Canceled Group Purchasing Organization Contracts Causes Senate Finance Committee Inquiry

Recently, Senate Finance Committee Chairman Max Baucus (D-Mont.) initiated an inquiry into recent actions by medical device manufacturer Medtronic, Inc.  In a letter to Medtronic’s Chief Executive Officer, Baucus inquired about a February, 2011 Wall Street Journal article that described Medtronic’s “cancelling of five contracts with Novation, LLC, one of the largest group-purchasing organizations (GPOs) and the consequences for other GPOs, hospitals, Medicare and Medicaid.  

GPOs allow hospitals and other health care entities to save money by aggregating purchasing volume and using that leverage to negotiate discounts with medical device manufacturers.  As a result, Baucus is concerned that Medtronic’s decision “could potentially increase costs for patients and reduce price transparency in the health care system.”  Specifically, Baucus asserted that, “Medtronic cancelling these contracts could considerably undermine efforts to reduce health care costs and increase transparency for consumers and taxpayers.” 

Consequently, Baucus requested information about the effect the termination of the group purchasing contracts will have on the pricing of medical devices at the hospitals that were represented by Novation and the cost to Medicare and Medicaid.  The inquiry also seeks information on how Medtronic intends to negotiate prices with providers in the future for the products affected by contract cancellations.

A Finance Committee staff report released in December found that Medicare Part A alone paid an estimated $108.9 billion for 6.9 million medical device procedures from fiscal year 2004 to fiscal year 2009. 

In his letter, Baucus cited to a February New York Times article that quoted a health care analyst saying, “Medtronic’s bold move could represent a positive shift in bargaining power away from the hospitals and back to the device manufacturers.”  As a result, the Finance Chairmen said, “reports that these moves are fueled by an attempt to discourage pricing transparency for these cardiac and orthopedic products, and increase cost to hospitals, are troubling.”  Accordingly, Baucus asked Medtronic to provide answers and information to the Committee by June 6, 2011, on a number of questions including:

• How long Medtronic had a business relationship with Novation
• For each year of the business relationship, the products covered by the contracts, the annual value of the products, and the total compensation provided by Medtronic to Novation.  
• The reasons for terminating Medtronic’s relationship with Novation in these five contracts?  What is the amount and source for the “expected cost savings” statement in the Wall Street Journal article?
• How termination of the group purchasing contracts affect the pricing of medical devices at the hospitals that were represented by Novation, and any fees given to those hospitals?  This includes any internal studies, assessments, or memoranda regarding the effect the decision to terminate the Novation contracts will have on the price of medical devices sold to the affected hospitals and any administrative fees provided to those hospitals.
• Did Medtronic make any oral or written communications or promises to affected hospitals on fees, pricing, or transparency in direct negotiations?
• Did Novation’s reported refusal to allow confidentiality clauses play any role in the decision to terminate the group purchasing contracts?  Please provide any internal studies, assessments, or memoranda regarding Novation’s ban on confidentiality clauses in contracts and on Novation’s sharing of pricing information among its members.
• All contract cancellations with GPOs since 2000. For each cancellation, the year, products covered by the contract, annual value of the products, and total compensation provided by Medtronic to the GPO for those products.
• Whether Medtronic has plans to cancel any additional contracts with GPOs during 2011 or 2012?

Discussion

At the time of cancelling the contracts, Medtronic said that it was focused on reducing expenses, and an internal analysis indicated that the Novation agreements were “underperforming.”  Medtronic also noted that the vast majority of its contracts with hospitals and others are already negotiated on the local level — without GPO input.

The outcome of this investigation should be interesting, especially considering last October, at the time ranking minority member Senator Charles Grassley (R-Iowa) asked for proof that GPOs, actually save the government money. Based on two reports, one from the Government Accountability Office (GAO) and one from his staff, Grassley asserted that there is no empirical data that GPOs provide any savings to the Medicare and Medicaid programs, which reimburse the hospitals for the care they provide to their beneficiaries.