Congress Investigates Medtronic Contract Terminations

Senate Finance Committee Chairman Max Baucus seeks information about the medical device giant's decision to cancel contracts with at least two group-purchasing organizations, saying that "reports that this move was fueled by an attempt to discourage transparency and increase costs are troubling."

Fridley-based Medtronic, Inc., is being investigated by Congress following its termination of contracts with at least two organizations that help hospitals negotiate discounts on medical products.

Senate Finance Committee Chairman Max Baucus is leading the probe. On Monday, he wrote to Medtronic CEO William Hawkins to request information on recently canceled contracts with Irving, Texas-based Novation, LLC, and Charlotte, North Carolina-based Premier, Inc., two group-purchasing organizations (GPOs).

GPOs work with hospitals and other health-care organizations to save them money by aggregating purchasing volume and using that leverage to negotiate discounts with medical device manufacturers.

Baucus seeks information about the effect that the contract terminations will have on the pricing of medical devices at the hospitals represented by Novation and the cost to Medicare and Medicaid.

“Reports that this move was fueled by an attempt to discourage transparency and increase costs are troubling,” Baucus said in a statement.”Medtronic canceling these contracts could considerably undermine our efforts to reduce health care costs and increase transparency for consumers and taxpayers.Medicare spends billions each year on medical devices for patients and we need to make sure these patients, and the taxpayers, are getting the highest-quality products at the best price.”

Baucus' letter to Hawkins cited two articles. One was a February 2011 Wall Street Journal article describing Medtronic canceling five contracts with Novation. “Medtronic's move could escalate a battle between device makers trying to protect product prices and their leverage in negotiations and GPOs trying to cut cost-saving deals for hospitals,” the article said. Baucus also called attention to a February New York Times article that quoted a health-care analyst saying that “Medtronic's bold move could represent a positive shift in bargaining power away from the hospitals and back to the device manufacturers.”

In response to Baucus' probe, Medtronic issued the following e-mailed statement: “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 health care reform and economic uncertainty. Like many organizations, we are focused on reducing expenses. This analysis has led us to cancel five underperforming Novation agreements. Medtronic expects there to be no disruption in our day-to-day business operations with our hospital customers, as the vast majority of our contracts (approximately 85 percent) are already negotiated at the local level. This includes pricing negotiations.”

Baucus requested a wide variety of information from Medtronic-reasons for terminating the contracts, how the contract cancellations will affect medical device pricing at the hospitals represented by Novation, whether Novation's ban on confidentiality clauses factored in to the termination decision, and whether Medtronic communicated with competitors about GPO business practices.

In his letter, Baucus requested a response by June 6.

Medtronic said that it will respond to Baucus “in a timely manner.” The company also made clear it has not canceled contracts with all GPOs.

“Rather, in the current health care environment where reducing costs is in the best interest of the company, health care providers, and patients, we are reviewing our national contracts on a contract-by-contract basis to maximize the value we can provide to our customers,” the company said. “We maintain a good relationships/partnership with several GPOs across our business.”

Medtronic is Minnesota's seventh-largest public company based on revenue, which totaled $15.8 billion in its most recently completed fiscal year.