TCO Defined, Why You Should Care, and How It Will Save You Money

You may already be familiar with the concept of total cost of ownership (TCO) and how it is becoming a more common way hospitals are identifying the true total costs of owning and operating a piece of equipment. An established concept in many other industries, TCO is a proven way of understanding, and therefore managing all the costs involved over an asset’s life. As more hospitals begin to understand that the purchase price of capital medical equipment is just a small portion – less than 30% on average – of the total cost of ownership, the value of knowing and being able to manage all the costs of medical equipment becomes increasingly important.

A simplified definition of TCO is: the purchase price of 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). TCO as a philosophy and an approach is very well suited to owning complex medical equipment because it allows for better visibility, making it easier to find the greatest opportunities for cost reduction.

In order to benefit from a total cost of ownership approach to managing medical equipment, hospitals must first establish a foundation of key “building blocks” critical for an effective TCO strategy. The building blocks essential to establishing any TCO strategy include good information, team collaboration and effective communication, and accurate and credible metrics to measure and track the impact of your TCO initiatives. If savings are a priority for your hospital, please read on to learn more about the many benefits of embracing TCO.

The building blocks to establishing an effective TCO strategy include:

  1. Good information: Hospitals have historically relied on traditional “price benchmarking” resources that largely focus on purchase price, along with limited internal information about the actual costs associated with each piece of medical equipment in their facilities. TCO requires good information, both internal and external, to allow the most complete picture of all costs, including purchase, service and disposition to know the right price to pay, and act on it. Benchmarking 2.0, an approach introduced by our company that you may be familiar with, is a way of identifying all costs associated with owning capital medical equipment through the power of good information, and enables more informed, confident spending decisions with greater opportunities to save money. An effective TCO strategy starts with having good information, and knowing the right price to pay for your capital medical equipment.

 

  1. Team collaboration and effective communication: Effective internal communications is essential for getting the information you need across multiple departments and key constituents to understand the equipment needs and related costs for your hospital. Identifying areas of potential savings that aren’t typically addressed requires effective communication, and getting buy-in and active support from all impacted departments who can often help identify the many opportunities for savings hidden within the lifetime of capital medical equipment. Consider the example of a small community hospital that was touting their negotiating prowess having been offered an expensive chemistry analyzer for what they thought was “free”. All they need to do was commit to a minimum level of reagent purchases over 5 years. Little did they know, until presented with additional benchmarking data that their “free analyzer” was being more than paid for by reagent pricing that was 162% higher than prices being paid by other hospitals! Rather than commit to a deal that wasn’t as good as they thought, they were able to re-engage their supplier, dramatically reduce the reagent pricing and costs for the 5 year anticipated life of the equipment.

 

  1. Accurate and credible metrics: The best way of ensuring your hospital is set up for long-term TCO savings efforts is to be able to measure and report the impact and savings from your hospital’s TCO initiatives. Using credible and objective metrics to get internal buy-in and support for a TCO strategy, and is the best way to initiate cost reduction of medical equipment before committing to a purchase, and for as long as your hospital may choose to own and operate that equipment. Only by having accurate metrics that track costs of each piece of equipment over its entire life can you understand the total cost of ownership, know where you can save and take the steps to ensure you are paying the right price on all costs, driving long-term structural cost reduction that is vital for many hospitals long-term sustainability.

 

Laying the foundational building blocks for an effective TCO strategy are the critical first steps to enable your hospital to realize substantial savings that will help reduce the total cost of ownership of your capital medical equipment, and improve your bottom line for years to come. By having good information, team collaboration and effective communication, and accurate and credible metrics, your hospital will be able to drive long-term savings efforts, and realize the many benefits and savings from a TCO approach to managing equipment costs.

TCO can take a little bit of work to get your arms around, but is a very meaningful approach that can advance your structural cost reduction goals over multiple years. If you’re a hospital that’s already benefitting from a TCO approach, contact us so we can share your savings successes, and if you have questions or want to discuss how hospitals are using TCO to drive substantial savings, please contact Miga Client Experience at (763) 225-8410 or client@migasolutions.com.

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