Devices & Diagnostics

Hospitals under ‘attack’ from Medtronic strategy, trade group claims

Medtronic’s group purchasing organization strategy is “nothing short of an attack on America’s hospitals” according to the Health Industry Group Purchasing Association. Medtronic has been canceling contracts with group purchasing organizations as a way, the company claims, to cut healthcare costs.

A trade group representing hospital group purchasing organizations lambasted Medtronic Inc.’s (NYSE:MDT) cancellation of more than $2 billion worth of contracts with GPO Novation LLC.

Health Industry Group Purchasing Assn. president Curtis Rooney called the Medtronic moves “nothing short of an attack on America’s hospitals” in a statement released today.

The Fridley, Minn.-based medical device giant’s view is much more understated. Medtronic said it made the decision “with an eye on removing costs from the healthcare system.”

But HIGPA spun the company’s move as anti-competitive, saying that GPOs, which are set up to negotiate medical supply prices for groups of hospitals, force companies to lower their prices.

“GPOs work on behalf of hospitals and other health care providers, and GPO contracts are based on strong competitive forces. 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,” Rooney said in prepared remarks.

Medtronic also shut down a deal it had going with GPO giant Premier Inc. for its spinal products.

“This move will likely raise costs for member organizations by eliminating the price protection that members benefit from through Novation’s national agreements,” Novation senior vice president of sourcing operations Pete Allen said in response to Medtronic’s February actions.

Medtronic believes the cancellations, which will allow it to build direct sales relationships with hospitals, will give it more leeway in the healthcare market. The company said dealing directly with hospitals will save the company $60 million annually. The five contracts with Novation account for about 5 percent of the Irving, Texas-based GPO’s $38 billion in yearly purchasing volume.

“As the leading medical device company with the broadest reach across the industry, Medtronic, like other health care organizations, realizes the challenges that all participants in the market are facing in light of healthcare reform and economic uncertainty,” according to its release regarding the cancellation of the GPO deal.

Some Wall Street analysts said the move could be the start of a larger trend.

J.P. Morgan Chase & Co. analyst Michael Weinstein told the Wall Street Journal that spiking the Novation deal represented “a watershed moment” that could send ripples through the entire industry, positing that Medtronic will ditch other GPO deals as well.

And “other firms may well want to move in the same direction,” Ben Andrew, an analyst with William Blair, told the broadsheet.

Bernstein Research analyst Derrick Sung wrote in a note to investors that, “MDT’s bold move could represent a positive shift in bargaining power away from the hospitals and back to the device manufacturers.”

The Massachusetts Medical Devices Journal is the online journal of the medical devices industry in the Commonwealth and New England, providing day-to-day coverage of the devices that save lives, the people behind them, and the burgeoning trends and developments within the industry.

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