Over the last year, the Consumer Price Index (CPI) increased 8.5% across the board. Medical care alone has increased more than 2.7%. Capital equipment vendors have published new price lists that reflect increases of 3-10%, with some bumping pricing up to 17%. It’s just a matter of time before increases are felt in the costs of overall medical care.
Keeping in mind that the most fiscally healthy hospitals have margins that range from 4-6%, consider that a hospital must generate $20 in revenue to make up for every dollar in costs. The bottom line is that the cost of treating patients is rising, and provider organizations are searching for ways to increase savings while maintaining the quality of the patient care they provide. symplr is fielding a significantly higher number of requests to work with provider organizations on savings strategies for servicing capital technology.
Consider the 90/10 rule for equipment purchases
Service cost can be an overlooked expense, especially when buried in the operating budget. For large health systems especially, it can be overwhelming to analyze every piece of equipment in use. It behooves them to consider the 90/10 rule: Some 90% of costs reside with 10% of your equipment.
For example, the average cost of a CT machine is $1 million with typical service costs for a high-level contract of $125,000 per year. According to the American Hospital Association, the life expectancy of a CT machine is five years, after which a major upgrade is typically required. As a result, service costs will total approximately $500,000—or half the price of the system. For other equipment and technologies, consider the quantity a provider requires. For example, the unit costs of an infusion pump may be only $5,000, but requirements for an inventory of 500 could result in costs exceeding $125,000 annually for a service contract. This factor may indicate to the health system that pumps could be a target alternative service strategy.
Strategies to lower service contract costs
Healthcare organizations can employ multiple strategies to lower the cost of a service contract. One is negotiating the price at the time of capital purchase. The profit margin for OEMs that service their own equipment can range from 40-60%. As a result, it benefits health systems to negotiate on services from the start, when they have the most leverage.
Another cost-savings strategy involves determining the service level and/or support a health system anticipates it will need for a technology to maintain continuous patient care. Critical equipment is dictated by the healthcare organization’s patient population and mission. First, consider the quantity of equipment needed and determine how critical it is to the hospital’s mission. Then, determine the required level of support by leveraging inventory management programs to:
- Obtain historical breakdown records
- Review utilization percentages
- Identify impact of downtime on clinical services
- Review impact to revenue for downtime
Some equipment and technologies could be candidates for lower coverage if they are considered low-use technologies, a backup system is available, or the equipment is consistently reliable. The cost-savings strategies can come via limiting the hours of service and preventive maintenance visits and parts coverage in the contract.
Key considerations in a service contract
To rein in costs, healthcare organizations must carefully think through multiple areas in any service contract. For example, software has become a costly line item in OEM service contracts, primarily because it gives the vendor leverage against competing third parties. Various categories or types of software may be included in the service contract. The vendor can add new features and functions, make enhancements, fix bugs, improve networking—and now more commonly offer cybersecurity. Older equipment facing end of life or basic systems may not get yearly upgrades. As a result, symplr recommends that customers ask the vendor what’s included in the software upgrades and determine whether it’s appropriate for their technology and utilization.
An additional contract factor to watch is a significant cost difference in coverage hours. The coverage needed will be dictated by how critical the equipment is and whether there is a backup. High-use systems may require coverage for extended hours or even after-hours or weekend preventive maintenance visits. Even when reviewing service on a low-use technology or consistently reliable equipment, a backup system may need to be available and/or it may require only 8-to-5 service coverage.
In the current tight fiscal environment, it’s only a matter of time before healthcare CPI increases negatively affect health systems’ bottom lines. Before committing to a service contract, examine what’s included and let historical data and patient needs guide the best value for your facility.
