Hospital systems across the country join the nonprofit associations as a way to band together and collectively boost their negotiating power as they seek better prices for medical devices and other supplies.
But Medtronic has argued in recent weeks that it could save money for the health-care system if it went around the purchasing associations and negotiated with health providers directly. When asked how this could work when the whole point of the purchasing associations is to keep prices down, Medtronic spokesman Christopher Garland responded in an e-mail that medical device makers such as Medtronic “operate in a highly competitive market.”
“That competitive environment keeps the pricing field relatively level,” Garland said.
Medtronic last month canceled contracts with Novation, a general purchasing organization based in Irving, Texas, and owned by VHA Inc., and the University HealthSystem Consortium.
Novation said at the time that the contracts were worth more than $2 billion annually, and that the end of the contracts involved not only pricing issues but the fact that “some medical device manufacturers are insisting on strict pricing confidentiality clauses in their local contracts as a condition of the agreement” — something Novation opposes.
Since then, Medtronic has also canceled a contract with another major purchasing organization: Charlotte, N.C.-based Premier. Some Wall Street analysts are suggesting that Medtronic’s moves could signal a larger trend in the medical technology industry, with other medical device makers seeking to go around the purchasing organizations.
‘They’re in this for profit’
The Health Industry Group Purchasing Association, a trade group representing the purchasing groups, is meanwhile outraged over Medtronic’s moves. “They’re in this for profit. … They’re obviously going to make money out of it,” said Curtis Rooney, the trade group’s president.
Rooney pointed out that Novation’s and Premier’s income for negotiating the Medtronic contracts was negligible, with each organization receiving less than $10 million in fees annually from Medtronic. Hospitals and hospital material managers say Medtronic’s move will cost them money because it weakens their negotiating power and keeps them from having access to pricing information, Rooney said.
Rooney isn’t exactly sure whether Medtronic is starting a trend either. Some of his trade group’s members have already been approached by other medical technology companies willing to cut deals, he said.
Many hospital systems appear concerned about Medtronic’s actions.
Purchasing managers representing 16 health providers across the country, including Rochester-based Mayo Clinic, sent a letter to Medtronic CEO William Hawkins last month that expressed “extreme disappointment” over the company canceling its Novation contracts.
“Your decision affects our institutions’ ability to deliver the best-possible medical care in the most cost-effective manner possible. As we and other hospitals across the country brace for the impact of federal healthcare reform, it is imperative that Medtronic understand the value we place on our partnerships with healthcare group purchasing organizations like Novation,” the health care executives said in the letter.
Not all health provider executives think Medtronic’s move is necessarily bad. Ridgeview Medical Center is one of the smaller hospital and clinic systems around the Twin Cities, but its chief administrative officer Michael Phelps thinks market competition could still protect Ridgeview from being taken advantage of. Ridgeview, which uses Novation, might even be able to cut better deals with Medtronic than it would have through the purchasing organization, he said.
Potential risks
Still, Phelps worries about cases where there aren’t alternative medical devices available.
“I’m not concerned if there are substitutes in the market, but if a company has a particular device in the market and there are no substitutes, we are at risk,” Phelps said.
Medtronic needs to seek out every possible strategy to boost revenue and earnings. The company announced last month that it planned to lay off between 1,500 and 2,000 workers amid declining year-over-year revenue in its main Cardiac Rhythm Disease Management division.
The medical technology industry faces some important hurdles and Medtronic’s moves demonstrate that it’s trying to find it’s way in the present environment, said Daniel McLaughlin, director of the University of St. Thomas’ Center for Health and Medical Affairs.
There have been few new, breakthrough medical device products in recent years. Physicians, who used to help medical technology companies sell products to hospitals, are “now on the other side of the table with the hospital administrators” as the nature of the health-care industry changes, McLaughlin said.
