Is Medtronic’s cancellation of GPO contracts a prelude to a trend, or just an anomaly?

March 21, 2011 – 12:27 PM | By Holland Johnson | No comments yet

Late last month, Medtronic (Minneapolis) reported that it was cancelling several of its largest contracts with group purchasing organizations (GPOs) worth more than $2 billion collectively. Medtronic said the decision to cancel five contracts with Novation (Irving, Texas) and another with Premier (Charlotte, North Carolina) will save it about $60 million a year.

Wall Street reacted positively to the news and some industry watchers are wondering if other companies will follow suit and bypass GPOs to sell products directly to hospitals. GPOs – which use high volume purchasing power to secure discounts for hospitals, introduce new devices to the market, and claim to save the healthcare system up to $36 billion a year – certainly hope Medtronic’s action does not signal a wider trend.

Last week, Mass Device reported that Medtronic’s CFO, Gary Ellis, told analysts at an investors’ conference, that the company is not making a strategic shift away from GPO contracts

“There’s a lot of speculation around here that a strategic change is going on,” Ellis told analysts at the Barclay’s Capital Investors Conference last week in Miami. “That is not the case.”

He added that the company plans “to maintain our relationships with GPOs that are providing a benefit.”

Chris Garland, a Medtronic spokesman, told Medical Device Daily that the company canceled five of its Novation agreements in an effort to remove costs from the healthcare system. “It is important to note that Medtronic has not, as is alleged, made a decision to eliminate all GPOs,” Garland said. “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.”

Curtis Rooney, president of the Health Industry Group Purchasing Association (Washington) told MDD it is too early to say whether or not this will set a wider trend among device manufacturers but he certainly hopes it does not. Medtronic’s decision to cancel these GPO contracts is “very problematic for hospitals, because they lose their ability to negotiate and be informed during negotiations regarding price,” he said. “They no longer have the ability to benchmark what the price is from a national level . . . and local level . . . there is no way to really get a sense of what the local market is.”

Pete Allen, senior VP of sourcing operations at Novation, told MDD he does not believe other device makers will follow suit and cancel their GPO contracts too.

Allen noted that Medtronic’s rationale for canceling the contracts, taking costs out of the healthcare system, “doesn’t hold up to any level of scrutiny. It’s an assault on the contracting efficiency that hospitals rely on, the reason they join GPOs to begin with.”

So how does Medtronic decide which GPOs are providing a benefit, and how is having fewer GPOs, which streamline costs for hospitals, make the healthcare system better? I suspect the assumed benefit here isn’t solely for the hospital or patients.

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