It’s no secret that hospital executives are facing continued pressure from what a recent article from The Wall Street Journal called a “perfect storm” of rising costs and declining reimbursements. To weather that storm, 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 reduce medical equipment costs and 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% of annual medical equipment lifecycle spending. 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.
Three Strategies to Realize Savings Using TCO
Though TCO methodologies and models can vary greatly (not to mention the level of complexity), here are three ways you can put the principle to work for your hospital:
1. 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 over a period of 7-10 years (or more!). Take MRIs as an example: many hospitals keep them 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 account for the impact of annual service costs over the anticipated life of the equipment. Evaluating TCO across all 10 years of life can allow hospitals to establish more accurate budgets that capture all the financial resources needed to support their clinical strategies and related equipment needs.
2. Gain greater visibility into 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 and reduce your medical equipment costs.
3. 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 200% or more. 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 available to help hospitals weather the current storm of market pressures, it is an important and immediate way to drive structural cost reduction.