Controlling costs of service: every dollar counts

August 29, 2022
Parts And Service
From the August 2022 issue of HealthCare Business News magazine

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

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