Weathering the Storm: Use a TCO Approach to Reduce Medical Equipment Costs
It’s no secret that hospital executives face continued pressure from what was described in a recent Wall Street Journal article as a “perfect storm” of rising costs and declining reimbursements.
To “weather the storm” in the face of these challenges, a growing number of hospitals are taking a more holistic view of capital equipment spending – and considering the Total Cost of Ownership (TCO) before it is purchased – to realize double-digit incremental savings. A TCO-based approach to budgeting, funding and managing healthcare equipment costs for its entire life considers not just the initial purchase cost, but also the annual service, training and other costs that account for more than 70 percent of annual medical equipment lifecycle spending.
TCO is not a new concept, and TCO methodologies and analytical models can vary greatly in their complexity and accuracy. One of the critical ingredients for any successful TCO-based approach is having access to the right information – the most accurate and actionable information that can inform decision making and optimize long-term capital equipment planning. Whereas traditional price benchmarking resources rely on incomplete or biased data that fails to capture the truly best market price, a TCO-based approach enables hospitals to know how much they are really spending across the medical equipment lifecycle and as a result, where they can save.
Here are three strategies hospitals can use to understand TCO and realize substantial savings – typically 12 to 16 percent of annualized equipment costs:
- Align budget, asset life and clinical strategies
Purchasing capital equipment without understanding the total cost across the lifecycle can result in costs that are higher than they need to be for seven to 10 years or more. For example, many hospitals keep MRIs in service for as long as 10 years. While hospitals often exhaust themselves trying to gain savings on the purchase price, they don’t always realize – or incorporate into future year operating budgets – the impact of annual service costs over the anticipated 10 years the equipment will be in service. Evaluating TCO over the anticipated life of equipment will allow hospitals to establish more accurate budgets that capture all the financial resources needed to support their clinical strategies and related equipment needs.
- Gain greater visibility and a complete picture of equipment costs
Many drivers of total equipment cost such as annual service, replacement accessories, software upgrades, ongoing training, networking and more are not included in the initial purchase price. A comprehensive TCO approach will create greater visibility into these costs, and as a result, will uncover more opportunities to save over the lifecycle.
- Extract “hidden” asset value
Many hospitals see the removal of equipment at its end of life as a headache. A proactive strategy can increase the financial return from the disposition of equipment by more than 200 percent. In addition, keeping underutilized equipment and redeploying it to another area of the hospital is an easy and efficient way to reduce capital spend.
While optimizing medical equipment spending through a TCO-based approach is not the only “life raft” that hospitals will need to weather the current storm of market pressures, it is an important and immediate way to drive structural cost reduction.