Finding the silver lining in this year’s capital budget

Summer is the start of the capital budget season for many hospitals, an annual rite of passage that can be a major source of heartburn for hospital executives as they try to fund all of their budget priorities.

But the capital budget process can also present an opportunity to find more savings. How?

By taking a comprehensive view of the many costs that comprise the total cost of ownership (TCO) of medical equipment, cost-conscious hospital leaders can uncover unexpected capital savings. From our experience of more than 13 years working with hospitals across the U.S., these savings can quickly add up to 12 to 16 percent of their capital equipment costs. While TCO is a commonly used framework for evaluating and budgeting asset costs, particularly for traditional IT assets, it is less frequently applied to medical equipment. Considering TCO during the capital budget process enables hospitals to better align internal cost expectations, avoid cost surprises in future years, and best of all, uncover a “silver lining” of savings that remains hidden to many organizations.

Here are three strategies that hospital leaders can use to more accurately understand their medical equipment lifecycle costs and find untapped savings:

1. Plan for total lifecycle costs
Medical equipment typically has an expected useful life of five to 10 years, and the “one-time” purchase of equipment will affect the annual budget for many years to come. Many hospitals focus on the initial purchase price – which represents less than 30 percent of annual equipment costs – but have limited visibility into medical equipment lifecycle costs such as annual maintenance, unplanned repairs, hardware and software upgrades, ongoing training and more.

Anticipating potential costs across the lifecycle makes it possible to identify alternative solutions that over time can present substantial savings.

For example, a hospital was upgrading a series of lab analyzers to take advantage of new features and a much faster processing time. The hospital had planned to purchase premium 24x7 service coverage for all six machines at an annual cost of $350,000. When the leadership team saw the total service cost ($2.1 million over six years), they re-evaluated their requirements and decided to cover only two of the six machines at the premium level to handle the lab’s night and weekend needs. This simple change resulted in savings of more than $58,000 per year, or $348,000 over the seven-year expected life (one year is covered under warranty) of the analyzers.
By mapping out and budgeting for all costs across the entire medical equipment lifecycle –purchase, service and disposition – hospitals gain the greater visibility they need to identify, manage and ultimately reduce costs.

2. Enlist suppliers’ help
Most hospitals rely on their suppliers to provide product and pricing information when purchasing new equipment, and it is clearly in the supplier’s best interest to provide this information. Fewer hospitals rely on their suppliers to help them identify savings in service, upgrades, training and other expenses that will increase over the life of equipment. In today’s competitive climate, savvy suppliers realize that by helping you keep your costs in check, they will increase the likelihood that you will be a repeat customer and will buy replacement equipment from them when the time comes.

Work with suppliers to walk you through all the hard and soft costs you should expect to pay over the life of any equipment. This will give you a more complete, accurate picture of costs and give you more data points to negotiate the details of equipment purchase agreements and service contracts to build in savings. Before issuing a purchase order, ask the supplier to help review your final summary of costs and make sure you have accurately projected what is needed. You may be surprised at how often suppliers will point out optional features that you may not need to purchase, and that can reduce your total cost.

Recently a community hospital was expanding its outpatient cancer treatment program and had purchased advanced features in a clinical software package that were not being used. The supplier pointed out that the annual service contract included coverage of the hardware and software required for the advanced features, and that if they removed them from the annual service contract they could reduce their annual cost by 4.8 percent – or nearly $20,000 per year – with no change in coverage, reliability or patient care.

Remember that suppliers have a strong vested interest in helping you not only choose the right equipment initially, but also to realize the intended benefits and ROI over time.

3. Leverage internal experts

Supply chain and purchasing departments are typically the most involved in negotiating and contracting for new medical equipment, but other internal stakeholders with extremely valuable knowledge are often left out of the process. Clinical engineering in particular can provide important insight into the different cost drivers of service contracts and big ticket equipment hardware and software upgrades. In addition, tapping other experts in IT, logistics and other departments is a great way to both foster internal collaboration and use institutional knowledge to identify savings opportunities.

Earlier this year, a regional hospital upgraded its fleet of patient monitors and moved to a wireless monitoring platform. The upgrade required a substantial investment in wireless networking infrastructure, including more than $150,000 in services to run networking cables throughout the hospital. The clinical engineering team running the project consulted with their colleagues in the IT department, and found that there were several members of the IT team experienced in network installation. As a result, the team removed $217,000 of costs from the final purchase agreement and used their colleagues to complete the work at a fraction of the proposed cost.

Nearly all hospitals are challenged to fund competing demands from clinicians for new medical technology. By taking a comprehensive view of spend through a TCO lens, hospitals can typically save 12 to 16 percent over the course of the equipment lifecycle. Armed with a more complete and accurate view of their total spend, even the most budget-challenged hospitals can find a silver lining of savings.

By Peter Robson, CEO, Miga Solutions

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

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