Controlling costs of service: every dollar counts
August 29, 2022
By James Laskaris
Controlling cost has always been a priority for hospital administrators, but now it is taking precedence over nearly every other factor of healthcare operations. 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 ranging from 3% to 10%, with some bumping pricing up to 17%. It’s just a matter of time before these 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% to 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.
Capital and consumables have always been a target for savings. However, now more than ever, 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 if it is 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 5 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. At the other end of the price spectrum is an anesthesia machine, which ranges in price from $30,000 to $60,000 and has a life expectancy of 7 years. Here, service costs typically range from $15,000 to $18,000 over the life of the equipment.
For other equipment and technologies, one must 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 of over $125,000 per year 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
There are multiple strategies healthcare organizations can employ 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’s beneficial for health systems to negotiate on services from the start, when they have the most leverage.
Another cost-saving strategy involves determining the level of service and/or support that a health system anticipates it will need for a technology in order to maintain continuous patient care. Critical equipment is dictated by the healthcare organization’s patient population and mission. First, the organization must consider the quantity of equipment needed and determine how critical it is to the mission of the hospital. Then, the required level of support can be determined 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-saving 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 is included in the software upgrades and determine whether it is appropriate for their technology and utilization.
An additional contract factor to watch for is a significant cost difference in the hours of coverage. The coverage needed will be dictated by how critical the equipment is and whether there is a backup. Systems with high utilization 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 only require 8-to-5 service coverage.
Replacement parts in contracts
Radiation emitting systems and ultrasound service contracts typically give the user the option to add tube or transducer replacement in the contract. For these technologies, a health system’s historical maintenance records are key to identifying whether tube or transducer replacement should be included in the contract. As an example, some x-ray tubes can last for years while others require yearly replacement. The repair history of transducers is dependent on the user and the cleaning process.
Savings of up to 50% can be seen with third-party tube and transducer options. Keep in mind that these options may include recertified or new systems. Recertified parts can save hospitals up to 75% of the cost a new part. However, its longevity will be an unknown factor. Although batteries are typically not included in service contracts, portable X-ray systems, infusion pumps, and monitors all require batteries. Savings of up to 50% can be realized when using a third-party battery provider.
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.
About the author: James X. Laskaris, EE, BME, is a clinical advisor and expert with symplr, specializing in biomedical engineering, equipment services, and OEM. With deployments in 9 out of every 10 U.S. hospitals, symplr is the leader in enterprise healthcare software and services.
Controlling cost has always been a priority for hospital administrators, but now it is taking precedence over nearly every other factor of healthcare operations. 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 ranging from 3% to 10%, with some bumping pricing up to 17%. It’s just a matter of time before these 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% to 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.
Capital and consumables have always been a target for savings. However, now more than ever, 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 if it is 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 5 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. At the other end of the price spectrum is an anesthesia machine, which ranges in price from $30,000 to $60,000 and has a life expectancy of 7 years. Here, service costs typically range from $15,000 to $18,000 over the life of the equipment.
For other equipment and technologies, one must 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 of over $125,000 per year 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
There are multiple strategies healthcare organizations can employ 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’s beneficial for health systems to negotiate on services from the start, when they have the most leverage.
Another cost-saving strategy involves determining the level of service and/or support that a health system anticipates it will need for a technology in order to maintain continuous patient care. Critical equipment is dictated by the healthcare organization’s patient population and mission. First, the organization must consider the quantity of equipment needed and determine how critical it is to the mission of the hospital. Then, the required level of support can be determined 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-saving 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 is included in the software upgrades and determine whether it is appropriate for their technology and utilization.
An additional contract factor to watch for is a significant cost difference in the hours of coverage. The coverage needed will be dictated by how critical the equipment is and whether there is a backup. Systems with high utilization 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 only require 8-to-5 service coverage.
Replacement parts in contracts
Radiation emitting systems and ultrasound service contracts typically give the user the option to add tube or transducer replacement in the contract. For these technologies, a health system’s historical maintenance records are key to identifying whether tube or transducer replacement should be included in the contract. As an example, some x-ray tubes can last for years while others require yearly replacement. The repair history of transducers is dependent on the user and the cleaning process.
Savings of up to 50% can be seen with third-party tube and transducer options. Keep in mind that these options may include recertified or new systems. Recertified parts can save hospitals up to 75% of the cost a new part. However, its longevity will be an unknown factor. Although batteries are typically not included in service contracts, portable X-ray systems, infusion pumps, and monitors all require batteries. Savings of up to 50% can be realized when using a third-party battery provider.
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.
About the author: James X. Laskaris, EE, BME, is a clinical advisor and expert with symplr, specializing in biomedical engineering, equipment services, and OEM. With deployments in 9 out of every 10 U.S. hospitals, symplr is the leader in enterprise healthcare software and services.