Medtronic Inc. Cancels Cardiovascular and Orthopedic Contracts With Novation

Medtronic Inc. Cancels Cardiovascular and Orthopedic Contracts With Novation

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IRVING, TX; February 24, 2011 – Novation, the leading health care supply contracting company, announced today that, Medtronic Inc. has cancelled five contracts with Novation that cover cardiovascular and orthopedic products. Novation is owned by VHA Inc. and the University HealthSystem Consortium (UHC), and VHA and UHC members represent $2 billion in annual purchases for Medtronic in these product categories. Novation has been in constant contact with Medtronic and has made every effort to maintain member value in these high cost categories. Medtronic stated in a letter to Novation that the company wanted to manage their business relationships with hospitals locally, rather than through a national GPO contract.

“This move will likely raise costs for member organizations by eliminating the price protection that members benefit from through Novation’s national agreements,” said Pete Allen, senior vice president of sourcing operations at Novation. “In addition, through our contracts members generate cooperative returns, and have more favorable terms and conditions. The contracts also protect members from pricing confidentiality clauses, eliminate freight fees, and mandate that new technology is added to contracts when the technologies are released.”

In response to Medtronic’s action, 16 of the leading U.S. not-for-profit hospitals and academic medical centers sent an open letter to the chairman and chief executive officer of Medtronic Inc., stating their ‘extreme disappointment’ with Medtronic during this time of unprecedented cost pressures. Hospitals in this country are facing more than $155 Billion in reduced government reimbursement over the next ten years; placing an unprecedented burden on their existing fragile financial viability. Dissolution of the Novation contracts will force health care organizations to develop individual agreements with Medtronic in order to obtain discounted pricing and new terms and conditions.

“Members have told us that Medtronic’s unilateral decision to cancel its agreements with Novation will likely increase their costs and impair the efficiency with which they conduct business,” stated Allen.

Novation has heard from many members that some medical device manufacturers are insisting on strict pricing confidentiality clauses in their local contracts as a condition of the agreement. These so-called “gag” clauses, which are not present in Novation agreements, prohibit hospitals from sharing pricing information with group purchasing organizations and other third parties that provide services designed to manage and control costs, such as benchmarking and auditing services.

It is unclear whether Medtronic will allow hospitals that desire to purchase Medtronic product through a local agreement the ability to share purchasing information with their GPOs or other advisors retained to help manage costs.

Allen continued, “If medical device manufactures are successful in limiting hospitals’ ability to understand and discuss pricing with outside parties, then they will be able to sell at price points that are not rational or relevant. That dynamic will keep prices artificially high and increase costs to the hospitals.”

In response to the complexities associated with contracts for high cost medical devices, especially in light of the Medtronic actions, Novation has taken the initiative to significantly enhance the valuable contracting support services health care providers are receiving at no additional expense.

Effective immediately and continuing through 2011, Novation will provide hands-on member support for the negotiation of all agreements for major cardiac and orthopedic devices, if members request this support. This service may be provided either indirectly through education and benchmarking assistance, or directly as the designated agent for contract negotiation on the member’s behalf.

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About Novation
Founded in 1998, Novation is the leading health care supply contracting company for more than 25,000 members of VHA Inc. and the University HealthSystem Consortium (UHC), two national health care alliances, and 5,500 members of Provista, LLC, representing 28,000 sites. Novation provides alliance members contract and price management and spend management services. Based in Irving, Texas, Novation develops and manages competitive contracts with more than 600 suppliers. VHA, UHC and Provista members used Novation contracts to purchase nearly $40 billion in 2010.

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