The real significance of the introduction of DRGs into Switzerland in January 2012 was brought home to me by a Swiss insurer. “Under the current system we have no way of knowing whether the price we are paying is correct. Someone has a heart attack and goes into hospital for x days. Then we are presented with the bill for treatment. If it is way out of line with our expectations we can question it, but it is not then easy to question the explanation as we have no way of comparing costs.”

Under DRGs, on the other hand, the insurer can see the price broken down by procedure. DRGs also mean that hospitals will no longer be rewarded for just keeping patients in bed for as long as possible.

We don’t yet know what the prices will look like (insurers don’t expect the new DRG pricing to incorporate any price drops on procedures).

But we do know that insurers in Switzerland will certainly take advantage of the opportunity to question bills and compare prices. In Switzerland health insurers compete hard on price to win consumers. And Swiss insurers lead the way in managed care in Europe. something close to 20% of the Swiss have taken advantages of packages which reduce prices by 20-% in exchange for them agreeing to go to providers nominated by the insurer.

Also note that, most unusually in Europe, Swiss insurers are free to negotiate prices with providers - indeed they have a legal duty to do so.

The Swiss insurance market has until recently been a very cosy place with Sante Suisse, a consortium representing all the insurers negotiating prices on an annual basis.

That changed last year when Helsana and Sanitas who together represent about a third of the market, set up on their own purchasing unit, with the avowed intent of negotiating hard on prices. The other large Swiss insurer, CSS, is also rumoured to be planning to break away from Sante Suisse.

Helsana has been innovative in other respects - it has, for instance, negotiated prices with foreign providers for its privately insured patients. Only a hundred Swiss patients a year actually cross the border but the German deal gives Helsana a bit more leverage with Swiss providers. But the absence of DRGs has made it a pretty blunt instrument. DRGs will give Helsana’s crowbar a lot more edge.

All this explains why the introduction of DRGs could damage margins at privately-owned hospitals such as Hirslanden, the big Swiss hospital group owned by Medi-Clinic of South Africa. Whilst Hirslanden is particularly strong in the top end of the market, where the wealthy do not care what they pay it, has increasingly moved into the mandatory insured market (forecast at 32% of sales in 2011) and what it calls the “semi Private” market (37%). Certainly, the fact that it carries out 40% of all private patient cases seen by the Swiss private sector shows its overall significance and also its potential vulnerability.

We don’t know precisely what impact DRGs will have. But it is likely to effectively lead to a big increase in capacity in a country where overcapacity already exists on a massive scale (Switzerland has 300 hospitals, the Netherlands has 100). This is because it removes at a stroke the incentive to keep patients as long as possible. If this leads to a 10% reduction in the length of hospital visit then DRGs will have led directly to a 10% increase in capacity.