Robert Betz, Ph.D., president of Robert Betz Associates, Inc. (RBA), a well-established federal health policy consulting firm located in the Washington, D.C. area, writes about the Medtronic/GPO debate in his latest View from Washington column:
Peter Allen, the song writer, wrote “Everything old is new again.” That musical observation is also true about the chain of events starting in late February when Medtronic announced it was walking away from some of its national group purchasing organization (GPO) contracts. Following a lackluster third quarter showing to Wall Street, Medtronic responded by announcing plans to cut up to 2,000 jobs, put the kibosh on some GPO relationships, and focus their sales and marketing efforts on individual providers. Love ‘em or hate ‘em, this is one of the gutsiest moves by a major device manufacturer in about three decades.
If you hang around long enough in health care, things just have a way of coming round again. Therefore, I was not surprised by reactions to the announcement by Medtronic. Peter Allen, (not the songwriter, but Novation’s Senior Vice President of Sourcing Operations and apparently no relation) said in released remarks “This move will likely raise costs for member organizations by eliminating the price protection that members benefit through Novation’s national agreements.” He got that right. Further, I will bet what’s left of the kids’ college funds, many of the big GPOs also feel just like Novation.
Curtis Rooney, President of the Health Industry Group Purchasing Association (HIGPA) said in a released statement that “Medtronic’s recent decision to cancel its GPO contracts puts greed ahead of patients, and is nothing short of an attack on America’s hospitals.” The Medical Device Manufacturers Association (MDMA) indicated rather that companies were “fed up” with paying fees to reach customers contracted through GPOs. There has never been a lot of love between HIGPA and MDMA. The bloom is definitely off the rose at this point
Leading investment firms like J.P. Morgan Chase & Co. referred to Medtronic’s decision as a “watershed moment” for the healthcare supply chain. Speculation on Wall Street is that other device manufacturers may follow Medtronic’s lead. On the Gerson Lehrman Group website a contributor wrote “I expect that St. Jude Medical and Boston Scientific will likely follow Medtronic’s example for their cardiac devices. The ortho/spine industry may follow Medtronic’s example as well as the major device companies struggle to maintain their average sales prices.”
GPOs should be worried about what Medtronic’s action may ultimately mean for small and rural hospitals going forward. No doubt, this is the beginning of a very acrimonious discussion in the healthcare supply chain, especially if some other large medical device manufacturers follow suit – as I suspect.
For the full View from Washington article, click here
Not to put too fine a point on it, but GPOs are the scourge of innovation in health care, and represent perhaps the biggest barrier to entry for entrepreneurs. What started out as a commendable goal, bringing together providers to increase their negotiation power and thus lower procurement costs, has long faded into a legalized extortion racket. (Actually GPOs are a great example of crony capitalism, as they would not exist without the influence they exercise in the US Senate.)
While they are effective at negotiating the best price from manufacturers, GPOs have a clear conflict of interest by way of the kickback they receive from those same manufacturers. Faced with the prospect of replacing a top tier manufacturer, like Medtronic, GE or Philips, with a second tier vendor with a substantially lower price, the top tier vendor retains their contracts. Why? Because a substantially lower price translates into a big revenue hit for GPOs.
Let’s take an example. Why don’t SpaceLabs and Nihon Kohden dominate GPO contacts for patient monitoring? Their products are every bit as good and reliable as GE and Philips. And they offer prices below those of GE and Philips. What will GPOs do when they are faced with truly disruptive innovation, say a patient monitor that sells for $8,000 that does everything and more as a $36,000 monitor from GE or Philips?
So will prices increase for some Medtronic customers? Probably, but part of that “price increase” will be realized by Medtronic through the GPO kickback they won’t have to pay. And there will still be plenty of competition – for both features and prices – among Medtronic and their peers in the market.
What value, exactly, do GPOs provide? Pricing transparency is insufficient to demonstrate broad and consistent savings from negotiating prices on behalf of hospitals. The “value” they provide manufacturers with contracts appears to be worth less than zero to Medtronic. And I guess in an effort to compensate for the low level of real savings they pass on to their members/customers, many GPOs now offer a plethora of “value-added” services like consulting. If GPOs had to survive by directly charging members for their value added services could they remain in business? Some might, but I’d bet most would struggle and quite a few would fail.
On balance, the entire health care industry would benefit if GPOs disappeared tomorrow. And apparently, Medtronic agrees.
Interesting post from a gentlemen in a position to know the GPO market. Our statistically significant experience in processing medical device transactions indicates non-contracted device purchases are consistently lower in price.