Medtronic (NYSE: MDT), the world's largest medical device company, is the target of an investigation that the U.S. Senate Finance Committee launched Monday.

The chair of the committee Max Baucus (D-Montana) sent Medtronic a letter in a bid to determine whether the Fridley, Minnesota company's cancellation of contracts with group purchasing organizations (GPOs) was designed to reduce transparency and increase costs for hospitals, an allegation that has surfaced in recent news reports.

In February, Medtronic cancelled five contracts it had with Novation and later with Premier, two major GPOs. In announcing the investigation, a statement from the Senate Finance Committee said, "GPOs allow hospitals and other health care entities to save money by aggregating purchasing volume and using that leverage to negotiate discounts with medical device manufacturers."

The Senate scrutiny comes at a time when both parties are looking at entitlement reform, including how to overhaul Medicare and Medicaid.

Specifically, Baucus's letter to Medtronic's CEO Bill Hawkins has 13 questions/demands. They include:

  • Did Novation's reported refusal to allow confidentiality clauses play any role in the decision to terminate the group purchasing contracts? Please provide any internal studies, assessments or memoranda regarding Novation's ban on confidentiality clauses in contracts and on Novation's sharing of pricing information among its members.
  • Please detail all contract cancellations with GPOs since 2000. For each cancellation, note the year, products covered by the contract, annual value of the products and total compensation provided by Medtronic to the GPO for those products.
  • At the Citi Global Health care Conference on March 2, you said that you would be "shocked" if your competitors did not follow Medtronic's lead by dissolving contracts with GPOs, like Novation. Did you or any agents of Medtronic engage in any direct or indirect communication with any competitors with regard to business practices concerning GPOs? If so, please provide copies of emails, phone logs, transcripts or any other documentation of communication with these companies.

Medtronic has until June 6 to respond to Sen. Baucus's letter.

A Medtronic spokesman declined to respond to the specific questions, but said the company got Baucus's letter.

"Medtronic acknowledges receipt of the letter from Sen. Baucus and will respond in a timely manner," said Christopher Garland, in an email. "We will not be responding to them in the press."

But Garland did point out that previously, Medtronic has said that it does not intend to terminate contracts with all GPOs. He also noted that 85 percent of Medtronic's contracts are negotiated at the local level directly with hospitals, even though national contracts already exist.

Medcitylogo

The Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.