The economics of medical equipment service

August 06, 2019
By James Laskaris

Healthcare costs the U.S. over $3.65 trillion each year, a figure that is growing at an annual rate of 5 percent.
The hospital market alone will reach an estimated $800 billion in the next couple of years. High-tech capital equipment has an important impact on costs, patient safety, and outcomes. Each year, providers will spend $31 billion on high-tech lab, patient monitoring, imaging, radiation therapy, and robotic technology. Healthcare IT and telemedicine technology adds another $35 billion to the spend. Combined with lower-end healthcare technologies, a hospital should expect to spend at least 2 to 3 percent of its budget on new technology every year. It’s a trend that will continue to grow as the population ages and consumers and physicians demand more leading-edge technology.

In any industry, service is an important issue when technology is involved. Along with the initial expense of acquiring technology, service can be a significant factor in cost of ownership. Each year the U.S. healthcare industry will spend over $14 billion dollars for service on medical technology. This accounts for 3-8 percent of what the original technology costs per year (IT accounts for up to 20 percent per year). Although small compared to a facility’s overall labor costs (50 percent) or even what hospitals spend on consumables (15¬–20 percent), service on medical technology could mean at least a $1–$2 million or more (0.5 percent of the overall budget) line item for a 200-bed hospital. Larger teaching facilities would see this number easily reach $3-$5 million. Hospital profit margins in the last 10 years hover in the 4-6 percent range at best, but as many as a quarter of hospitals function in the red. Because of this, service has been a focus for lowering costs.

Service can also be an important revenue stream for vendors, accounting for up to 40 percent of a vendor’s total revenue. This is especially true of high-end technology providers (robotics, imaging, lab, IT) or systems with a long life cycle (sterilizers, beds, lights). Profit margins for vendors on their service plans can also reach 50 percent. This has become especially evident for new IT-focused technologies where software licensing and upgrades have become the norm.

The good news is that there are multiple service options available to control costs. The key is to balance lower costs without compromising outcomes. These include multiple-vendor, hospitalwide, third-party, and in-house service options. Each has its own pluses and minuses when balancing risks with savings.

With hospital margins limited at best, savings matter. A hospital must generate $20 in revenue to for every $1 in costs. With multiple options available, service is an excellent area to look for savings. But one size does not fit all. Providers should determine where they are in respect to their overall service costs, then identify benchmarks for comparison to similar users. Quotes from asset management, third-party service organizations, or maintenance insurance proposals should provide excellent guides. The asset management team can then determine the right balance of cost saving, outcomes, and risks for maintaining your technology.

Changing market
There are four types of medical equipment maintenance: corrective, operational, preventive, and predictive. Corrective includes repairs to technology that is no longer functioning properly. Operational maintenance is tasks that can be performed by the equipment user, such as filter changes. Preventive maintenance is work performed to reduce the chances of a system failing without warning. Predictive maintenance is an evolving concept based on monitoring the equipment and performing corrective or preventive maintenance when warranted. It is a cost- and time-saving method made possible by online remote equipment monitoring.

Changing face of technology
Technology has been rapidly evolving over the years, with computers playing an increasing role in medical devices. IT is also playing a much bigger role in direct patient care than it did even a few years ago, thanks to new “pay-for-performance” initiatives. Devices such as X-ray machines, CT, lab technology or even medical records, which were once stand-alone systems, are now networked to save costs and improve efficiencies and safety. It is an evolving process that brings technology, physicians, and patients together and is commonly referred to as “Medical Home”. The downside is that it has complicated practice in which technology has evolved beyond just the “box”. The result is the addition of software, wireless, internet, and networking concerns to the service market.

With varying needs and markets, few industries have the luxury of access to one-size-fits-all technologies. Unique markets have motivated hospitals to develop their own technological environment, designed to provide care according to their patient mix. This requires a combination of multiple technologies and vendors, which makes a “plug and play” approach difficult.

To address this, biomed and IT departments have begun to work closely with each other and with vendors to manage the network. When individual service contracts are required, clearly defined rights and responsibilities of each party should be indicated. Even so, the network and its ability to assist in delivering healthcare is the responsibility of the hospital. To facilitate this, a manager within the facility should be identified to take responsibility for the operation and upkeep of the hospital’s networks.

Think ahead, ‘before the purchase’
The time to consider the service options of a new technology starts way before signing the purchase order — as early as the capital budget process. This is when the vendor is the most flexible with pricing and service options. After the sale, the vendor has all the leverage. The key is to have a plan well before the warranty expires. Multiple tools are available that include service rating databases along with FDA recalls and MAUDE (FDA) records. These will give potential buyers an indication of a technology’s general service history.

Part of the capital budget process should involve the views of the department director and bio-med staff on how best to maintain the technology. This allows departmental and material managers to have clear goals when negotiating service on the technology. Considering that the cost of service over the life of a technology can equal the capital costs allows negotiators to get a true picture when comparing vendors and models
Keep in mind that not all technology requires a service contract, especially if trained in-house staff is available. If this is the case, service training should be considered. Aggressive negotiations can produce service schools and manuals at no cost. These can represent line items worth thousands of dollars. Diagnostic software and tools may also be required. These are also negotiable at the time of sale, and with large purchases they can be included at no charge during the purchase discussions.

If the decision is to purchase a vendor-supplied service contract, lower costs can be achieved through multi-year agreements. These usually represent a savings of 5–10 percent over single-year agreements. The downside is that the fine print may prevent you from seeking additional savings in the future. Before signing a multiyear contract, consider the length and the out clause. Down the road the department may want to seek other options, such as asset management, time and materials, or in-house support, if staff feel the vendor’s service contract is not cost-effective or dependable.

Another factor to consider is an annual price increase. Historically, price increases have been tied to market basket increases as per the Consumer Price Index (CPI). Market basket increases for medical equipment and supplies are 3–4 percent. Vendors typically price their increases at 1 percent below the market basket increase. This puts the average increase across the board for technology at between 2–3 percent.

Road map to lower costs
As Medical Technology becomes more complex, providers are seeing their cost of ownership increase. This is true even though competition has driven vendors to offer more reliable technology, particularly in the first few years of operation. For this reason, a full-service contract may not be cost-effective in the early life cycle, especially when routine (preventive) maintenance is performed. But when a technology reaches the end of its life expectancy (typically 5 to 7 years for higher-end technology), service and software costs may exceed the cost of replacement. In this case the systems should be high on the capital budget committee’s list for replacement.

There are advantages and disadvantages for all levels of contracts. To determine which level is best for your needs, consider these factors:

How much is the technology utilized?
Where is it in its life cycle?
How reliable is it?
Is there a backup system available?

Technology that has a high level of utilization and does not have a backup is a candidate for a full-service contract. The loss of revenue if it becomes unavailable may exceed any savings from alternative service options. On the other hand, mature technology in the middle of its life cycle may not require a contract. Cost-conscious facilities with an innovative technology management team should address service needs systematically. This includes tracking the service costs of a technology on a “time and materials” basis.

Even with a full-service contract, vendors can provide an estimate of what the repairs would have cost. At the end of the year, if these costs exceed the cost of a contract, a full-service contract is warranted. This will also help a facility determine when a technology is due for replacement. Considering that even smaller facilities may have thousands of pieces in their inventory, tracking all technology in this manner may require more resources then are available. One thing to keep in mind is that 90 percent of any organization's service costs are associated with 10 percent of the equipment.

James Laskaris
Software has assumed greater importance as technology becomes more computer-driven. It’s often considered a black hole in the budget, especially when higher-end system vendors offer software support as line items. Typically, these are offered on existing equipment on the basis of new features, increased compatibility, or to fix preexisting bugs. But the question in the back of a director’s mind remains: What additional value are we getting for a $10,000-plus software contract or upgrade? Before committing to a software support contract, I recommend you ask several questions: What new features will you be receiving? Will they be truly new features and capabilities or just aesthetics? What does a software upgrade cost on a time and material basis? You may end up paying for a new screen image or for the system to be compatible with something you do not have.

About the author: James Laskaris is the senior clinical strategist at MD Buyline.