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Why Medtronic Wants to Break the Grip of Hospital Purchasing Firms

Medical device maker Medtronic (MDT) has stirred up the world of group purchasing organizations (GPO), which buy supplies for hospitals, by ending its contracts with leading GPO Novation and selling directly to hospitals. But, although the GPO trade association suggests this is the end of the world as we know it, no hospitals have yet suggested they'll actually stop buying products from Medtronic. The question is who truly has the bargaining power in this market. Perhaps we'll get a better answer to that question if Medtronic cuts off more GPOs.

Curtis Rooney, president of the Health Industry Group Purchasing Association (HIGPA), which represents the major GPOs, suggests that that's already happening in a press release that states that Medtronic has canceled some of its largest GPO contracts -- and he said the same thing to the Wall Street Journal. But a spokesperson says that HIGPA doesn't know of any other cancellations of GPO contracts by Medtronics beyond Novation.

According to the Journal, this is all about "the $200 billion U.S. medical device industry [defending] itself against slumping product prices and tougher bargaining from hospitals." Well, that's certainly part of it. But the device makers also don't see why they should have to pay GPOs a fee to get them to buy their products. Although this arrangement is legally protected, it reduces the device manufacturers' profits.

According to a device-maker-sponsored study that was released last fall, GPOs inflate healthcare costs by $37.5 billion a year through a system that requires suppliers to pay kickbacks of 2 to 18 percent to the GPOs. For example, one analyst estimates that Medtronic alone paid Novation $40 million to $60 million in annual fees. By comparison, Novation was said to generate $2 billion out of the $16 billion in revenues that Medtronic is expected to reap this year.

There's no doubt that Medtronic makes some devices that hospitals need. That would tend to mitigate the potential fallout if Medtronic cut off all ties with GPOs. On the other hand, hospitals are increasingly employing the specialists -- particularly cardiologists and orthopedists -- who use Medtronic's products. As a result, the power of those doctors to determine which devices a hospital will buy has been greatly diminished.

The one thing that's clear is that GPOs are afraid that other device makers will follow Medtronic's lead. If they do, it would be a big hit to the GPOs' bottom line. On the other hand, they're likely to retain their stranglehold over other hospital supplies, which are available from a number of different vendors. So perhaps the GPOs are more worried about this than their customers are.

In any case, it should be interesting to see what happens if the device makers all decide to go around the GPOs. It will probably affect the latter's stock prices in the short run, but the business they're in is much bigger than devices.

Image supplied courtesy of Wikimedia Commons.

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