Módulo 1-S6

Wayne Forrest

Analyzing equipment costs, cradle to grave En: Healthcare Technology management. Vol. 8, número 4.

Abril, 1997

Conozca un modelo para identificar los costos de propiedad asociados a los equipos médicos a fin de reducir los gastos sin perjudicar la operatividad y seguridad de los equipos.

Este material de lectura se ha preparado de manera exclusiva para los participantes del Diploma de GeTS y en concordancia con lo dispuesto por la legislación de derechos de autor:

D. Leg. 822-Articulo 44

Diploma en Gestión de Recursos Tecnológicos en Salud-GeTS

Analyzing Equipment Cost: Cradle to Grave

For better or for worse, managed care, cost pressures and the subsequent need to maximize revenues have dramatically changed the way healthcare facilities

evaluate equipment purchases.

during their cradle-to-grave life-cycle.

C. Wayne Hibbs, principal of the consulting firm C. Wayne Hibbs & Associates (Dallas) and formerly of MDB Information Network (Dallas), has set up a Seven Compartment Model to determine life-cycle costs for more than 30 types of equipment ranging from infusion pumps to PET scanners. The model consists of labor, financing, service, supplies, training,

utilities and utilization (see chart above).

Institutions can no longer pick the biggest, brightest and high-techiest piece of equipment on the trade show floor while ignoring the price tag.

Instead of the traditional doctor-knows-best approach, facilities - if they have the resources to do so - are basing their equipment purchases on life-cycle cost analysis models previously reserved for manufacturing and other industries.

"The level of financial acumen in the administration of healthcare is increasing dramatically," observes Robert Ford, operations manager in the Finance and Technology Management Services group of Hewlett Packard's Medical Products Group (Andover, Mass.). "Our business is going from a cottage industry of artisans with magic in their fingers to a large, high-tech industry. You're hearing people say `You may be the wizard of cardiology, but you’re also the cardiology product line manager”.

On the outside, one box may look just like the nest. What makes them different? How much they’ll cost

"Everybody thinks the No. 1 item is how much the equipment costs [to purchase]," Hibbs says. "The primary considerations in the cost of ownership are typically the labor costs to maintain the equipment and the supply costs to keep it up and running.”

Hibbs places price – including how the facility will pay or finance the equipment. The third tier includes training staff on the

equipment, utilities such as electricity and site preparation - and utilization, or the frequency with which the equipment is used. The Calculations

To properly conduct life-cycle cost analysis, Hibbs advocates that a facility compile a database with as consideration for purchase. Each profile must include items such as the costs of supplies, materials to

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT

grew from 43 percent in 1993 to 51 percent in 1995. Rentals gained in popularity from 5 to 21 percent during the same time.

maintain and operate the machine, labor and utility costs.

That information - represented as a single piece of equipment or one of several units within an entire department - is then entered into a computer modeling program capable of performing multiple calculations simultaneously, such as Lotus 1-2-3 or Microsoft Excel.

"There are private physicians' practices and small hospitals that don't want to buy a big piece of equipment, because they may be consolidating with another hospital or network," says John Carroll, senior product manager of AT&T Capital Leasing Services' Health Care Group (Framingham, Mass.). "Similarly, if a facility wants to buy an MRI or an ultrasound that they feel may be upgradeable in four or five years, they may not want to own the entire asset."

"You end up with a spreadsheet-type presentation that shows what the total budget of the department ought to be as a benchmark for the year," Hibbs says, "based on the number of procedures it is doing and how much equipment and staff are there." The most common leasing options include a "fair

market value" lease or a "dollar out" lease. The benchmark is the critical component to determine how efficiently a department is operating and - more importantly - if and where changes are necessary in equipment, staffing and other related expenses.

Under the fair market value lease, a facility chooses the length of the lease at the time of purchase. At the end of the agreement, the leasing company takes ownership of the equipment and sells it on the secondary market. The facility's monthly payments are based on the length of the lease and what the leasing company predicts the equipment will fetch as a pre-owned or refurbished system at the end of the agreement.

It is a complex model that - in Hibbs' words - "is not for the light-hearted."

If you make a mistake, it can be expensive. A misplaced decimal point on the utility costs can blow your model out of the water," he says.

Labor

Labor is the most important factor in analyzing cost over the life of a piece of equipment simply because approximately 55 percent of a hospital's revenues are consumed by wages, salaries id benefits. An American

Hospital Association (Chicago) study –which includes hospitals of all sizes - calculates that expenses for medical supplies, pharmaceuticals, utilities, food, housekeeping supplies and administration take up 34 percent of a hospital's income. The remaining 11 percent goes toward capital costs (interest and depreciation on the facility and equipment), as well as fees for contracted professional and administrative services.

"A good leasing company should take some risk, other than just providing financing," said Kenneth (Chip) Halverson, president of equipment lessor and refurbisher Comdisco Healthcare Group Inc. (Rosemont, III.). "We're saying that if you return [the equipment] in two years, we know it will be worth X. We'll find another user and we'll earn our profit - if we're right. If we're wrong on the value, then we don't earn a profit."

Because the leasing company makes its return on the sale, the borrower will receive a very low interest rate on the lease, possibly close to zero percent.

Under the dollar out lease, a facility can buy the equipment for $1 at the end of the agreement. Facilities looking to utilize equipment long term often choose this option. Monthly payments are based on the length of the lease and the price of the equipment, with interest rates generally two or three percentage points above the prime rate.

Financing

One key decision in life-cycle cost analysis is whether to buy, lease or rent equipment. In recent years, leasing and renting have become the most popular options.

On the flip side, with 126 hospitals under its wing, Tenet Healthcare Corp. (Santa Barbara, Calif.) prefers to buy its equipment outright and use it as long as possible.

"Leasing can be very expensive," maintains David Ricker, Tenet's vice president of Materiel Resources Management. "We would rather buy the equipment, because we are a liquid company. We get our disposable costs or service costs down as low as we can, take advantage of the [equipment's] depreciation and avoid interest rates." According to medical equipment financing firm

Newcourt Linc Financial Corp. (Chicago), the number of healthcare facilities with equipment leases

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT

Service Service costs are one of

the major considerations for David Natale, director of technology assessment services at Premier Inc. (Charlotte, N.C.), the

Training "If you're buying a new CT or PET scanner, you don't just take it out of the box, turn it on and expect your staff to be able to use it," adds Hibbs.

country's largest alliance of hospitals and healthcare systems, with more than 1,700 members.

The cost to train clinicians to operate new equipment is usually negotiated as part of the initial purchase price. Buyers also can figure into their life-cycle analysis what it will cost to train their biomedical engineers to perform in-house preventive maintenance, thus avoiding service contract expenses.

"Service contracts for imaging equipment can run tens of thousands of dollars per year," Natale says. "We have an in-house service organization that we often recommend to our hospitals to save some of the cost." The contract also should include follow-up training

sessions for new hires or as technology advancement warrants.

If there is no in-house service group to turn to, facilities must negotiate the best deal possible. When doing so, one key component should be an uptime guarantee. So advocates John Sutton, senior contract manager for group purchasing organization AmeriNet (St. Louis). He recommends uptime guarantees of 9? or 98 percent and agreements that include a penalty if the benchmark is not achieved.

Utilities

Electricity, gas, water and site preparation also factor into analyzing cost, although there may be relatively little healthcare facilities can do to control some of these expenses.

"A lot of ultrasound companies guarantee 98 to 99 percent [uptime]," Sutton said. "There are some companies that don't feel as comfortable and they guarantee 95 percent or less. That means if you're doing 100 scans on a CT scanner, it could fail five out of every 100 times. That's not acceptable to me."

Supplies On the supply side,

disposables and consumables -catheters, contrast agents, X-ray tubes, batteries, cryogens, etc. - factor heavily in life-cycle cost analysis.

"Heating and air conditioning are not the big issues they once were,"

observes Robert Rusk president of manufacturing and consulting firm Rusk Co. (Wichita, Kan.). "Today's computers boil down to PCs and they're not the environmental monsters early CT computers were."

"You need to figure the number of times [the equipment] will be used - whether it be a week, a month or year - and multiply the

costs of the disposables that go along with the machine," says Premier's Natale. "With an X-ray machine, you look at the X-ray tube. That's the expensive part that goes [bad] vs. an MRI which doesn't have an X-ray tube."

Electricity costs, however, can be a huge problem. Cath labs require 80,000 to 100,000 watts, while an X-ray machine consumes 50,000 watts of power. Expenses for heating, air conditioning and water to cool a linear accelerator - figuring 25 to 30 cases per day, six days a week - can run $150,000 a year. By comparison, an ultrasound machine uses 1,100 watts and can plug into a wall outlet.

In Rusk's view, energy efficiency may be in the eye of the beholder. "I think there are sales people out there trying to convince their customers that their machine generates more X-rays per kilowatt. That's absolutely false," he says. "It's a physical reality that if you want to generate so many X-ray photons at a certain penetrating power, it takes so many kilowatts. Fifty kilowatts is 50 kilowatts, for anybody's X-ray machine."

While the cost of supplies differs from modality to modality, consultant Hibbs says the formula to calculate life-cycle costs doesn't change. "Infusion pumps have the same types of hot buttons and concerns as MRI, PET and CT scanners and linear accelerators."

Efficiencies to be had, Rusk adds, exist in the image reception and intensifying screens.

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT

As facilities hold on to equipment longer, upgradeability is becoming increasingly important. "The No. 1 question is: Is it upgradeable?" says AmeriNet's Sutton. "The No. 2 question is: How long is that company committed to upgrading that system, for how many years and what will be the cost?" Many OEMs do offer upgrade provisions in their service contracts.

Facilities also need to consider site preparation costs for new equipment. Is the floor sturdy enough for a 5,000-pound CT gantry? Can the walls or ceilings support mounted equipment? Can the wiring handle the massive electricity demand and prevent power surges and dramatic declines? And - as obvious as it may sound - can the equipment fit through the doors? More than one facility, Rusk says, has forgotten to check that one. Ricker says Tenet is "willing to pay more money for

equipment, if it's going to be more productive," but adds that it doesn't see "significant differences - and this is a broad-based statement from one manufacturer to the next in terms of throughput. I think the playing field is pretty level.

Given equipment design differences within the same modality, Rusk suggests making the room as generic as possible. "The more complete the planning is on the front side, the more cost effective it is down the line," he advises. And the more generic the floor plans, the more flexibility a facility has in choosing one brand of equipment over another. "That's where they'll save money."

Utilization Utilization is the number

of procedures equipment can perform over a certain period of time.

"The challenge for the manufacturers is to help us identify and then to communicate where these systems can be more productive so we can impact our budget," Ricker continues. "I can't think of a product that comes to mind that a manufacturer can clearly rationalize a much higher price in exchange for documented throughput and productivity."

Hibbs cites the example of a linear accelerator. A facility buys it, installs it, calibrates it and trains its

staff to operate it. "The very first patient you use it on is very expensive," he says. "From that patient on, there is a definite ramping up of efficiency until you get up to the operating range when it's utilized 80 percent of the time. That's where you're most efficient operation is.

Another factor buyers need to evaluate, opines Premier's Natale, is the alternatives facilities can create with a new piece of equipment.

"By buying one device, you may render a diagnosis that enables you to avoid a more expensive procedure," he explains. "Factoring in patient and clinical outcomes to find out how well this item really works is exceptionally difficult to quantify. Those who are doing it are kind of wagging numbers they're either pulling out of their hat or are published by some manufacturer who's presenting that kind of data."

One company trying to quantify the numbers is Hewlett Packard. HP has calculated the potential savings of using ultrasound to avoid cath lab procedures for valve problems, using `Friday afternoon' ultrasounds instead of nuclear medicine scans, replacing X-rays with ultrasound for women undergoing chemotherapy and accounting for reductions in liability insurance and documentation. Over a five-year period, HP estimated the savings at $297,642 when ultrasound is used as an alternative modality (see chart "Potential Savings Utilizing Ultrasound, "page 40).

"That's what life-cycle cost shows you - as you vary the number of patients, what does it cost?" he continues. "It doesn't make a difference if you're a for-profit or not-for-profit hospital or a home healthcare facility. What makes the difference in lifecycle cost analysis is how much are you using the equipment?"

According to Comdisco, the average lifespan of an ultrasound system in the U.S. climbed to 5.7 years in 1995 from 4.4 years in 1992. The lifespan of an MRI system reached 4.5 years, up from 3.1, over the same period, while CT scanners' longevity rose to 6.6 years in 1995, compared with 4.5 years in 1992. Radiology information systems also can play a major

role in life-cycle cost analysis by preventing dollars from slipping through the cracks.

"If you have a good, hardy piece of equipment that is relatively well-engineered, a 12- to 13-year life-cycle is possible," says Helen D. Wilson, director of sales and marketing for Siemens Medical Systems' (Iselin, N.J.) managed healthcare service. "On the other hand, there are companies selling low-cost radiology rooms with five-year warranties. After five years, you just throw it away. The truth of the matter is, that's not a bargain. Even if ours is double the price, if it lasts 12 years, [our] deal is the bargain."

Henry Soch, executive director of Philips Healthcare Consulting (Shelton, Conn.), says facilities are "underutilizing" their radiology information systems. "Many systems have bar-coding capabilities that allow facilities to capture additional charges at the point of service, so they're not losing catheters, contrast media and other consumables that may have been used in a procedure."

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT

"At this level," Premier's Natale says, "we're negotiating contracts with preferred vendors and we're looking at how much of a discount they're going to give our members, as well as other value-added enhancements to the contracts." With more than 1,700 members, Premier has significant buying power.

In addition, most radiology information systems have the ability to track patient cycle time, Soch adds, enabling institutions to gauge the efficiency of the patient process.

"The balancing act most folks are trying to get to is how do you optimize your costs without quality suffering?" Soch says. "People are being judged on the quality of imaging service they provide and on their individual facility. The real winners will be the ones who can get the cost equation down, while maintaining quality."

Tenet in December signed an agreement to buy 14 CT scanners from GE Medical Systems (GEMS of Waukesha, Wis.). Along with an estimated savings of $2.6 million in service and life-cycle costs over the next five years, Ricker says Tenet "expects to use those CT scanners for 10 to 15 years."

So, given the potential of life-cycle cost analysis, everyone must be jumping on board the bandwagon. Well, not exactly.

"It's a little frustrating when you get into discussions with some customers and they say `Life-cycle cost sounds good, but what's your best price?"' relates Eric Keller, Siemens' director of service business development.

Despite all the financial belt-tightening, some old habits are still hard to break. Keller and Wilson say some institutions still insist on buying more equipment with more options than they need.

"My experience is that facilities that belong to networks – be they large or small - have the program well in-hand," adds Siemens' Wilson. "Not everybody wants to have a cardiac cath center or open-heart program anymore. You see more hospitals specializing. Competitively, they don't feel they need to have the latest and greatest, especially in a network where they're not competing for DRGs, because the network still captures the patient."

"I think that's a legacy from the past when it was fee-for-service and pass-through on capital equipment," notes Keller. "It was very easy to buy the biggest and the best, because that's what the physicians wanted and there was no negative incentive to the institution. In fact, it was a competitive way to attract physicians and referrals."

Whether you're a buyer or a seller, the bottom line is that the influence of life-cycle cost analysis is growing. "There were more CEOs and CFOs at [this year's] RSNA than we ever saw in our lives," recalls Wilson. "There are doctors who are on top of this, but there are others who are being dragged forward."

Smaller, stand-alone facilities, which naturally have fewer resources, tend to be behind the learning curve on life-cycle cost analysis. For them, group purchasing organizations may be an option.

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT