News | March 07, 2011

Medtronic Cancels Major Contracts With Group Purchasing Organization

March 7, 2011 – Last week Medtronic Inc. cancelled its five contracts with Novation LLC, one of the largest U.S. group purchasing organizations (GPOs), which previously represented $2 billion. The contracts included reduced price, large group purchases of cardiovascular and orthopedic devices.

Medtronic stated in a letter to Novation that the company wanted to manage its business relationships with hospitals locally, rather than through a national GPO contract. Several GPOs and their member hospitals fear other larger device companies may follow Medtronic’s example, which may increase healthcare costs with high prices for devices.

Novation is owned by VHA Inc. and the University HealthSystem Consortium (UHC). It is a leading healthcare supply contracting company for more than 25,000 members of VHA Inc. and UHC, two national healthcare alliances, and 5,500 members of Provista LLC, representing 28,000 sites. Novation manages competitive contracts with more than 600 suppliers.

“This move will likely raise costs for member organizations by eliminating the price protection that members benefit from through Novation’s national agreements,” said Pete Allen, senior vice president of sourcing operations at Novation. “In addition, through our contracts members generate cooperative returns and have more favorable terms and conditions. The contracts also protect members from pricing confidentiality clauses, eliminate freight fees and mandate that new technology is added to contracts when the technologies are released.”

In response to Medtronic’s action, 16 of the leading U.S. nonprofit hospitals and academic medical centers sent an open letter to the chairman and CEO of Medtronic, stating their “extreme disappointment” with the company during this time of unprecedented cost pressures. Hospitals in this country are facing more than $155 billion in reduced government reimbursement over the next 10 years, causing issues with hospitals’ financial viability. Dissolution of the Novation contracts will force healthcare organizations to develop individual agreements with Medtronic in order to obtain discounted pricing and new terms and conditions.

“Members have told us that Medtronic’s unilateral decision to cancel its agreements with Novation will likely increase their costs and impair the efficiency with which they conduct business,” stated Allen.

Allen continued, “If medical device manufacturers are successful in limiting hospitals’ ability to understand and discuss pricing with outside parties, then they will be able to sell at price-points that are not rational or relevant. That dynamic will keep prices artificially high and increase costs to the hospitals.”

The Health Industry Group Purchasing Association (HIGPA) also lambasted Medtronic’s actions this week. The broad-based trade association represents 16 group purchasing organizations, including for-profit and nonprofit corporations, purchasing groups, associations, multihospital systems and healthcare provider alliances.

“Medtronic’s recent decision to cancel its GPO contracts puts greed ahead of patients and is nothing short of an attack on America’s hospitals,” said HIGPA President Curtis Rooney. “GPOs work on behalf of hospitals and other healthcare providers, and GPO contracts are based on strong competitive forces. Manufacturers compete with one another to win business by offering the best products and services at the best value. Medtronic has simply abdicated this competitive space in an effort to prevent hospitals from banding together to get the best deals. The result is purely predatory.”

He said Medtronic has left hospitals in isolation to negotiate with a device maker that will now be able to charge whatever local markets will bear. Hospitals will be unable to share nonproprietary data and validate that they are receiving a fair price on the products they buy.

“As a result, the $200 billion medical device industry will be able to leverage its army of salesmen to drive unnecessary utilization and further enforce contractual ‘gag clauses’ to keep prices a secret. This will give device makers a virtually unchecked ability to drive up costs for hospitals and Medicare,” Rooney said. “At a time when all participants to the healthcare delivery system are searching for ways to cut costs, Medtronic is solely concerned with currying favor with Wall Street and driving profits – leaving hospitals and taxpayers to foot the bill.”

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