Q&A Continued…A $95 Billion Opportunity for Innovative Expense Reduction
In last week’s blog post, we discussed how capital equipment is an innovative, overlooked and ripe area for hospitals looking to reduce costs. Hospitals spend an estimated $95 billion on capital equipment and related expenses (such as service contracts) annually. The post showed that by taking a more information-driven and comprehensive lifecycle approach, hospitals can take a large chunk out of that spend.
We were enthused by the level of interest in last week’s post. Given the interesting discussion that ensued, we are sharing some of the questions we received—and our answers.
Question 1: How do you recommend overcoming the challenges of doing capital budgeting “by committee” when achieving consensus regarding priorities and the best use of available capital is near impossible?
Miga Answer: The fact that your hospital even has a capital budget committee puts you a step ahead of many organizations. Many hospitals we work with operate without a formal “enterprise-wide” capital budgeting and approval process, with clinical departments each fighting for the resources they need and operating completely independent of one another. This complicates the capital decision-making process even more. The answer to your question almost always goes back to starting the process by having the right information. Capital committees that properly go through objective, informed value analysis and capital benchmarking as part of a standard process can most easily determine budget priorities. Without proper due diligence and rigorous metrics around potential spend, capital committees are typically left in the dark and struggle to gain consensus.
Question 2: We do not consider the cost of service contracts during the capital budgeting process. No one on our hospital executive team has a clue how much we are wasting on service (especially in our lab and radiology departments), but I can’t get them to see the problem. I feel like I’m just wasting my time trying to get the higher ups to pay attention to service costs.
Miga Answer: Service has become a priority savings area for many hospitals. Many OEMs are now shifting their fee model away from equipment costs and toward service, software and licensing costs, which has complicated traditional “price to price” benchmarking. There are many ways to draw more attention to service costs, but here are two suggestions… First, as part of the capital purchasing process, encourage your department/hospital to evaluate the total cost of ownership instead of just the purchase price of the new equipment. As described in the previous post, for every $1 of equipment purchases, at least $2 is required to maintain and operate it. If you anticipate and review those costs at the time of purchase, savings opportunities will be easier to uncover. Second, use your healthcare technology management/clinical engineering staff as internal expert resources on this subject. Many hospitals don’t ask service contract questions to their own internal service teams. This is a huge missed opportunity. These teams know the equipment, failure rates, parts costs, how to perform upgrades, etc. Get them a seat on the purchasing table. You’ll be surprised with how much you’ll save.
Question 3: We have so little capital to spend that it is hard to believe this is a big opportunity to save. Also, our hospital uses every piece of equipment for as long as possible and until it can’t be repaired.
Miga Answer: For hospitals with little capital or who are going through a capital freeze, consider buying quality, pre-owned equipment. There is typically savings of up to 50% when considering used vs new and most patients (and providers) wouldn’t even be able to tell the difference in functionality. One Miga Client needed to replace two patient stretchers of a discontinued model that was no longer available new. The hospital wanted to maintain one standard model for their fleet of stretchers, but replacing all of them was not budgeted and not an option. By buying two refurbished units at less than half of the cost of the comparable new stretchers, the hospital saved $20,000 (60%) and avoided an unplanned cost of $160,000 to replace the entire fleet.
Question 4: We have preferred vendor agreements in several departments including radiology, lab and radiation oncology that require us to purchase equipment and service from a specified vendor for the next 5 years. That takes away much of the kind of savings the article talks about.
Miga Answer: Good question! Many of our clients are entering into these kinds of long-term, enterprise-wide agreements with major OEMs. Even within these larger enterprise deals, there are still significant areas of savings. You would be surprised to know the variation in price even within these deals. Additionally, you most likely don’t have an obligation to buy equipment at any moment in time. These factors can provide enough negotiation leverage so that you can get you the best equipment options at the lowest cost, every time.
Question 5: All of our capital is being invested in IT and there is not much being spent on clinical equipment. That really limits how much opportunity there is for us to find more savings.
Miga Answer: Not so fast…IT purchases also represent a huge area of cost and potential savings for hospitals, especially given the growing convergence of IT with clinical technology. In a recent example of a hospital client of ours, we found an IT reseller literally reduced their price on an enterprise purchase of data servers by 50%+ as a way to take away share from another competitor. We know IT purchases can get very complicated, but by taking the same lifecycle, data-driven approach, you’ll surprise yourself with how much your hospital might be able to save.
We hope sharing the following information to your questions was beneficial. As always, we encourage you to be a “savings advocate” at your hospital. Don’t be afraid to take a deeper look a capital costs. There’s tremendous opportunity to find untapped savings that can go straight to the bottom line.Tweet