‘Price secrets’ drive up costs for hospitals and taxpayers
Medical device manufacturing giant Medtronic recently announced that it cancelled some of its largest group purchasing organization contracts. (See related story in this month’s Journal of Healthcare Contracting.) At a time when all participants in the healthcare delivery system are searching for ways to cut costs, Medtronic’s move will raise costs for hospitals. In summary, Medtronic’s decision puts price ahead of patients – mention taxpayers.
GPOs work on behalf of hospitals and other healthcare providers, and GPO contracts are based on strong competitive forces. Manufacturers compete with one another to win business by offering the best products and services at the best value. GPOs work hard to provide their members and clients a better, more accurate view into the cloudy world of physician-preference-item pricing. Medtronic’s abdication of this space all but assures hospitals will lose the ability to benchmark the price of these expensive products. The result is purely predatory. Medtronic’s contract cancellations will raise costs for everyone but Medtronic. Wall Street has already signaled its support by reacting positively to this news. Medtronic is a publicly traded company, not a charity, and the notion that circumventing GPOs will decrease healthcare costs does not withstand the slightest bit of scrutiny.
Hospitals weigh in
Hospitals have already rejected Medtronic’s cost-savings claims. For example, 16 of the nation’s largest hospital systems, including the Mayo Clinic, Spectrum Health and Baptist Memorial, sent a letter to Medtronic to express their “extreme disappointment” with the contract cancellations. “Like the vast majority of American hospitals, we use our GPO every day to negotiate favorable pricing and other contract terms with medical suppliers like Medtronic, allowing our organizations to save money on medical supplies and devices,” they wrote. “Medtronic’s unilateral decision to cancel its agreements with Novation will likely increase our costs and impair the efficiency with which we conduct business.”
The impact of Medtronic’s decision itself on the GPO industry will be minimal, but the effect on hospitals will be great. There are many great companies working with GPOs – many of them competitors to Medtronic – who will continue to bring the best, most innovative products to market. Since Medtronic’s cancellations, GPOs have already fielded calls from innovative medical device companies looking to step into the space vacated by Medtronic.
Serious public policy issue
Looking beyond the minimal financial and competitive impact of the Medtronic decision on GPOs, however, a serious public policy issue bears examination – the ways in which medical device manufacturers increase healthcare costs through pricing secrecy in the physician-preference-item marketplace.
Recent reports show that many medical device manufacturers, including Medtronic, have inserted confidentiality agreements – so-called “gag clauses” – into hospital contracts for medical devices. They also successfully sued to enforce these clauses. Gag clauses prevent hospitals from discussing the prices of medical devices with third parties such as GPOs, other hospitals, and even their own physicians. There is not another industry in America in which consumers purchase goods without having any pricing information or without any ability to compare the prices of products or services. Imagine trying to purchase a television without knowing the price before it was paid for. Without GPO benchmarking, Medtronic has left hospitals in isolation to negotiate with device makers that will now be able to charge whatever local markets will bear. Hospitals will be unable to share non-proprietary data and validate that they are receiving a fair price on the products they buy. They may also lose non-price terms and conditions concerning recalls and other important service provisions directly affecting patients. The problem will be even more extreme in small, rural markets, where community hospitals have few resources to leverage against a $16 billion corporation.
The $200 billion medical device industry will be able to leverage its army of salespeople to drive unnecessary utilization and further enforce contractual gag clauses to keep prices a secret. This will give device makers a virtually unchecked ability to drive up costs for hospitals and Medicare. These actions demonstrate one simple fact – the physician-preference-item market is broken. We expect that Medtronic’s decision will bring renewed scrutiny from all healthcare stakeholders – including Congress and the General Accountability Office – of the medical device industry’s use of gag clauses. If Congress is serious about healthcare cost containment, then the transparency issue has to be more than a threat lobbed at political opponents. Transparency needs to begin in the supply chain, particularly in the physician-preference-item marketplace. Suppliers that thrive on pricing opacity and use secrecy to drive up their own profits do so at the expense of hospitals, taxpayers and Medicare.