntary Medical Insurance (VMI) can also be purchased, though the cost must be paid by the individual or employer of the individual and will not be paid by the government. The insurance health model has stipulated radical innovations. Due to these changes, new businesses such as private insurance and medical agencies have appeared. The businesses and state control bodies which fund state health insurance must sign contracts with individual insurance agencies that select medical institutions, handle patient care, and pay medical facilities for care rendered. Additionally, the new model stipulates that new financial institutions will appear within the framework of the regional and federal branches and will serve to accumulate monies for health expenditures as well as manage spending and monetary transactions. Beginning in the second half of 1993, businesses and institutions were obliged to transfer 3.6% of the employees pay to the government for insurance premiums. In 2009 this mandatory payment was reduced to 3.1 %. Beginning in 2011, the payment has been increased to 5.1%. Since 2011, money has begun to accumulate in the regional and federal MMI funding reserves. 2.2.2. How Healthcare Facilities are Financed Historically, hospitals were paid through line item budgets, based largely on the number of hospital beds available. Polyclinics received funds according to a similar formula that used total number of patient visits in lieu of available beds. These budgets were increased each year on the basis of a centrally agreed figure that covered inflation, growth, etc. A side effect of this system created perverse incentives to expand facilities in order to command greater resources. The shift to a financing system based in part on insurance mechanisms was intended to address these issues and, through insurance-based pricing, creates pressures and incentives for hospitals to reduce the length of stay and to use diagnostic tests and investigations more rationally. The prospective payment method was to fix the price for any particular inpatient case in accordance with a pre-determined list of diagnostic classifications. Payments to polyclinics were to be made by a variety of clinical settings, providing encouragement to treat patients in the ambulatory setting rather than referring them on to hospitals. In addition, it was expected that hospitals and polyclinics would receive some 30% of their finances from the region based on their actual costs. In practice however, the implementation of the new funding system has been more complex and the payment of hospitals has varied from the original proposals. In Figure 6, we can see that at present, a regional healthcare institution (a hospital for example) has 4 sources of financing: 1. Funding from the territory MMI Fund or insurance organization (for staff salaries, incl. social security payments, drugs, clothes, meals for patients etc.) according to the Tariff Agreement; 2. Funding from the regional authorities for a number of services according to the state order (hi-tech services, equipment purchase, facility management and maintenance of healthcare facilities, etc); 14 The Russian Medical Technology Market.

3. Funding from insurance companies according to the tariffs of voluntary or private medical insurance program (VMI); 4. Funding from patients for paid services according to the tariffs of the hospital. A hospital can also receive extra financing from the MMI Fund, regional authorities, and members of the Legislative Assemblies within specific programs. 2.3. Relationship of patients, providers, and payers Medical services are achieved through the interaction between the health service users (patients), providers (medical institutions) and intermediaries (insurance companies), which are uniformly directed at achieving the target needs of each. Unfortunately however, the Russian medical service market maintains a lack of transparency (with the state control over a large part of medical institutions), as well as the insufficient development of commercial services in some sectors of medical care (e.g., outpatient and inpatient care, prevention). The presence of these factors leads to a lack of objective indicators for the evaluation of the quality of MMI assistance, for instance it is impossible to establish a direct correlation between the price and the quality of care provided by medical services. The following points are contradictions and peculiarities in the provision of medical services: 1) Discrepancy of the fairness of pricing; market prices do not always reflect actual prices, even when a large number of health care providers are involved. 2) Lack of patient understanding concerning the prices for medical services at different specialists, and difficulties in accessing such information directly from the attending physician. 3) Disparity between quality of care covered by the state medical insurance versus private insurance coverage, (reflected in the price discrepancy between the two types of treatment coverage). 4) Importance of treatment and patient care coming second to the cost of medical services and supplies 6) The situation in which the existing system in Russia can t promote innovation and improve the quality of services without increasing their cost; 7) Patient choice is reduced; a lack of adequate competition within the medical services industry results in a lack of choice for a patient to go elsewhere for care, even when services undergo a significant price increase. 2.4. Healthcare providers Currently, a number of different types of hospitals and healthcare clinics are in operation. They include: Rural Health Posts These offer basic health checks and facilities for routine examinations, immunizations and minor injuries and cover a population of about 4,000 people. Health Centers These cover larger rural populations of approximately 7,000 people and offer a range of primary care services. They are able to perform minor surgeries and are normally staffed by a team of nurses in conjunction with a pediatrician, a therapist and a midwife or gynecologist. Urban Polyclinics These provide general practice services and include disease screening, treatment for chronic illnesses and on-going care. Depending on their size, urban polyclinics would also house approximately 3 4 specialists from fields such as cardiology, oncology and obstetrics. Special Focus Polyclinics Where pediatricians and specialist ambulatory pediatric care treat children up to the age of 19. Medical treatment facilities have a unified nomenclature and are divided into several umbrella divisions: o Hospitals o Clinics o Medical dispensaries (Specialised clinics) o Outpatient-and-polyclinics o Medical Centres o Emergency medical aid and blood transfusion facilities o The social services institutions for the protection of motherhood and childhood The Russian Medical Technology Market. 15

o Sanatorium-and-spa institutions o Pathology and lab facilities o Military medical facilities o Epidemiological institutions and disease monitoring institutions o Facilities for the education and supervision of patients with chronic or infectious diseases (i.e. tuberculosis, AIDS) o Infectious disease control centers o Disinfecting stations o Pharmacies Table 3. Medical institutions Year Number of hospitals Number of hospital beds Total in Russia Total per 10000 citizens Number of physicians at outpatient-andpolyclinic institutions Total in Russia Capacity of outpatientand-polyclinic institutions (visits per shift) Total in Russia Total per 10000 citizens 2010 6,500 1,373,400 * 96,8 15,300 3,657,800 257,7 * Beds available in 24-hour hospitals (except beds in day hospitals) (Source: ROSSTAT) Table 4. Number of medical staf f personnel Year Number of doctors Number of mid-level medical personnel Total (in, thousands) Total per 10,000 people Total (in thousands) Total per 10,000 people 2010 704,3 49,6 1511,0 106,0 (Source: ROSSTAT) Table 5. Number of doctors in specializations Total (in thousands) Per 10,000 people Total number of doctors in all specializations 704,3 49,6 Therapeutic profile 165,5 11,4 Surgical profile 69,3 4,9 Obstetrician-gynecologists 43,6 5,7 Pediatricians 69,4 32,4 Ophthalmologists 16,7 1,2 Otolaryngologist 12,4 0,9 Neurologists 26,1 1,8 Psychiatrists and Drug/addiction specialists 24,4 1,7 Physiologists 8,9 0,6 Dermatologists and Phlebologists 12,1 0,9 Radiologists 18,3 1,3 Doctors of physical therapy and sports medicine 4,1 0,3 Epidemiologists and pathologists 17,8 1,3 Dentists 59,8 4,2 (Source: ROSSTAT) 16 The Russian Medical Technology Market.

Table 6. Estimates of medical care capacity Indicator 2010 Number of physicians per person: Total (in thousands) 704 Total per 10,000 inhabitants 49.6 Number of medium-level* medical employees : Total (in thousands) 1511 Total per 10 000 inhabitants 106 Number of hospital beds: Total (in thousands) 1398 Total per 10 000 inhabitants 99 Number of medical institutions offering out-patient services (in thousands) 15.6 Capacity of polyclinics (number of patient visits per shift): Total (in thousands) 3651 Total per 10 000 inhabitants 257 Number of maternity consultation offices, children s polyclinics, out-patient clinics, medical centers with maternity and children s sections (in thousands). Number of maternity beds (in thousands) 81 Number of medical and obstetrical rural health stations (in thousands). 39.8 * Medium-level medical employees in Russia are nurses, medical assistances, midwifes etc. (non-doctors). Staff with secondary medical education. 2.5. Decision makers 11.7 (Source: ROSSTAT) Key stakeholders in Russian healthcare are: President Government Ministry of Health and Social Development and it s associated branches (Federal Service on Consumer Protection, Federal Service on Surveillance in Health Care and Social Development, Mandatory Insurance Fund) Regional Ministries of Health City (municipal) health administrations Private insurance companies Authorities of departmental health care systems (about 20) The Russian Medical Technology Market. 17

Table 7. Decision - makers in healthcare Decision-makers in healthcare roles and responsibilities Federal level Regional level Municipal level President and Primeminister approve all significant decisions Ministry of Health develop a strategy and policy in healthcare, plan the health care budget, and develop standards and levels of care (Directives from the Ministry are not mandatory for regional ministries) Federal Government commands the activity of specialized regional projects (i.e. stroke care equipment procurement, reconstruction of hospitals, building of centers) Ministry of Health monitors and controls implementation of projects State Duma (lower chamber of the Russian Parliament) approves budgets for federal health care and Federal Mandatory Insurance Fund s Regional Ministry of health develop health care strategy, plan regional health care budget, regional programs (drug supply etc.), and plan procurement of medical equipment Regional governments approve regional health care budget and regional mandatory insurance fund s budget Plan projects in different sectors (information of health care, one-channel financing, roadside medical care, medical care for vascular diseases) The main workload in implementation and planning of care services falls on the municipal level which is poorly funded and has a dearth of employees and equipment The Health administration at the municipal level plans hospital budgets, approves lists of procured drugs and equipment 2.5.1. State Health Care Service National level The Ministry of Health and Social Development, its branches and associated funds, the Government of the Russian Federation, and the State Duma (legislative branch) Regional level ministries, departments, and committees of State Health Care Service, Governors, administrative personnel from federal city authorities. Local level formulary committees and administrative personnel of medical organizations. 2.5.2. Parallel systems The following organizations have their own Health Care in parallel to the Federal system : The Ministry of Internal Affairs; The Ministry of Defense; The Federal Security Service; The Russian Railways; Large industry corporations such as Gazprom and 30 others. 2.5.3. Public procurement within hospitals In Russia, the acquiring goods and new technologies for a clinic or hospital depends largely on the desires of the individuals who govern that hospital or region. Placing an order involves the participation of the following persons: Responsible executor (deputy chief physician, chief nurse, in accordance with the competence), Head of accounting and reporting department, Head of the finance department, Additional appropriate staff (lawyer, economist, accountant, etc.) Chief physician (Head of the hospital or clinic) Other persons where appropriate in the process of order placement for public procurement 18 The Russian Medical Technology Market.

For more detailed information please see sections: 4.5 IP protection and patent issues 4.6 Medical devices purchase and reimbursement Table 8. Persons and their associated function in the acquisition of new ser vices and medical equipment for a health care facility Person Responsible executor Head of planningfinance department Head of the department of accounting and reporting Lawyer or economist Chief Physician Function Forms the application for the purchase of goods, works, and services. Decides on the contractor for the project, decides the source of funding for the project as well as its funding classification, and can amend plans as they deem appropriate Estimates the revenues and expenditures of the institutions and the associated project applications. Organizes the advising and decision making team involved in the project. Advises on the legal aspects of the project, and the legal process involved in accomplishing goals and aims of the institution. Organizes and coordinates the development of draft contracts. Controls the placement of orders in accordance with the needs of the health care institution. Approves order applications. Confirms the need for the order. Approves the terms of the order and how the order will benefit the institution (i.e. is the order for maintenance of equipment or services, or for on the modernization of medical equipment). Evaluates the competence and capabilities of the individual persons ultimately responsible for using or carrying out the order at the end stage. Specifically, the chief Physician will: Organize and monitor the work of the institution as it carries out the implementation of the order; Ensures that a fair and the uniform distribution of work in relation to the implementation of the order is achieved. 2.6. Healthcare policy: Current and future federal and regional investment programs into healthcare infrastructure The Russian Government has made healthcare reform a national priority. Starting in 2006, the National Priority Project or Zdorovye (meaning health in Russian) was enacted with the main goal to improve the quality of medical services and healthcare standards across the country. This government funded program is targeted at enhancing primary care capacities, purchasing new equipment and improving facilities for public healthcare services. In short this program focuses strongly on providing healthcare based on the latest technological advances. Approximately USD $15 billion has been earmarked from the Federal budget to be spent over the next two years on modernizing Russian healthcare. The Russian government announced its plans to spend approx. USD 7 billion (more than a half of the total funds earmarked for health care reform in the next two years) on upgrading the healthcare system in Russia. The government will spend a further USD 1.3 billion to fully upgrade seven major medical research institutions by 2014. Funds are currently being provided for the construction of 15 high-tech medical centers across the country and for the purchasing of new equipment for hospitals, vehicles, immunization programs, and more. Particularly, RUB 6 billion (USD 200 million) are to be spent for the construction of pediatric medical facilities and include prenatal centers in St Petersburg, Saransk (Republic of Mordovia) and in Republic of Dagestan, a children s hospital in Voronezh and other Russian regions (a total of 17 total new constructions). A further RUB 40 billion (approx. USD 1.3 billion) is to be spent for the development of seven major medical institutions in Moscow, St Petersburg and Novosibirsk and include: the Scientific Center for Obstetrics, Gynecology and Perinatology (Moscow), the Meshalkin Research Institute of Circulatory Pathology (Novosibirsk), the Priorov Central Institute of Trauma and Orthopedics (Moscow), the Research Institute for Organ Transplants and Artificial Organs (Moscow), the Endocrinology Research Center, the Federal Center for Heart, Blood and Endocrinology, as well as the Neurosurgical Institute both in St Petersburg. The Russian Medical Technology Market. 19

As part of the Zdorovye National Project, the construction of new health centers is currently underway, along with procurement of the new equipment for these centers. The 10-year program for infrastructure upgrades includes major capital investment in new hospitals and clinics with a special focus on primary care and preventative treatment. The project also focuses on treatment and prevention of drug abuse, obesity, diabetes, tobacco use, chronic alcohol abuse, cardiovascular diseases and cancer treatment, and involves the opening of 502 health centers across Russia. At these centers, patients will be able to receive information, see a doctor, and access medical treatment. The Zdorovye National Project additionally plans to open 193 Centers of Children s Health, for which the government has allocated RUB 820 million (approx. USD 27 million). Another Federal program in the works, the New E-Healthcare Project, focuses on the development of telemedicine in Russia, upgrading computer systems and software in health care institutions (e.g. digitizing administrative records and upgrading to electronic patient records), and switching to electronic forms for MMI. Recently the head of the Russian Minister of Health, Tatiana Golikova, announced that all regions in Russia will develop and approve programs to modernize Health Care in 2011 2012. Creating programs of modernization is one of the important steps of reform in Russian health care. Previously, the Federal Ministry of Health and Social Development prepared a template program which was adopted in every region. Each program consists of spending allocations in several key regions: construction of new facilities, procurement of medical devices and supplies, modernization and digitization of health care institutions, and support for the implementation of new standards of medical care. All procurement of medical devices will be done according to the Medical Care Regulations. These Regulations allow buyers a significant amount of freedom to choose equipment, devices and materials that they deem necessary. In total, 83 regional programs exist. A detailed description of each program is available at the regional Ministries of Health web site. The description of these programs contains information about funds available in 2011 and 2012, spending in each medical organization, rationale for procurement and need, and description of regional health care systems and facilities. Under the new regional programs, 2011 and 2012 will provide exciting opportunities for medical device manufacturers and distributors in Russia. The total estimated budget for these programs for 2011 and 2012 is USD 22 billion. Approximately USD 16 billion will come from MMI funds with the rest of the funds coming through the regional budgets. Table 9. Estimated purchases in 2 011 2 012 for medical devices and equipment Purchasing program Start date End date Basis for the development Federal projects Project Health the current priority of all the national health projects in the sphere of public health Medical devices for children with auditory disabilities and impaired hearing. Prenatal and neonatal diagnostics Development of a network of perinatal centers Formation of public health education programs Development and improvement of blood service Increased services for vascular diseases 01.01.2006 31.12.2012 01.01.2010 31.12.2012 Concept of public health development from the Russian Federation with aims for continuation through 2020 01.01.2009 31.12.2012 Concept of public health development from the Russian Federation with aims for continuation through 2020 01.01.2009 31.12.2012 Concept of public health development from the Russian Federation with aims for continuation through 2020 01.01.2009 30.12.2012 Concept of public health development from the Russian Federation with aims for continuation through 2020 01.01.2009 31.12.2012 Concept of public health development from the Russian Federation with aims for continuation through 2020 01.01.2008 31.12.2012 Concept of public health development from the Russian Federation with aims for continuation through 2020 20 The Russian Medical Technology Market.