Medical device giant Medtronic Inc. scotched a handful of contracts with the group purchasing organization Novation LLC. in a move that could herald new directions in the way struggling device companies work with hospitals and their purchasing middlemen.

Medtronic, which last week announced plans to cut up to 2,000 jobs, said Friday it canceled five contracts worth $2 billion with Novation for cardiovascular and orthopedic devices, in an effort to cut back on costs.

Selling directly with hospitals could save the Fridley, Minn.-based Medtronic $40 to $60 million a year, according to predictions made by Bernstein Research analyst Derrick Sung, in a letter to investors.

"With an eye on removing costs from the health care system, Medtronic believes that we will be best able to address the varied needs of our customers by managing our business interactions and relationships locally instead of through Novation," Medtronic said in a statement.

However, Novation said the move will likely pass on higher costs for its members, and that 16 hospitals had written a letter of complaint about Medtronic's actions.

"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," Pete Allen, senior vice president of sourcing operations at Novation, said in a statement.

Novation said costs could rise as medical device companies often require nondisclosure agreements preventing hospitals from sharing prices with aggregators. The group said that by "limiting hospitals' ability to understand and discuss pricing with outside parties, ...they will be able to sell at price points that are not rational or relevant."

But the medical device industry said companies weren't leaving GPOs to keep their prices confidential. The Medical Device Manufacturers Association, a trade lobby, said rather companies were "fed up" with paying fees to reach customers contracted through GPOs.

J.P. Morgan Chase & Co. analyst Michael Weinstein said Medtronic's decision could represent a "watershed moment", according to the Wall Street Journal, as other firms might start to follow the company's lead.

"I expect that St. Jude Medical and Boston Scientific will likely follow Medtronic's example for their cardiac devices. The ortho/spine industry may follow Medtronic's example as well as the major device companies struggle to maintain their average sales prices," a Gerson Lehrman Group contributor wrote on the company's Website.

The contracts with Medtronic, which still has deals with other GPOs, represent about 5 percent of Novation's nearly $40 billion yearly business, according to the New York Times. Irving, Texas-based Novation, founded in 1998 by VHA Inc. and the University HealthSystem Consortium, is believed to be the country's largest GPO by volume.

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