Wednesday, March 9, 2011

Medtronic: I've Got The Power

Since TSB is the people's blog spot, our editorial board decided that we should post a blog regarding Medtronic's watershed moment terminating the Novation and Premier agreements, and analyze the potential pro's and con's of this decision.  As the Rap Artist "Snap" sang in 1990, "I've Got the Power." Yes fellow bloggers, Medtronic's does have the power, considering that historically GPO's are nothing more than another layer of insanity in the hierarchy of needs.  The more one looks at this decision, it becomes evident that Medtronic was correct in terminating these contracts.  The question now becomes, how much of an upper hand will they have, and how will this affect the rest of the industry?  Historically, hospitals have never excelled at negotiating pricing.  It has always been an eleventh hour knee jerk reaction by some financial wizard that decided on going after the implant companies without analyzing the politics of hospital medicine.  For many years, hospitals failed to understand the concept of working with physicians, better known as revenue generators.   And when they did, it was from an adversarial position. An "us against them" mentality existed, and contrary to some opinions this mentality still exists without overture in many areas of the country. What hospital administrators failed to understand was the power of corporate consulting agreements.   So rather than partnering with the revenue generator, they cut off their nose to spite their face.   Today, a new model is emerging. The industry is being challenged with another shift in dynamics with the rise of physician owned distributorships. But more on that later on.

So how does this benefit Medtronic?  Most readers know that Medtronic does not only play in the spine industry, they are a major play in the cardiac arena, one that is not as proliferated with "gnat on my ass" spine companies. Historically, when it comes to working with the medical community, Medtronic has been the leader in both of these specialties.  For once, surgeons from two different specialties have the ability to form an alliance when it comes to choice, especially in many of these hospitals.  As long as there is no backlash from the DOJ or the U.S. Senate,  Medtronic will continue to leverage these relationships based on the volume and revenue that these physicians bring to their respective facilities.   In addition, most purchasing and material management people lack the necessary acumen to negotiate an equitable deal.  By terminating this agreement Medtronic can negotiate on its own terms, considering that Novation opposed pricing confidentiality.  If anything, this relationship was an advantage for Novation in that they were negotiating from a vantage point of strength, by leveraging an economy of scale.   What is even more ridiculous is that Curtis Rooney, president of THIGPA, is quoted as saying, "they're (Medtronic) in this to make money."  Considering that, "Novation and Premier receive less than $10 million annually from Medtronic," what does Mr. Rooney think Novation and Premier are in it for?  As for weakening hospitals negotiating power,  if they hired people that had knowledge, and experience from within the industry, they would understand how to deal with companies like Medtronic.  If Hawkins and his team  will be remembered for anything, it could be that he had the chutzpah to make a stand.  Our industry has way too many wannabe whores that spend their day in a bait and switch, and dropping their shorts faster than a cheap trick.  It's the hospitals responsibility to manage itself in a cost effective manner.  Let's face it, most of the spine industry is a commodity industry with a few technological advancements that allows one competitor to differentiate itself from the rest of the playing field.  The job of the purchasing director, materials manager, and CFO is to work at identifying the haves from the have nots.

So as a new precedent is being establish by the leader in our industry, it will be interesting to monitor how hospitals react to this across the country, and whether they are willing to be better partners with their revenue generators? Legally, if a company can partner with a surgeon in a business venture, why can't a hospital partner with a surgeon?  Some have even raised the possibility of the hospital and surgeon inventor collaborating to bring new technology to the marketplace.  Another example of partnerships has been gainsharing, and with the advent of POD's, aren't these models similar in their objective?  One still shares in the discount and profitability that is passed on to the hospital and the physician?  If anything, a precedent must be established so that there is some balance in how business is conducted. Unfortunately, the problem lies in how much of the pie do you divide in order to keep everyone happy?  A cost efficient system benefits everyone, regardless whether people challenge the belief that quality of care will become a major issue.  But then definition has never been a formidable trait in our industry.   TSB wants to know what our bloggers think?  Is this the start of something beautiful or are we taking two steps forward to go three steps back?


  1. That Medtronic contracted with the GPO in the first place was surprising, because as the market leader they would be best positioned not to have to. So they did it to either a. not have use of their products be reduced because others participated and they didn't, or b. to have use of their products increase because they participated and others didn't. Either of these rationales hinge on the premise that the GPO members will effectively limit their use of products only to those companies who contract with them.

    Clearly Medtronic's decision to depart from the contract is an indicator that they believe GPO members have not effectively done so, and that any loss Medtronic may see in surgery volumes by members will be at least or more than made up for by the higher prices they are able to charge for the surgeries they will still get.

    Take home message may be that purchasing department "strategery" remains relatively powerless against surgeon preference.

  2. if we all ask ourselves, "What is the purpose of a GPO?" Most of us would reply with, "Hospitals utilize/subcontract their negotiating powers to deliver lower costs on supplies and services" Great in theory, however GPO's have evolved into their own giant bureaucracies that only exist to add another layer of cost to the consumer.
    In other words, you gotta pay to play. As a fellow blogger put it recently, "I could go to the GPO tomorrow and try to GIVE my SH*T away for free and they wouldn't take me up on it!!"

    Medtronic and all the others have to start cutting back somewhere, and the GPO's are the first cost savings measure we see. Next will be the points on commissions as our products are all seen as commodities now, and last will be the consulting/royalty payments to our beloved surgeons. I am sure there are a few others in between not mentioned here but they are a comin

    As hospitals continue to buy up physician practices (giving less power and choices to the surgeons), more and more capitated pricing, and ACO's (Accountable Care Organizations), the decision making and the division of proceeds lies more and more in the hands of the hospitals!

    We better start cozying up to the materials managers and purchasing directors, not to mention cutting back on our lavish lifestyles....just sayin

  3. Medtronic will gain no significant revenue from the "higher prices they are able to charge" to Novation and/or Premier member facilities. When one cuts through the B.S. being generated by GPO executives and Medtronic competitors one thing is clear- 90%+ of all Medtronic customers who belong to one of the aforementioned GPOs and generate any significant volume in spine are already on a locally negotiated pricing agreement with terms superior or equal to the national GPO agreement.

    With this being the case, Medtronic received minimal value from the GPO, let alone efficiencies of scale in the contract negotiation and management process. In fact, in many cases the GPO was working against Medtronic. Talk about "biting the hand that feeds you."

    Clearly, hospitals have failed to get behind the agreements negotiated by their GPOs for surgeon preference items. I can't say I blame them. If they have the expertise and surgeon leverage to negotiate more effectively then so be it.

    Perhaps GPOs in their present form are an outdated business model. Time will tell, but Medtronic started the clock.

  4. This is like pharma. Are unions coming just like in pharma?

  5. @1:29 Agree completely. So why did they contract with the GPO in the first place? Every reason you cite for their departure existed beforehand. I think at the time they were afraid they would lose business if they didn't, which they clearly are no longer as worried about.

  6. ... I should add: or hoped to gain business they didn't have, which they are no longer hopeful of.

  7. Does Jim Tressel work in the spine industry??? Does he own a POD or a tattoo parlor?

    I say make the Choke-Eye players return the tattoos they received.

    GO BLUE!!!!

  8. Having been in the industry since dirt, GPOs or similar organizations have been around for a long time. They tend to break out as hospitals find themselves in a bad financial position and GPOs provide an opportunity reduce device cost, or costs of services like liability coverage. In time, the hospital learns, they don't need them and before long, there is no compliance, the quite frankly can't keep up with surgeon demands. They learn they can get the same price once prices drop to levels that are at or close to the end point for a period of time and they too can avoid the admin fees paid to the GPO. GPO power tends to start at one coast and move their way to the other. It used to be about a seven year cycle, but has lasted longer than historical norms, but then the economy, particularly the healthcare industry has not been in the same turmoil it's been in for the past four, approaching five years.

    Is the Medtronic action a trend, and will this affect others? Quite frankly, Premier/Novation have always been a bit of joke. They have always talked big, but never carried much of a stick. They always relied on the hospital to maintain compliance. While it happens rarely, when has a materials manager ever had the power or ability to control a surgeon motivated to use what they want. NO hospital can offend their cash cows for very long.

    What we will see in more hospitals owning their doctors. Control the docs, you control admissions and control revenue. Any hospital, without exception, not making money on spine ain't doing it right. For a while, surgeon owned hospitals struggled, but that was not because they couldn't make it, they just didn't do it right. Most have figured that out. And, as many have learned, price is important, but balanced pricing is what makes them money.

    GPOs are not going away. Those like Humana go out of their way to get a balanced price and keep the doctors happy. If I was a GPO, though a pain to the device industy, I would model my GPO just like them. They are making money.

  9. Speaking of POD's. I believe that a group of individuals that own and operate some outpatient centers in our area are also operating in conjunction with a POD. They are doing the cases with these surgeons in the hospitals as well. This is difficult to work against when the doctor is getting a piece of the facility and a piece of the implants. The crazy thing is there was never one case of Pioneer done in SE FL but now these guys are jumping on the cash caboose. This reminds me of medical marijuana, legalize it so we can all play the same game or put a stop to it. Otherwise the only people who get involved and profit from it are the ones with morals low enough to justify the grey area they are delving into.

  10. I long for the days when I could charge GPO pricing. Why pay to have your name on a list that nobody reads?

  11. The elephant will keep on flying high! Do you think Medtronic would hire a rapper with two years of spine experience? Brrr

  12. A personal thank you TSB for the post, as well as to the legion of Anonymous that followed up with clear-minded, well-thought responses.

    The amount of business (i.e. 'taxation without representation') in spine for these two groups has been seriously hindered. And, as TSB stated, Medtronic Inc. (not per se spine) will be the better, financially, for it.

    My one caveat is to TSBs comment: "In addition, most purchasing and material management people lack the necessary acumen to negotiate an equitable deal."

    Variability at the regional level will always exist, but, what's obvious to me is that the current market conditions show that you don't need an MBA to wield a cost-cutting axe at the dozen or so vendors panicking to stay in an account.

    But now it's time to wargame, to which I pose the following:


    So, which way do YOU go when the national/regional rebate laden GPO bid comes up? With or without? Is this a play only for the majors?

    2. BUT WHAT ABOUT...:

    HPG, Broadlane/Medassets, etc. Is this a vote against GPOs or a strategic consolidation? Was Medtronic proactive in their discussions with key member accounts? We all know someone in there cares about 'compliance and rebates'. Did they, or are they going to make this up financially to their volume Novation, VHA, etc. accounts?

    3. DEAR REP:

    How confident are you in your future with all this C-suite, macro negotiation and change?


    GPOs generate disproportionate amounts of revenue (>70%) from admin fees. Their not going to lay down and go away. Especially considering that more than a few CFOs at large companies are probably thinking, well, if MDT can do it...

    So you're the CEO of Novation, what do you do? (I'll preemptively take 'call my recruiter' off the table).

    Responses to all, some or one of the above is appreciated.


    Ps. On the edge of my seat for the POD discussion!

  13. Speaking of MDT, any comments/insight into FDA's rejection of Amplify?

  14. POD's, POD's, POD's, I heard one of the larger POD's was being investigated and about to get hammered with big time fines, revoked medical license and jail time. Then I woke up from my dream.

  15. Novation and Premier have historically done very well with commodoty products like Xray film, catheters and hospital supplies- including toilet paper, copier paper, etc. the death of these GPO's started when they began wrapping implant and physician specific products into the mix. Companies pay HUGE fees to be part of these agreements just to get the end-around from the hospitals for even better pricing. so now, the hospital pays Novation to be a part of something they're not fully utilizing, the manufacturer pays a percentage fee on sales for products that they're selling WELL below the contracted rate and Novation has the balls to try and hold accounts to "favored nations" pricing strategies. I'd have dropped these M'Fers years ago if I were running MDT. their product line ( outside of diabetes supplies) doesn't even resemble anything that should be contracted through a major GPO.
    The upside for those of us who no longer work for big blue, is that many hospital systems that have been snowed into thinking they need to buy Novation or Premier vendor products only- is done. Thank you Big Blue....

  16. 6:39: I would have to agree with you. Thanks Medtronic. They also did us little guys a favor as well, because it was and still is almost impossible for a small company to get on those gpo contracts. And it is a scam the hospitals bought into. The gpo's were raking it in from both sides, the manufacturers and hospitals. Plus, the pricing wasnt that great. I would have loved to get on a gpo contract pricing, because it was much better than a local negotiated price.

  17. 11:17
    I think rejection of Amplify shows couple of things
    1-conflict within FDA
    2-Even big fish like MSD can not get away with a product that has some cancer risk, even though it was deemed safe by 5 expert at FDA
    TSB may want to start a new thread on this development

  18. My Novation hospital thought the MDT contract was a joke. They could get better dealing direct with the manufacturer.

    In another buying group, the hospital cherry picks the contract. Instead of being compliant, they took an "all play" mentality.

    So, if the GPO contract is worthless to me, why waste our time?

    Unfortunately, now, every hospital thinks it deserves the biggest discounts in the country! Having dozens (or perhaps hundreds) of spine vendors clamoring at their door has created a commodity mentality. What is a very unique and service-intensive line is now being treated like a band-aid, an aspirin, or a 4x4 sponge. Thank you Nuva, Globus, Lanx, K2, Integra, OrthoDevelopment, XSpine, Biomet, Alphatec, Thekan, Pioneer, LDR, etc., etc., etc...

  19. Pedicle screws and cervical plates ARE like band-aids. The only reason your in the room for a case is to keep the competition, that is hanging out in the sterile core, out of your room. Pretty sure a surgeon can get by without a rep in the room.
    In 5 years our position, as it is today, will not exist. We will be pharma reps. Yes, in part because of the 150+ spine companies fighting for a piece, but also the fact that for a long time we were charging a boat-load for a screw that didn't really have much technology in it. Ah, those were the days.

  20. its gettin' its gettin' its gettin' kinda hectic!

  21. For years and years, healthcare supply manufacturers, MDT included, have been chugging along at 20% plus profit margins, growing in many cases. Getting rich and fat. At the same time, their reason for being, hospitals and the healthcare system, have been seeing their margins decline, rapidly! Oh yeah, and who pays for it? Everyone. Taxpayers. Insurance Co's. It couldn't last for ever.

    Why should a Spine rep make $250k - $500k? More than the doc? yep. Med school? Nope. Liability? Nope. A screw is a screw is a screw is a screw.

    In the end, this will hurt MDT. There is now so much hatred for this company in the hospital, GPo and doctor circles. This move, done in the way it was done, will hurt them.

  22. $250-$500K. In who's world. Less than 5% of all spine representative make that kind of change. Companies try to convince reps they can make that kind of money, and it was out there 5 years ago. Doc's are bitching they are making less. Not according to any info I have read; max I have seen is 7%. It's akin to the oil companies jacking prices because there might be a supply issue, or insurance companies sucking the life out of folks in advance of Obama care.

    As 10 reps from 10 different companies if they are making more money than they did last year. I'll make it easier for you, better to ask how much less they are making. It will avoid getting laughed at.

  23. By the way, based on the recent expansion by hospitals across this country, those poor hospitals continue to make so little money, as they expand and build new Parking Garages, Cancer Centers, Children's Hospitals, and of course have we ever met a CEO of a hospital that actually took a pay cut. Some of you people need to snap out of your fantasies, TSB would suffice it to say that the average spine rep (including the infamous cover rep) earns between $80-$150K, and that doesn't include covering one's expenses. As NBA players love to say, "there's no question" that there are others that earn substantially more than that, but they are the exception rather than the rule. As TSB says, there's a place for everyone in this world, and if surgeons believe that sales reps are driving up the cost of delivering healthcare in this industry, maybe they should start looking at the earnings that CEO's make in spine, but then again, why would anyone want to bite the hand that FEEDS them?