Medtronic's decision to end GPO contracts could aid rivals

Medtronic's move to cancel with group purchasing organizations Novation and Premier might be backfiring. Although it anticipated that rivals, including St. Jude Medical, would follow its lead, they in fact have gone in the opposite direction, as Dow Jones notes.

In late February, Medtronic informed Novation that it was cancelling five contracts for cardiovascular and orthopedic products valued at $2 billion. The devicemaker said at the time it wanted to negotiate device prices directly with hospitals, rather than through a national GPO contract. The device giant cancelled a contract with Premier for its spinal products roughly a week after it dumped Novation. The company had hoped to save money.

CEO Bill Hawkins said he'd be "shocked" if other device makers didn't also cancel contracts this year, as Dow Jones notes. Medtronic says it paid Novation small fees that it totalled about $8 million, but said it wasn't getting any business advantage. And because it It negotiated directly with hospitals most of the time, it could cut out the middleman, i.e., Novation.

The company then announced it was combining its U.S. cardiac and vascular group sales as of May 1. The move came in response to challenges hospitals are facing in the changing healthcare environment, as well as the increasing importance of the hospital administrator as a decision maker in device selection, according to the company. 

But Hawkins' prediction turned out not to come true. In April, St. Jude Medical inked a 30-month agreement for cardiac rhythm management products with Novation. Roughly two weeks later, the GPO signed on Biotronik as a partner. And Boston Scientific is already a Novation customer. CEO Ray Elliott has said GPO relationships can be complex; "however, through candid discussions, we've always found ample common ground and value to reach agreements with the majority of our GPOs," Dow Jones notes.

J.P. Morgan analyst Michael Weinstein believes Medtronic lost some implantable defibrillator market share in its recent fiscal quarter because of the merging of its sales organizations as well as its cancelling with Novation, according to Dow Jones.

Medtronic's moves also have caught the attention of Senate Finance Committee Chairman Max Baucus (D-MT), who is looking into whether the devicemaker's actions could potentially increase costs for patients and reduce price transparency in the healthcare system. 

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