Outside of hospitals’ capital and supply costs, service contracts are the next line item that can have a significant effect on overall life cycle costs. With equipment maintenance increasing 2 percent to 3 percent annually, service is a substantial expenditure for hospitals. However, negotiating these service contracts can be difficult and confusing. The following are the most common questions MD Buyline routinely receives related to negotiating service contracts and understanding how to find the best and most effective equipment support.

1. Are service contracts negotiable?
Service contracts are always negotiable. When reviewing maintenance agreements, we consistently find additional dollars on the table and often recommend that our members consider other levels of service. This could include recommending a time-and-materials-based contract when it is appropriate, or recommending no service contract in situations where the hospital’s size or type of technology indicates that the biomedical department can sufficiently service the equipment.

Additionally, when committing to a service contract, especially if it is for more than one year, we recommend including a limit to the maximum increase per year. The current standard is the Consumer Price Index, or market basket increase, less 1 percent, which translates to price increases of 1.5 percent to 2.25 percent per year. However, in some situations, hospitals may find including a fixed cost for the term of the agreement works better for their purchasing scenarios. Another key factor is negotiating annual payments on a multiyear agreement rather than paying in full up front. This allows customers to maintain leverage should service quality or responsiveness be an issue.

2. When should service contracts be negotiated?
Negotiating the service support contract at the point of sale offers the best opportunity to find savings. Service contracts purchased later can be 10 percent to 20 percent higher than at the point of sale. Additionally, negotiating after the purchase of a system can significantly reduce leverage. A multiyear service contract will provide additional value because these contracts are typically priced lower. With a multiyear contract, customers should be sure to negotiate paying on an annual basis and include the option to change contract levels depending on the performance of the system, or renegotiate price depending on the quality of service.

3. What are the options for service contracts that were not negotiated at the point of sale?
If a contract has already been signed, flexibility can be limited. However, many vendors will work with customers or offer options for reducing the cost of coverage. Customers should begin by conducting a comprehensive review of the current service agreements and work with the vendors to discuss the goals and objectives of their institutions. Another option would be to purchase a service contract at the end of warranty on a sliding scale. Also, customers should consider that as the equipment ages, broader coverage may be needed. A piece of equipment that is only a year old will likely not require the same type of coverage for equipment that is five years old.

4. What are the statistics for new equipment service costs as a percentage of list price?
As a rule of thumb, service contracts for capital equipment cost between 6 percent and 8 percent of the average replacement value of the equipment, though this can vary by the type of technology. In some cases, the pricing can vary based on procedure volume, as well. Some equipment that has little variability in configuration may be based on a fixed “list price." The age of the equipment, models covered, type of coverage and condition of the equipment all influence this price. However, there can be variability in service pricing. We have seen a range of approximately 2 percent to 24 percent overall. For example, when we look at IT coverage, we often see hardware in the 8 percent to 12 percent range, but software falls between 18 percent and 24 percent.


5. How should the percentage of cost for service renewals for older technology be estimated? Although older equipment can carry a higher risk of failure, in general, pricing depends on the technology and configuration. Because maintenance contracts for older equipment depend on different metrics, it is best to find a reputable source to benchmark service for these older or obsolete systems. The cost of service for older equipment is always higher than that of newer systems. As the equipment ages, the cost of service will increase, and many vendors will have a 3 percent to 4 percent per year increase on multiyear agreements to account for aging. The main exceptions to these rules are systems that are reaching sunset, or are no longer supported due to obsolescence.

6. How is the amount of service coverage needed determined?
Customers should begin by evaluating the complexity of each piece of equipment and the hours needed for operation. They also should consider the service history of existing systems in their facilities. Every organization uses equipment differently. Some experience more wear and tear than others based on patient load. Customers should assess how critical the equipment is to their workflow and whether there are backup systems that will allow patients to still be treated when the primary system is down. It can also depend on the volume and the number of systems available should one of the units need service and be down for a day or longer.

How easy is it to absorb the patient scheduling during that downtime with other units? The expertise of a customer’s biomedical department will also help to determine the amount of coverage needed. We also suggest considering any government regulations that require a specific standard that is only valid from the original equipment manufacturer (OEM).

7. Is standardizing with one service vendor recommended?
This is becoming a more common focus of many customers. It is a case-by-case basis and is not the right solution for everyone. If a facility wants to standardize, it should review its history with this provider, if it has one, and the amount of equipment it has from that vendor, provided the service provider is also a manufacturer. Facilities should also consider that a single service provider may not be able to repair every system and may need to contact the OEM for service. This can cause additional delays. Customers also should be sure to track downtime and response time to ensure they are not seeing longer response times from the provider.

In these “master service agreements,” often the vendor providing service will make the first attempt at repair, but may have to subcontract the OEM vendor to come in and complete the service repair. Although the customer may be paying less initially, it may result in a longer time to repair for these types of situations. A key area to watch is how the pricing changes at contract renewal. If there were many instances in which the servicing vendor had to bring in secondary support, that cost will be reflected in the contract renewal. In some instances, these types of contracts can include equipment that does not need a service contract. Customers should closely review the contract for these types of equipment and determine what level of risk they are comfortable assuming.


8. Can third-party vendors provide the service needed at a lower cost? In some instances, this can be an excellent option for hospitals to save money, but these types of contracts should be looked at on a case-by-case basis. For high-end or other technologies that require specific expertise, remaining with the OEM is often the best option. The reason for this is twofold.

First, many of the more advanced technologies require proprietary diagnostic software that is not available to third-party service providers. Secondly, the OEM engineers are trained specifically on that type of technology. For low-end technologies that may require minimum service, a third-party contract can make financial sense. As always, it is important to balance risk with savings. Customers should always consider the trade-off of value versus cost. We often find for critical technologies, it is not cost-effective to consider a third party if its ability to repair a system in a timely manner is limited.

9. What contract language should be included in service contracts?
Although the legal department should always carefully review all service contracts, we have found there are five clauses to always include in any service contracts to protect the facility.

• Multiyear Service Contracts: These contracts are typically priced lower. Facilities should negotiate paying on an annual basis and at a fixed rate throughout the contract term. The option to change contract levels depending on system performance, or renegotiate price depending on the service quality, should be included.

• Performance Guarantee Clause: This ensures that the equipment is performing to the agreed-upon performance specification and will eliminate any finger-pointing if a service issue arises.

• Response Time Guarantee:M Response time to service problems is vital in choosing a service contract, especially with systems that can’t afford downtime. These must be provided in writing and acceptable to the hospital before the purchase order is issued.

• Uptime Guarantee: Many vendors will provide a 95 percent to 98 percent uptime guarantee on their equipment. Vendors typically calculate uptime guarantee on a 24/7 basis, but uptime guarantee should be calculated during specific hours of operation.

• Termination Clause: All contracts should have a termination clause that allows the facility to terminate the entire agreement or terminate coverage of specific items within that contract. Clauses that impose a penalty for termination should be deleted.

10. Is it possible to get out of a service contract?
It is difficult to cancel a service contract, except in cases in which there is a breach of the contract. However, language should be included in the initial contract to allow the facility to review the cost, quality of service and terms on an annual basis. This can help facilities adjust rates in instances when they find the equipment has low failure or use rates, and when there are issues with the vendor’s performance.

About the authors: Katie Regan, MA, is the clinical publication manager at MD Buyline and has over seven years of clinical research and medical writing experience. Tom Watson, BS, RCVT, is a clinical analyst at MD Buyline with over 40 years of experience in the field of cardiovascular medicine. Kevin Hodges is the director of operations for MD Buyline and has over 20 years of experience helping hospitals develop purchasing strategies to maximize their savings.