TCO Defined Part 2 (4/4) – Wrapping Up TCO
This is the final installment of our blog series talking about “Total Cost of Ownership” (“TCO”) as a proven way for hospitals to manage and lower medical and IT equipment costs. As we wrap up this series, we want to thank all of our readers for their responses and continued engagement. TCO can be a difficult topic to get your arms around, and your questions have helped us make this discussion more meaningful for all of our readers.
TCO is a proven way of first understanding, and then managing, all the many costs associated with owning and operating capital medical equipment over its life. As more hospitals begin to understand the potential value of TCO as a cost management strategy, they will need to know what information to use to develop and guide implementation of a TCO approach. For starters, let’s revisit the simple definition of TCO as it relates to capital medical equipment we introduced in the first post of this series. TCO is the purchase price of the equipment plus all non-labor direct costs of operating, servicing, and maintaining the equipment for its entire anticipated life, less any value recovered from disposition (whether re-use, trade-in, resale or donation).
Like so many of the topics addressed on this blog, to realize the benefits of a TCO strategy, you need to start by making sure your hospital is using good information. This will help you develop the most complete and accurate picture of all costs associated with owning and operating capital medical equipment.
The prior posts in this series discussed and defined the underlying costs of TCO associated with each of the three phases of the medical equipment lifecycle: purchase, service, and disposition. Here is a recap:
Purchase – TCO starts with the decision to purchase new equipment. Most hospitals have historically focused their savings attention on the price of new medical equipment, and there are many opportunities to save on purchase costs. For example, think of the many different considerations involved with the purchase of equipment. Consider the accessories you select, specialty software options that get added, or even substantial and often overlooked costs for behind the wall networking or construction required for equipment installation. These costs are all real, can quickly add up and must be considered as part of an effective TCO strategy. While important, purchase costs represent less than 30% of total lifecycle costs so don’t overlook the other savings opportunities related to equipment service and disposition described below.
Service – Many hospitals think of service as simply annual maintenance (or preventative maintenance) costs plus annual repair costs. What they don’t always realize is that service also includes many other costs that are incurred after the initial purchase. This can include software upgrades, additional training for new employees, one-time replacement of critical components and many other costs required to keep equipment running reliably and available when needed. Together, annual service related costs represent 68% of total annual equipment costs, and consequently is often the biggest opportunity for incremental savings.
Disposition – Finally, at end of life, the disposition of equipment is often an afterthought with convenience being the highest priority, in part because hospitals don’t have access to the right information to help them understand what their equipment is really worth. Having the right information to know the value of your equipment can provide a basis for a comprehensive approach to disposition that is a key foundation of a complete and effective TCO strategy. Don’t overlook trade-in values for equipment when considering disposition options. Even these can be improved by using the right information when negotiating trade-ins as part of a new equipment purchase. Too often, hospitals accept the first trade-in or resale offer they receive, simply because they think some value is better than no value.
By harnessing the power of accurate and actionable information across all the phases of the medical equipment lifecycle, you can take the right steps to bring the benefits of a TCO approach to your hospitals efforts to lower medical equipment costs. This will allow you to drive long-term structural cost reduction to save beyond the near future.
We hope our readers have benefitted from this discussion about the many different drivers of medical equipment TCO. Adopting a TCO strategy can help every hospital unlock savings that may be hidden in their equipment costs. We hope the breakdown of the costs associated with each of the three phases of the equipment lifecycle was helpful, and provides a framework you can use to begin developing your hospital’s TCO strategy. We will continue sharing best practices and cost savings strategies that can help your hospital save, and we look forward to our readers continued engagement.
If you have any other questions about TCO and how an effective TCO strategy can benefit your hospital, please reach out as we’d love to hear from you.Tweet