Line in the Sand

Time will tell if other PPI manufacturers follow Medtronic’s lead, or if they seize the opportunity to show GPOs the love

The true import of Medtronic’s recent decision to cancel cardiovascular, orthopedic and spinal-products contracts with Novation and Premier remains to be seen. But there’s no denying that its action quickly turned into the supply chain’s equivalent of the “shot heard ’round the world.”

Was it, as Health Industry Group Purchasing Association President Curtis Rooney maintained, an attack on America’s hospitals, or was it merely a carefully thought-out business decision by a manufacturer facing its own set of economic challenges? Would other manufacturers follow Medtronic’s lead, or would the company be left hanging in the wind? Would Medtronic’s decision strike a deadly blow to pricing transparency, or would it have minimal impact on providers, most of whom contract for their own physician-preference-items anyway?

And finally, was the dialogue following Medtronic’s decision honest debate, or was it, as one observer – quoting Shakespeare’s Macbeth – said, “sound and fury, signifying nothing?”

Will others follow?
Will more companies follow Medtronic? “Absolutely,” says one supply chain executive with experience on both the provider and supplier side. “It’s like luggage fees at the airport.” Once one airline slapped on the fees, most of the rest followed.

Not everyone agrees.
“I would kind of doubt others will follow,” says Bud Bowen, former president and CEO of Amerinet. “Some of Medtronic’s competitors may be sitting on the sidelines. They may wait and see what kind of hubbub this creates. They may see it as an opportunity to ride in on a white horse [and say], ‘We’ll gladly contract with your GPO.’ Others may say, ‘Let’s see if Medtronic gets away with this; if they do, we’ll try it as well. I would say most will sit on the sidelines and wait to see how it plays out.”

“It’s nothing new,” Bowen says. “Typically, companies in the high-physician-preference product area don’t play with the GPOs. They jump back and forth. They get involved with GPOs for awhile, then someone inside says, ‘This is crazy; why are we paying all these fees?’ So they decide, ‘Let’s not do this anymore. ’It depends on who’s in the seat of power.”

“In my opinion, it won’t really mean a whole lot to the industry,” says one national accounts consultant. “[Dropping GPO contracts] has been bandied around corporate management meetings a number of times.” Companies whose product offerings are limited to physician-preference items figure they have very little to lose, and some margin to gain, he says. But for manufacturers that offer both physician-preference items as well as commodities, it’s a different story. Pull out of the physician-preference contracts, and you risk losing your commodities contracts as well.

Even so, “Medtronic has thrown down the gauntlet,” he says. “They’ve said, ‘We’re a physician-preferred device company with major market share in all business units. We don’t need the GPO.’”

Withdrawing from GPO contracts won’t put Medtronic out of business, “but it could hurt the bottom line,” he adds. (Novation members represent $2 billion in annual cardiovascular and orthopedic purchases for Medtronic, says the GPO. The Wall Street Journal reports that analysts expect Medtronic’s 2011 sales to be about $16 billion.)

Some believe Medtronic’s decision might actually open up opportunities for GPOs and their members. “I heard very solid reports that other companies have seized on this as an opportunity to do business with GPOs with new, more favorable terms, conditions and pricing,” says Rooney. “This decision could actually backfire [on Medtronic] if that is the case.”

“This will open the door for other players, especially the smaller ones,” says one national accounts consultant. “Physicians will look at their technology.”
“My gut reaction is, the competition should be all over this,” says Ken Murawski, Healthcare Links, a corporate accounts consulting firm. “If they have as good a mousetrap at lower cost, they can play it up and hopefully move market share.

“GPO contracts are about moving market share in exchange for a contract position, better pricing, GPO marketing support and to an extent, creating a barrier to entry for competition,” he says. “Medtronic chose to give that up and they may regret it – but only if the competition, along with GPO support, can maintain or take share away from Medtronic.”

Medtronic made a calculated business decision, adds Joe Colonna, vice president supply chain management, Piedmont Healthcare, Atlanta. And its actions from this point on will also be calculated business decisions. “They decided they didn’t need this relationship. Now, if all the customers of that GPO walk [away from Medtronic], then Medtronic made a bad decision. Even if 20 percent were to walk away, the vendor would probably go back to the GPO.”

Contracting executives need to make some calculated business decisions of their own, he adds. “Their question is, ‘Am I going to support the GPO, or will I decide I need that vendor more than making my GPO happy?’ Medtronic is counting on the fact that the GPO can’t hurt them and can’t help them. The real issue is, if the business relationship makes sense, you should work together. If it doesn’t, you should walk away from each other.”

Pricing ramifications
Most observers took with a grain of salt Medtronic’s statement that dropping its Novation contracts was done “[w]ith an eye on removing costs from the healthcare system.” (Medtronic declined to be interviewed for this article.)

“It doesn’t make sense,” says a national accounts consultant. “How do you lower prices and raise profits for the company? And at same time, you’re adding costs, because a lot more negotiations will have to take place at the local level.”

“What’s of critical concern to us is that it may be another sign of the trend that certain manufacturers of physician preference items will do anything to disaggregate the market,” says Rooney. Medtronic’s sales and marketing expenses approach the annual net revenues of the entire GPO industry, he says. “It is really David vs. Goliath, and if hospitals don’t use a GPO, they really don’t have a chance.”

GPOs and Medtronic “are coming from two different sides of the fence,” says a national accounts consultant. “Where GPOs have control, they can save you money. Where they can’t, they can’t. We all know it’s [not true] that Medtronic will pass along savings to hospitals. They’ll make more profits, and stockholders will appreciate it. But it won’t drift down to the industry in any shape or form.”

“In fairness to GPOs, they share a good percentage of admin fees back to hospitals,” says one supply chain executive. “So [for manufacturers to give] fees directly to [providers], it’s not that much different than giving them to the GPO. Hospitals might leak a little bit of oil, if they don’t get back that value. Their quarterly rebates will be a little anemic right out of the gate. It will be their responsibility to go after some of them.”

FTE shortage
Some are sounding the alarm that should other manufacturers follow Medtronic’s lead, hospital and IDN contracting departments may face unmanageable work loads. That’s because many have cut FTEs, opting to rely on GPO contracts for the bulk of their purchases.

“Medtronic has put hospitals in a difficult position, where they have to individually negotiate terms,” says Pete Allen, senior vice president, sourcing operations, Novation. “It adds a lot of redundancy and inefficiency to the system.” Even for those members that prefer to negotiate their own contracts for physician-preference items, “Novation provides a tremendous service in creating a standard set of terms and conditions that they can reference. Such things as shipping costs, return policies, indemnification, warranty, insurance, confidentiality, are all covered by standard Novation terms and conditions.”

Says Rooney, “What GPOs do is aggregate the purchasing power of hospitals and other healthcare providers, and develop terms and conditions that manufacturers can use so that they don’t have to negotiate with the nation over 5,000 hospitals individually. This brings efficiencies to everyone, and saves money.”

“Many health systems cannot have a full complement of staff to work legal, contracting, item master updating, distribution line charges, PAR automation updating, and charge master review and updating, says James Patrick Connor, MBA, vice president supply chain operations, Westchester Medical Center, Valhalla, N.Y. “I am looking for fewer changes, and seamless system-to-system updating, not more ancillary labor and data points on the consumable side. Change at the IDN level has both hard and soft dollars associated with it. I depend on my GPO to absorb a lot of the cost currently.”

“You’ll see more burden placed on the IDNs,” notes a national accounts consultant. “They’re not set up to handle the entire market basket of GPO agreements. Like [stand-alone] hospitals, they have small staffs. Yes, many do treat the GPO agreements as a starting point. Shame on suppliers for letting that happen.” Instead, suppliers should be building tier structures into their agreements, thus giving IDNs more flexibility. “It’s poor national account management,” he says.

Transparency threatened?
In addition to the impact on prices and overworked purchasing departments, Medtronic’s decision signals an assault on pricing transparency, that is, the ability of hospitals to compare their prices with others, according to those with whom JHC spoke.

“The objective for the industry is pricing transparency, and I think this is a step backward,” says a national accounts consultant.

“GPOs work on behalf of hospitals and other healthcare providers, and their contracts are based on strong competitive forces,” says Rooney. “Manufacturers compete with one another to win business by offering the best products and services at the best value. Medtronic has simply abdicated this competitive space in an effort to prevent hospitals from banding together to get the best deals. The result is purely predatory.

“Without GPO benchmarking, Medtronic has left hospitals in isolation to negotiate with a device maker 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. The problem will be even more extreme in small, rural markets where community hospitals will have almost no size or volume to leverage against a $16 billion corporation.”

“Physician-preference, high-margin device companies very much would like to keep their pricing on a one-off basis, that is account by account, and they don’t want that pricing to be known,” says Bowen. GPOs offer some point of reference.

“There are work-arounds, but it is concerning,” adds a supply chain executive, speaking of the potential loss of transparency. “Hospitals are their own islands, and they will lose touch with reality over time.” Having consulted for a medical products manufacturer in years past, he knows from experience that prices for physician-preference items can vary dramatically depending on the state or region of the country.

Others doubt that actions such as Medtronic’s will affect transparency.

“With the communications that are out there and the competition keeping them honest, I would think it would be difficult for Medtronic to raise prices indiscriminately,” says Murawski.

“If I were a well-connected vice president of supply chain, and I was looking to deal with Medtronic, I’d call up [colleagues in other IDNs] and ask, ‘Off the record, where do I need to be?’” says one national accounts executive with experience on the provider and supplier side. “Some will tell you, some won’t. But there’s enough information out there.” For public companies, “all you have to do is go online and pull up their annual report to figure out how much they’re making.” You can start your negotiations from there.

“There will be no way to manage prices?” asks Colonna. “That’s [not true]. There are … independent databases you can use to figure out if you’re getting a good price or not.”

“With technology and with the way hospital employees move around, things are more fluid than they were 10 years ago,” adds a national accounts consultant. “That information is still out there. I don’t think this will squelch information.”

GPOs as data warehouses
At least one observer believes the long-term impact of decisions such as Medtronic’s could be damaging to GPOs in their role as information providers.
“GPOs are turning into information houses,” says the national accounts executive. “They all have tools where members can dump their data, and in exchange, get aggregated information back, so they can see what their peers are doing.”

As GPOs morph from a pure contracting model to a data management model, two things can happen, he says. First, manufacturers may become less willing to pay admin fees. “If GPOs’ future is in data management, what’s the fee model for that?” Second, if manufacturers pull out of contracts, GPOs have less data to crunch, and their role as data warehouses may be jeopardized.

That’s particularly true in the case of data about high end, physician-preference items, he says. “How important is data on the low end [that is, for commodities]? What difference does it make if I’m paying 19 cents or 21 cents for a lap sponge? I’m more interested in whether I can buy a stent for $1,500 as opposed to $2,100.”

The transparency issue will continue to be a thorn in manufacturer/GPO/provider relations for some time to come, he adds. “As a manufacturer, I wonder, ‘Why shouldn’t my price be a secret?’ But when I put on my [provider] hat, if I just spent $40 or $50 million a year with Medtronic, I think I own that data, and I think I can do anything I want with it.”

All of which leaves the vice president of supply chain in a quandary. “The manufacturer says, ‘I’m going to give you the deal of a lifetime, but the pricing has to be confidential.’ At the end of the day, the GPO isn’t paying my salary nor are they keeping my hospital alive.’” The VP might just take that deal.

GPOs and physician preference items
At the very least, Medtronic’s decision raises the question of the GPO’s role in physician-preference contracting.

“Speaking from the manufacturer’s perspective, the move to IDNs has already started,” says a national accounts consultant. “It is – and should be – in every company’s strategy. Very loyal, strong IDNs that are [tight] with their GPO will hang with their GPO. The rest of them – almost every one of them – write their own contracts. So regardless of their contract with the GPO, manufacturers are trying to hone in on IDNs.”

“You have to look at this way,” says a supply chain executive. “Are GPOs adding value to the supply chain with these types of [physician-preference] products? No. They’re not out marketing Medtronic pacemakers. So the [manufacturer] sales rep gets no benefit from a GPO contract; it’s completely physician-driven. [Hospitals or IDNs] will tell you’ve they’ve standardized, or they’ve done this or that. But they haven’t.”

“For the IDN, negotiating physician preference products [as opposed to commodities] is where they should spend most of their time, because that’s where the money and the margins are,” says Murawski.

“Regardless of my GPO in any particular product line, I probably will use what my physician says,” adds Colonna. “If there happens to be a GPO relationship, I will try to take advantage of it. [Contrast that] with commodities. In that case, it’s, ‘Let’s take a look at the GPO first, then work in conjunction with the GPO and the business partner, because we don’t have the resources to manage a thousand contracts, or however many there are.’”

“I am an advocate of [physician-preference items] not being on GPO contracts,” says Connor. “This gives each institution an opportunity to align site-specific corporate goals with the internal physician practice model. Having the flexibility to approach each service line and physician model from a service line perspective affords my institution the ‘face time’ to explain our cost-savings goals and objectives.

“In a service where many manufacturers’ products are used, we then have the flexibility to reduce the number of suppliers, or set a flat cost-per-procedure or -item. The approach has worked great for our first round of cost savings, without having to tell our staff, ‘You must use this manufacturer for this item.’

“The GPO model of national contracting for [physician-preference items] limits an institution’s ability to present an open-minded approach to cost restructuring with the physicians as team members,” Connor continues. “When you approach the clinical side of a busy facility, we in operations must let the surgeons inform us what they are willing to use, and then work the cost down and pursue either a service line model with many vendors at the same price, or limit the vendor we will deal with based upon cost. Either way, we drive down cost. Each institution needs to determine which approach is best.”

One wild card in today’s market is the number of physicians that are employed by hospitals or are seeking employment by hospitals, says a national accounts consultant. In such situations, GPO contracts may play a bigger role in members’ product selection. That’s because hospital administration may have more influence over the products their physicians use. But even in situations where doctors are not hospital employees, hospitals are educating their doctors about the costs associated with the products they use, he adds. And physicians are listening.

Continuing role for GPOs
Medtronic’s decision may force GPOs to clarify their core strength, says one national accounts executive. Is it contracting for commodities, clinical commodities or physician-preference items? Each GPO’s answer will determine its future course.

“My GPO is responsible for providing me a service to reduce cost using aggregated spend as the cost-reduction driver,” says Connor. “I do not have to use every contract my GPO has, but we have proven, on both [physician-preference items] and regular service line consumable items, that cost savings are obtainable and substantial. Our overall supply spend is down close to 9 percent, on over $100 million in spend on an annual basis. We get monthly analytics in a timely manner to ensure we are utilizing as many contracts as possible.

“We segregate [physician-preference] from medical supply spend in all our financial systems, and perform cost-to-charge ratios to ensure our costs are tracking our annual budget. We have predetermined saving targets already loaded, by general ledger accounts. Tracking the spend daily, weekly and monthly ensures that our internal personnel and our GPO partner work through any contractual cost variance issues as soon as possible.”

Manufacturers of physician-preference items who believe they can do better outside the GPO’s tent than inside it will encounter resistance, says Connor. “At most institutions, the physician-preference category can easily be over 30 percent of the med/surg consumable spend. We have a responsibility to provide our clinical staff with the best available product – the right item, delivered to the right place at the right time.

“[But] if manufacturers do not understand that the acquisition cost of items in healthcare need to be not only contained, but reduced, they are not communicating with the healthcare institutions.”