As hospitals continue to face increasing industry pressure and prepare for the potential outcomes of healthcare reform, they are looking for even more ways to cut costs without impacting patient care. Hospitals are scrutinizing all spending and making difficult decisions on how to invest and manage available funds.
When making these tough decisions, hospitals need to realize that capital equipment is not the same as supplies and that there may be a tremendous money-saving opportunity by reviewing their maintenance contracts and expenses.
Unlike spending for supplies, delaying or deferring new capital purchases does not eliminate the need to replace equipment. As new technologies are developed, hospitals may be forced to upgrade. However, in today’s still uncertain environment, hospitals are looking for opportunities to extend the useful life of their current equipment and delay investing in new equipment for as long as possible.
The maintenance side of capital equipment purchasing has historically been a lucrative profit center for suppliers. For certain categories of equipment, such as laboratory testing systems, suppliers will install a piece of equipment at no cost, but charge the hospital for maintenance and consumable supplies. This blend of service and consumables might not always be the most cost-effective option for hospitals. Additionally, service contracts may include restrictions, such as what service may be considered “after hours,” forcing hospitals to incur additional charges.
Since funding for equipment maintenance typically is part of the operations budget, not the capital budget, every dollar counts. Today with increasing industry pressures and lower reimbursements, hospitals are operating on revenue margins that are forcing them to manage their “cash on hand” carefully. Equipment maintenance provides a huge opportunity for savings regardless of where the hospital is located, their size or what type of system they are.
In an uncertain market, it is imperative that hospitals look at how they can reduce and better manage their maintenance costs since every dollar saved can be reinvested. However, very few hospitals do a good job of the overall management of costs and the quality of maintenance they’re getting. But why?
Hospitals have capital equipment spread throughout their facilities. Often, multiple providers are providing maintenance. Many hospitals view this as a “per item” event. It’s difficult for hospitals to determine the ROI of having a supplier maintenance contract versus looking for outside vendors, which would require a case-by-case validation. Many hospitals lack the skills, time or resources to manage this task and, therefore, don’t look at the overall maintenance “big picture.”
According to industry experts, service contract costs typically range between 10 percent to 12 percent of the overall purchase price of the piece of equipment, skewing slightly higher, 15 percent to 18 percent, if the equipment has complex computer components or software. Hospitals should look for the optimized mix of service programs and providers to reduce their overall maintenance cost to approximately 7 percent to 9 percent of the replacement cost of the equipment being maintained. They should also remove equipment from facilities that is no longer in use to eliminate any dollars spent on servicing the unused equipment. Having a goal to reduce cost as a percentage of the total replacement cost will allow hospitals to flex the service options for individual categories, while managing the overall expense and driving it as low as possible.
In order to set a benchmark toward establishing this goal, hospital executives and materials managers need to ask themselves several key questions: 1) Do you have a good, clean, up-to-date equipment ledger? 2) What equipment requires service? 3) Of this equipment, what maintenance is required or mandated? 4) Who is currently providing the maintenance and what is your satisfaction level? 5) What is the ratio of your current maintenance cost as a percentage of the replacement cost of the equipment being maintained?
By asking these questions, hospitals can begin to develop a larger frame of reference. This will help them analyze the cost of maintenance as the percentage cost of equipment replacement, instead of traditional cost or ROI, and identify savings dollars to re-invest in their organization and deliver better patient care.
Niklaus Fincher is vice president of purchased services, sales & capital at VHA Inc.