Medtronic Inc. (NYSE:MDT), already looking to reshape its business by laying off thousands of workers, is making another big streamlining move: Canceling contracts worth $2 billion a year with Novation LLC, a group purchasing organization.
The Fridley, Minn.-based medical device maker announced its restructuring plan as part of its third-quarter results release earlier this week. Now Novation says Medtronic is putting the kaibosh on five deals covering cardiovascular and orthopedic products.
“Medtronic stated in a letter to Novation that the company wanted to manage their business relationships with hospitals locally, rather than through a national GPO contract,” according to a Novation press release.
“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, Novation’s senior vice president of sourcing operations, said in prepared remarks. Irving, Texas-based Novation, which is owned by VHA Inc. and the University HealthSystem Consortium, represents more than 25,000 healthcare providers including hospitals, non-acute care centers and academic medical centers.
Medtronic’s move prompted 16 of the consortium’s members to send a letter to MDT chairman and CEO Bill Hawkins expressing their “extreme disappointment” with the company “during this time of unprecedented cost pressures,” according to the release.
“Hospitals in this country are facing more than $155 billion in reduced government reimbursement over the next 10 years, placing an unprecedented burden on their existing fragile financial viability,” according to the release. “Dissolution of the Novation contracts will force health care organizations to develop individual agreements with Medtronic in order to obtain discounted pricing and new terms and conditions.”
One issue that looms large with GPOs is the inclusion of confidentiality clauses in contracts with medical device makers. The so-called “gag” provisions — which Novation eschews in its contracts — bar the sharing of pricing information between hospitals, GPOs and other parties. That practice, Novation said, will drive medical device prices to artificial highs.
“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,” Allen said. “That dynamic will keep prices artificially high and increase costs to the hospitals.”