Medtronic Cancels Five Contracts With Hospital Group Purchasing Organization

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The country's largest medical device manufacturer, Medtronic, recently canceled five contracts with hospital group purchasing organization (GPO) Novation worth $2 billion, the GPO said Feb. 24.

Medtronic said it was canceling the contracts, which covered cardiovascular and orthopedic products, in favor of negotiating directly with local hospitals. A health care attorney told BNA that by circumventing the contract middleman, Medtronic's move could have a major impact on the purchasing decision-making process for hospitals in the future.

Novation, based in Irving, Texas, is owned by VHA Inc. and the University HealthSystem Consortium (UHC). In 2009, Novation members used the GPO to purchase $37.8 billion in products and services, the company said.

In a statement, Novation said it had been in “constant contact with Medtronic and has made every effort to maintain member value in these high cost categories.”

In response to Medtronic's action, Novation said that 16 of the leading not-for-profit hospitals and academic medical centers sent an open letter to Medtronic's chairman and chief executive officer stating their “extreme disappointment” with Medtronic. The GPO said its member hospitals could end up paying higher prices, and develop individual agreements with Medtronic, which could “impair the efficiency with which they conduct business.”

Novation also noted that some medical device manufacturers are insisting on strict pricing confidentiality clauses in their local contracts. However, the group said it was unclear whether Medtronic would allow hospitals the ability to share purchasing information with their GPOs or other advisors retained to help manage costs.

“This move will likely raise costs for member organizations by eliminating the price protection that members benefit from through Novation's national agreements,” Pete Allen, senior vice president of sourcing operations at Novation, said in a statement.

Medtronic said in a statement that a “vast majority” of its contracts are already negotiated locally.

The company noted the pressures and challenges of health care reform and economic uncertainty for health care organizations, and said it “will be best able to address the varied needs of our customers by managing our business interactions and relationships locally instead of through Novation.”

Medtronic is based in Fridley, Minn.

'Calculated Decision.'

Michael Gaba, an attorney at Holland & Knight in Washington, told BNA March 1 that Medtronic is making “a calculated and educated decision that it will, at a minimum, protect its profit margin by removing Novation as the broker in its relationships with its hospital, and in turn, its physician customers.”

With health care reform tightening hospital reimbursements, Gaba said GPOs are pressing for even better deals for their customers--the hospitals--by putting the squeeze on medical device companies. He said Medtronic is apparently relying on the strength of its relationship with the physician community to, at the very least, maintain its market share and profitability.

By removing Novation from the purchasing equation, Gaba said Medtronic is doing two things. First, it is eliminating the fee it pays to Novation for the right to sell significant volume of products to its 16 hospitals.

Second, and perhaps of greater value, Gaba said Medtronic is “re-establishing the importance of physicians in these hospitals' purchasing decision-making processes.”

When device companies negotiate directly with hospitals, physicians become the marketing targets because they are the ones using the products or recommending them to patients. When the GPOs become involved, device companies are negotiating volume discounts to sell their products to all the hospitals represented by the GPOs. Physicians still need to state their device preferences to the hospitals, but the companies tend to spend a greater percentage of their sales time with the GPOs, rather than directly with physicians, so the doctors play a lesser role.

Negotiating directly with hospitals can bring up issues of Stark (self-referral) and anti-kickback compliance, to ensure physicians are not receiving compensation for preferred devices. Gaba said that if other medical device companies follow Medtronic's lead and cancel their contracts with GPOs, “they would be wise to review and invigorate their compliance programs to ensure their sales forces are operating within the bounds of the anti-kickback statute and other laws.”

GPO Trade Group.

In a March 7 statement, the Health Industry Group Purchasing Association (HIGPA), which represents 16 group purchasing organizations, criticized Medtronic's move.

HIGPA President Curtis Rooney said that 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.”

Rooney added that GPOs “work on behalf of hospitals and other health care 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.”

According to Rooney, “Without GPO benchmarking, 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 non-proprietary data and validate that they are receiving a fair price on the products they buy. The problem will be even more extreme in small, rural markets where community hospitals will have almost no size or volume to leverage against a $16 billion corporation.” 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.”

By Nathaniel Weixel