Hospitals, patients, and the government may end up paying a higher tab for Medtronic products now that the firm has abruptly cancelled contracts with group purchasing organizations (GPOs), a trade group for GPOs charged.
In late February, Medtronic withdrew from agreements with Novation, the nation's largest GPO, covering orthopedic and cardiovascular devices worth a total of $2 billion annually.
According to a report in the Wall Street Journal, the company has also walked away from a spinal products contract with another leading GPO, Premier. Neither Premier nor Medtronic indicated the value of that contract.
The moves drew flak from the Health Industry Group Purchasing Association, which called the cancellations "an attack on American hospitals."
"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," the group said in a statement.
"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," the statement continued. "Hospitals will be unable to share nonproprietary 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."
According to a Novation statement, "This move will likely raise costs for member organizations by eliminating the price protection that members benefit from through Novation's national agreements."
Novation added that 16 of its hospital members had sent Medtronic a letter expressing their "extreme disappointment" with its decision.
In its own statement, Medtronic contended that cancelling the contracts "will ultimately take costs out of the healthcare system."
At the same time, the company also sought to reassure its current customers. "Medtronic expects there to be no disruption in our day to day business operations with our hospital customers, as the vast majority of our contracts (approximately 85%) are already negotiated at the local level," a company statement said.
"It is important to note that Medtronic has not, as is alleged, made a decision to eliminate all GPOs," the statement added. "Rather, in the current healthcare environment where reducing costs is in the best interest of the company, healthcare providers, and patients, we are reviewing our national contracts on a contract-by-contract basis to maximize the value we can provide to our customers. We maintain a good relationships/partnership with several GPOs across our business."
Nevertheless, GPOs and some hospitals worry that Medtronic may be opening a new front in a long battle between device makers and GPOs -- perhaps setting a precedent for other companies.
Manufacturers have complained about the federal government's treatment of GPOs, granting them an exemption from anti-kickback rules that allow GPOs to collect contract administration fees from vendors.
Last October, the Medical Device Manufacturers Association released a study it had commissioned from two well-known economists that criticized the fee structure. The study also indicated that hospitals purchasing medical products in the "aftermarket" without going through GPOs paid lower prices.
The economists, Robert Litan of the Kauffman Foundation and Hal Singer of Navigant Economics, argued that GPOs actually cost the healthcare industry an extra $25 billion annually -- of which Medicare pays nearly half.
However, the study did not account for the fact that GPOs typically return to their hospital members a portion of the fees collected from vendors.
The Government Accountability Office released its own report on GPOs last fall, requested by Sen. Charles Grassley (R-Iowa), a longtime critic of GPOs.
The GAO report found that, in 2008, six large GPOs including Novation and Premier negotiated contracts totalling $108 billion.
Administrative fees paid by vendors such as Medtronic totaled $1.7 billion, of which $1.1 billion was passed along to members of the GPOs.
The GAO also found that GPOs provided a range of services besides negotiating prices for specific products. All six organizations in its study performed clinical evaluations and technology assessments for members, and most offered benchmarking data, supply-chain analyses, and continuing medical education.
A former hospital chief in Wisconsin has sided with the GPOs in the dispute.
Medtronic's abandonment of GPOs "is troubling to say the least," wrote Ed Howe, retired CEO of the Aurora Health Care hospital chain based in Milwaukee, in a blog post.
"It is a move that hurts hospitals, and, in my opinion, it shows that Medtronic wants to avoid a competitive process that has been proven to drive down prices and create transparency."