By Rich Fabian
Calculating the total cost of ownership (TCO) for capital equipment means adding obvious costs like the initial purchase price to less obvious ones like the eventual trade-in value.
Most hospital purchasing departments calculate TCO relatively narrowly. They tend to stick to a simple formula of the purchase price plus the cost of the service contract over a specified period, usually 3 to 5 years. By focusing on things that are easily counted, they often overlook significant variability that can impact TCO—variability in what the service contract covers, for instance. While TCO is increasingly recognized as the ideal figure for hospitals to use in making purchasing decisions, it remains challenging to calculate fully. With the need to better manage margins in a Covid and post-Covid environment, now is a good time for hospitals to standardize their TCO calculation.
More hospitals and clinics are taking up the challenge of TCO calculations because cost containment is such a prominent focus; understanding the full extent of total ownership costs is a prerequisite for containing them. In sessions at the Radiological Society for North America conference and in the pages of imaging publications, resources are being presented to help hospitals become more analytical about their purchasing decisions around capital equipment, including portable capital equipment. For example, one study conducted by Alpha Source tracked a nationwide installed base of specific ultrasound equipment in order to establish the range of service costs associated with the equipment. One of the goals was to identify the financial basis for selecting the following alternatives: (1) comprehensive service contracts; (2) service and repairs billed hourly; or (3) reliance on in-house biomed resources to meet servicing needs.
Ultimately, the study found that the average total annual spend across all medical equipment was $9,800 per year—but that the upper end of the range was over 5 times (5X) that amount. Almost 25 percent of hospitals were found to have spent 50 percent more than the average cost of a service contract—and 10 percent of hospitals had spent twice the average annual price of a service contract—by opting for hourly billable service (T&M) and parts. Business intelligence like this makes a concrete and convincing case for the benefits of TCO calculation, which is standard in other industries. In the automotive business, for instance, the average cost of repair at 150,000 miles is collected and compared across brands. While that kind of comparison is not yet available for medical equipment, hospitals are trying to get it as part of the competitive bidding process. The same inquiries could be posed to third-party service providers to learn more about their charges to service different manufacturers’ equipment.