As hospitals and clinics become more analytical
about their purchasing decisions, they are starting to evaluate the
total cost of ownership (TCO) of capital equipment, including portable
capital equipment, rather than the initial outlay alone. Hospitals and
clinics are recognizing that if they want to control and contain their
costs, they must first understand what they’re actually spending over
the lifetime of their equipment.
New resources
are emerging to support these calculations. At a recent Radiological
Society of North America (RSNA) meeting, for instance, a forum was held
where industry experts discussed critically important components of TCO
for the purchase of imaging equipment specifially. These components
included the financial, quality, and technical aspects of the
equipment’s future maintenance and repair. Similar resources include a
recent retrospective study reported in Imaging Technology News and
conducted by Alpha Source that calculated TCO in part by tracking the
service history of a large, nationwide installed base of a specific type
of ultrasound equipment over a three-year period (2010 to 2014). The
evidence-based report considered the economic benefits and risks of
comprehensive service contracts versus service and repairs billed hourly
versus in-house biomed resources, and ultimately found a wide range of
expenditures by type of ultrasound machine. Although the average total
annual spend across all units was $9,800 per year, the high end of the
range was over 5 times (5X) that. Furthermore, about one quarter of the
hospitals were found to have spent 50 percent more than the average cost
of a contract, and 10 percent of hospitals spent twice the average
annual price of a service contract by purchasing hourly billable service
(T&M) and parts.
Such analysis is
insightful and gets to the specifics needed for a TCO calculation.
However, service and repairs are only part of the story regarding the
total cost of owning imaging equipment— other categories of costs,
discussed below, also need to be taken into account.
Understanding Soft Costs
While
customers focus primarily on purchase price and secondarily on future
costs, they often overlook what are known as “soft costs.” These costs
include those necessary to upgrade equipment as well as to train and
educate users. Other “soft costs” that tend to be overlooked include how
the vendor’s maintenance track record and reputation may affect the
equipment’s trade-in value. Service rates and warranty specifics also
vary by vendor. The following is a soft cost checklist of some of these
components, and reasons why they need to be considered up front in the
decision-making process:
Upgradability
It
used to be that equipment was so hard coded that there was no such
thing as a software upgrade. Today, customers can acquire systems with
increasingly flexible platforms and software feature sets, many of which
are updated remotely. When evaluating these options, purchasers must
take into consideration the cyber security angle: can hospitals and
clinics update or upgrade their equipment without exposing their data?
Hospitals need to find vendor partners who have invested in an
architecture that delivers those upgrades while also protecting
customers from cyber security risks.
Training and Education
When
thinking about total cost of ownership, hospitals need to make sure the
technology vendor behaves more like a partner by educating its users
into expertise. For instance, the vendor should provide a robust
training program that can give users a high level of confidence to
operate, and to a certain extent troubleshoot, the equipment they will
be working with. That training must necessarily comprise both onsite and
online modules to satisfy the need for in-person communication as well
as access on demand, any time. Forward-thinking OEMs are today providing
training portals that include a rich array of technical how-to content;
application/use case advice and techniques; and workshops, seminars,
and other formats that feature increasingly sophisticated multimedia. If
the OEM is offering all of these resources as a value-add benefit, it
represents a major cost saving for a healthcare institution because
training and education can be an expensive proposition.
Track Record
In
the automotive business, there is a great deal of data regarding the
average cost of repair across brands at 150,000 miles. Unfortunately,
much less data is available on a side-by-side basis with medical
equipment. However, most manufacturers can glean that data through their
warranty service contract records. Smart buyers are now asking for that
information, as they should, when entering into a competitive bid for
new equipment. It might be helpful for those who use third-party service
providers to ask for those organizations’ data on the cost to service
equipment by manufacturer.
Downtime and Redundancy: Importance of Rapid Replacement Loaners
Some
unseen, underestimated, and hard-to-capture costs revolve around
equipment failure and downtime. A cascade of problems and related costs
occur when this happens, including the disruption of patient care, lost
revenue, and the need to buy additional equipment as a backup. Resulting
delays in care can also increase a patient’s length of stay (LOS), or
the LOS for an entire cohort of patients, for that matter. That metric
is of course an important factor on the hospital’s quality scorecard;
poor performance in terms of LOS can lead to financial penalties as well
as threaten patient satisfaction scores (to say nothing of staff
dissatisfaction). Equipment failures also hinder patient flow, causing
problems with scheduling and other areas of workflow. And while
scheduling problems can be a headache, the more dire threat is to
patient care. Delays can pose a critical threat to patient health under
certain clinical circumstances; in these circumstances, too, the added stress on staff can be severe.
When
an ultrasound system fails, especially if it is being used at the point
of care, the substitution of other imaging modalities can be expensive
(think patient transportation costs and delays due to unavailability or
other bottlenecks). The risks multiply and become more acute if the
patients being transported are critically ill. Finally, the likely
substitute when an ultrasound machine is down is a CT scan—a much
costlier alternative that also increases patient exposure to radiation.
In the absence of a loaner program or rapid equipment replacement, these
and other dislocation-related costs must become part of the overall TCO
calculation. Choosing a vendor with a track record and infrastructure
to provide 24-hour loaner turnaround would eliminate most of these costs
and concerns.
Warrantees and Service Rates
An
OEM’s warranty is a good barometer of their confidence in the quality
and durability of their equipment. Customers with longer warranties
often have a lower TCO as those policies cut service costs signi_cantly.
Robust, longer warranties can help keep annual service costs in
check—as low as 2% of the purchase price versus the high end, which can
range from 10-14%.
Aside from warranty
duration, providers should study the contract for details about coverage
before a purchase decision. Some of the strongest warranties cover
user-driven failures, for instance. Warranties that cover expensive
ultrasound transducers from user-driven perils like damage from drops
can save the purchaser considerable money. In many ways, warranties are
the real linchpin of a TCO calculation. Organizations such as KLAS rate
who has best-in-class user experience; these evaluations are worth
referencing when considering a medical equipment purchase. An in-depth
examination of warranties with advice will follow in a second article in
this publication.
Service Rates
Not
all OEMs charge the same service rates. Hospitals and clinics
considering a technology purchase need to understand not only the
duration and coverage of its warranty but also the rates that the OEM
will charge for service after the equipment is out of warranty.
Customers should reference OEM published rates when considering a
purchase, and add these costs into the TCO calculation. Like many of
these other soft costs, these rates can vary greatly and are usually
realized when it’s too late. Proactive and customer-centric OEMs can do
their part here by helping customers better understand their overall
service contract options, including whether they can dispose of a
service contract altogether if they meet these needs with a solid,
comprehensive warranty, at least until the warranty expires. While
system durability should be the key driver lowering the TCO, there are
other contributing factors. One includes robust OEM training to in-house
biomedical departments, at no cost, to troubleshoot on first-level
issues. OEMs can save hospitals and clinics significant expense by
ensuring that in-house biomed departments are trained to deal with the
simple issues that don't necessarily require the involvement of the
company or third-party service. A large Southwest medical complex
successfully lowered their ultrasound system TCO in part by working down
their service rates. With an installed base of 391 systems, they were
able to achieve annual service costs of .10% and a TCO 1.60*
Trade-in Value
A
TCO discussion is incomplete without looking at the future trade-in
value of a system. If the value of the equipment declines because of a
poor reputation for longevity, high repair costs, or upgradability
limitations, the cost of ownership is higher due to a presumed lack of
trade-in value. When purchasing a brand and system, reputation and
resulting resale value matters. Equipment owners should look at
longitudinal data that points to resale value in the purchase decision,
and check in along the way as a system ages.
Component Interchangeability
Most
readers are familiar with the need to purchase a new array of
accessories and components every time they upgrade to a new smartphone
(think chargers or cases). Purchasers of ultrasound systems can help
bring down the TCO of their equipment when important components are
designed to work across systems of that generation, and even across
subsequent upgraded models. In the case of ultrasound, when expensive
components like probes are made to be interchangeable, that can save
owners significant money and reduce the TCO.
Conclusion
A
better understanding of true TCO will enable providers to make smarter
decisions about durable imaging equipment, and ultrasound in particular.
An article to follow will focus on one of the consequential and complex
aspects of TCO, the warranty.
*Installed base
of SonoSite Point-of-Care Ultrasound Systems. Annual service cost based
upon percent of equipment purchase cost, and TCO cost based upon
combination of extended warranty and annual service cost as a percentage
of equipment purchase since 2000/2001
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Hospitals and clinics are recognizing that if they want to control and contain their costs, they must first understand what they’re actually spending over the lifetime of their equipment