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Módulo 1-S6

Wayne Forrest

Analyzing equipment costs, cradle to grave


En: Healthcare Technology management. Vol. 8, número 4.
Abril, 1997

Conozca un modelo para identificar los costos de propiedad


asociados a los equipos médicos a fin de reducir los gastos sin
perjudicar la operatividad y seguridad de los equipos.

Este material de lectura se ha preparado de manera exclusiva para los participantes del Diploma de
GeTS y en concordancia con lo dispuesto por la legislación de derechos de autor:
D. Leg. 822-Articulo 44

Diploma en Gestión de Recursos Tecnológicos en Salud-GeTS


Analyzing
Equipment Cost:
Cradle to Grave

F
or better or for worse, managed care, cost during their cradle-to-grave life-cycle.
pressures and the subsequent need to C. Wayne Hibbs, principal of the consulting firm C.
maximize revenues have dramatically Wayne Hibbs & Associates (Dallas) and formerly of
changed the way healthcare facilities MDB Information Network (Dallas), has set up a
evaluate equipment purchases. Seven Compartment Model to determine life-cycle
Institutions can no longer pick the biggest, brightest costs for more than 30 types of equipment ranging
and high-techiest piece of equipment on the trade show from infusion pumps to PET scanners. The model
floor while ignoring the price tag. consists of labor, financing, service, supplies, training,
Instead of the utilities and
traditional utilization (see chart
doctor-knows- above).
best approach, "Everybody thinks
facilities - if they the No. 1 item is
have the how much the
resources to do equipment costs [to
so - are basing purchase]," Hibbs
their equipment says. "The primary
purchases on life- considerations in the
cycle cost cost of ownership
analysis models are typically the
previously labor costs to
reserved for maintain the
manufacturing equipment and the
and other supply costs to keep
industries. it up and running.”
"The level of Hibbs places price
financial acumen – including how the
in the facility will pay or
administration of finance the
healthcare is equipment. The
increasing third tier includes
dramatically," training staff on the
observes Robert Ford, operations manager in the equipment, utilities such as electricity and site
Finance and Technology Management Services group preparation - and utilization, or the frequency with
of Hewlett Packard's Medical Products Group which the equipment is used.
(Andover, Mass.). "Our business is going from a
cottage industry of artisans with magic in their fingers
to a large, high-tech industry. You're hearing people The Calculations
say `You may be the wizard of cardiology, but you’re To properly conduct life-cycle cost analysis, Hibbs
also the cardiology product line manager”. advocates that a facility compile a database with as
On the outside, one box may look just like the nest. consideration for purchase. Each profile must include
What makes them different? How much they’ll cost items such as the costs of supplies, materials to

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT


maintain and operate the machine, labor and utility grew from 43 percent in 1993 to 51 percent in 1995.
costs. Rentals gained in popularity from 5 to 21 percent
That information - represented as a single piece of during the same time.
equipment or one of several units within an entire "There are private physicians' practices and small
department - is then entered into a computer modeling hospitals that don't want to buy a big piece of
program capable of performing multiple calculations equipment, because they may be consolidating with
simultaneously, such as Lotus 1-2-3 or Microsoft another hospital or network," says John Carroll, senior
Excel. product manager of AT&T Capital Leasing Services'
"You end up with a spreadsheet-type presentation Health Care Group (Framingham, Mass.). "Similarly,
that shows what the total budget of the department if a facility wants to buy an MRI or an ultrasound that
ought to be as a benchmark for the year," Hibbs says, they feel may be upgradeable in four or five years,
"based on the number of procedures it is doing and they may not want to own the entire asset."
how much equipment and staff are there." The most common leasing options include a "fair
The benchmark is the critical component to market value" lease or a "dollar out" lease.
determine how efficiently a department is operating Under the fair market value lease, a facility chooses
and - more importantly - if and where changes are the length of the lease at the time of purchase. At the
necessary in equipment, staffing and other related end of the agreement, the leasing company takes
expenses. ownership of the equipment and sells it on the
It is a complex model that - in Hibbs' words - "is not secondary market. The facility's monthly payments are
for the light-hearted." based on the length of the lease and what the leasing
If you make a mistake, it can be expensive. A company predicts the equipment will fetch as a pre-
misplaced decimal point on the utility costs can blow owned or refurbished system at the end of the
your model out of the water," he says. agreement.
"A good leasing company should take some risk,
Labor other than just providing financing," said Kenneth
Labor is the most (Chip) Halverson, president of equipment lessor and
important factor in refurbisher Comdisco Healthcare Group Inc.
analyzing cost over the life (Rosemont, III.). "We're saying that if you return [the
of a piece of equipment equipment] in two years, we know it will be worth X.
simply because We'll find another user and we'll earn our profit - if
approximately 55 percent of we're right. If we're wrong on the value, then we don't
a hospital's revenues are earn a profit."
consumed by wages, salaries Because the leasing company makes its return on the
id benefits. An American sale, the borrower will receive a very low interest rate
Hospital Association (Chicago) study –which includes on the lease, possibly close to zero percent.
hospitals of all sizes - calculates that expenses for Under the dollar out lease, a facility can buy the
medical supplies, pharmaceuticals, utilities, food, equipment for $1 at the end of the agreement.
housekeeping supplies and administration take up 34 Facilities looking to utilize equipment long term often
percent of a hospital's income. The remaining 11 choose this option. Monthly payments are based on the
percent goes toward capital costs (interest and length of the lease and the price of the equipment, with
depreciation on the facility and equipment), as well as interest rates generally two or three percentage points
fees for contracted professional and administrative above the prime rate.
services. On the flip side, with 126 hospitals under its wing,
Tenet Healthcare Corp. (Santa Barbara, Calif.)
Financing prefers to buy its equipment outright and use it as long
One key decision in as possible.
life-cycle cost analysis is "Leasing can be very expensive," maintains David
whether to buy, lease or Ricker, Tenet's vice president of Materiel Resources
rent equipment. In recent Management. "We would rather buy the equipment,
years, leasing and because we are a liquid company. We get our
renting have become the disposable costs or service costs down as low as we
most popular options. can, take advantage of the [equipment's] depreciation
According to medical equipment financing firm and avoid interest rates."
Newcourt Linc Financial Corp. (Chicago), the
number of healthcare facilities with equipment leases

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT


Service Training
Service costs are one of "If you're buying a new
the major considerations CT or PET scanner, you
for David Natale, director don't just take it out of the
of technology assessment box, turn it on and expect
services at Premier Inc. your staff to be able to use
(Charlotte, N.C.), the it," adds Hibbs.
country's largest alliance of hospitals and healthcare The cost to train clinicians to operate new
systems, with more than 1,700 members. equipment is usually negotiated as part of the initial
"Service contracts for imaging equipment can run purchase price. Buyers also can figure into their life-
tens of thousands of dollars per year," Natale says. cycle analysis what it will cost to train their
"We have an in-house service organization that we biomedical engineers to perform in-house preventive
often recommend to our hospitals to save some of the maintenance, thus avoiding service contract expenses.
cost." The contract also should include follow-up training
If there is no in-house service group to turn to, sessions for new hires or as technology advancement
facilities must negotiate the best deal possible. When warrants.
doing so, one key component should be an uptime
guarantee. So advocates John Sutton, senior contract Utilities
manager for group purchasing organization AmeriNet Electricity, gas, water and
(St. Louis). He recommends uptime guarantees of 9? site preparation also factor
or 98 percent and agreements that include a penalty if into analyzing cost,
the benchmark is not achieved. although there may be
"A lot of ultrasound companies guarantee 98 to 99 relatively little healthcare
percent [uptime]," Sutton said. "There are some facilities can do to control
companies that don't feel as comfortable and they some of these expenses.
guarantee 95 percent or less. That means if you're "Heating and air
doing 100 scans on a CT scanner, it could fail five out conditioning are not the big
of every 100 times. That's not acceptable to me." issues they once were,"
observes Robert Rusk president of manufacturing and
Supplies consulting firm Rusk Co. (Wichita, Kan.). "Today's
On the supply side, computers boil down to PCs and they're not the
disposables and consumables environmental monsters early CT computers were."
-catheters, contrast agents, X- Electricity costs, however, can be a huge problem.
ray tubes, batteries, cryogens, Cath labs require 80,000 to 100,000 watts, while an X-
etc. - factor heavily in life- ray machine consumes 50,000 watts of power.
cycle cost analysis. Expenses for heating, air conditioning and water to
"You need to figure the cool a linear accelerator - figuring 25 to 30 cases per
number of times [the day, six days a week - can run $150,000 a year. By
equipment] will be used - comparison, an ultrasound machine uses 1,100 watts
whether it be a week, a month and can plug into a wall outlet.
or year - and multiply the In Rusk's view, energy efficiency may be in the eye
costs of the disposables that go along with the of the beholder. "I think there are sales people out
machine," says Premier's Natale. "With an X-ray there trying to convince their customers that their
machine, you look at the X-ray tube. That's the machine generates more X-rays per kilowatt. That's
expensive part that goes [bad] vs. an MRI which absolutely false," he says. "It's a physical reality that if
doesn't have an X-ray tube." you want to generate so many X-ray photons at a
While the cost of supplies differs from modality to certain penetrating power, it takes so many kilowatts.
modality, consultant Hibbs says the formula to Fifty kilowatts is 50 kilowatts, for anybody's X-ray
calculate life-cycle costs doesn't change. "Infusion machine."
pumps have the same types of hot buttons and Efficiencies to be had, Rusk adds, exist in the image
concerns as MRI, PET and CT scanners and linear reception and intensifying screens.
accelerators."

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT


Facilities also need to consider site preparation costs As facilities hold on to equipment longer,
for new equipment. Is the floor sturdy enough for a upgradeability is becoming increasingly important.
5,000-pound CT gantry? Can the walls or ceilings "The No. 1 question is: Is it upgradeable?" says
support mounted equipment? Can the wiring handle AmeriNet's Sutton. "The No. 2 question is: How long
the massive electricity demand and prevent power is that company committed to upgrading that system,
surges and dramatic declines? And - as obvious as it for how many years and what will be the cost?" Many
may sound - can the equipment fit through the doors? OEMs do offer upgrade provisions in their service
More than one facility, Rusk says, has forgotten to contracts.
check that one. Ricker says Tenet is "willing to pay more money for
Given equipment design differences within the same equipment, if it's going to be more productive," but
modality, Rusk suggests making the room as generic adds that it doesn't see "significant differences - and
as possible. "The more complete the planning is on the this is a broad-based statement from one manufacturer
front side, the more cost effective it is down the line," to the next in terms of throughput. I think the playing
he advises. And the more generic the floor plans, the field is pretty level.
more flexibility a facility has in choosing one brand of "The challenge for the manufacturers is to help us
equipment over another. "That's where they'll save identify and then to communicate where these systems
money." can be more productive so we can impact our budget,"
Ricker continues. "I can't think of a product that comes
Utilization to mind that a manufacturer can clearly rationalize a
Utilization is the number much higher price in exchange for documented
of procedures equipment can throughput and productivity."
perform over a certain Another factor buyers need to evaluate, opines
period of time. Premier's Natale, is the alternatives facilities can create
Hibbs cites the example of with a new piece of equipment.
a linear accelerator. A "By buying one device, you may render a diagnosis
facility buys it, installs it, that enables you to avoid a more expensive
calibrates it and trains its procedure," he explains. "Factoring in patient and
staff to operate it. "The very first patient you use it on clinical outcomes to find out how well this item really
is very expensive," he says. "From that patient on, works is exceptionally difficult to quantify. Those who
there is a definite ramping up of efficiency until you are doing it are kind of wagging numbers they're either
get up to the operating range when it's utilized 80 pulling out of their hat or are published by some
percent of the time. That's where you're most efficient manufacturer who's presenting that kind of data."
operation is. One company trying to quantify the numbers is
"That's what life-cycle cost shows you - as you vary Hewlett Packard. HP has calculated the potential
the number of patients, what does it cost?" he savings of using ultrasound to avoid cath lab
continues. "It doesn't make a difference if you're a for- procedures for valve problems, using `Friday
profit or not-for-profit hospital or a home healthcare afternoon' ultrasounds instead of nuclear medicine
facility. What makes the difference in lifecycle cost scans, replacing X-rays with ultrasound for women
analysis is how much are you using the equipment?" undergoing chemotherapy and accounting for
According to Comdisco, the average lifespan of an reductions in liability insurance and documentation.
ultrasound system in the U.S. climbed to 5.7 years in Over a five-year period, HP estimated the savings at
1995 from 4.4 years in 1992. The lifespan of an MRI $297,642 when ultrasound is used as an alternative
system reached 4.5 years, up from 3.1, over the same modality (see chart "Potential Savings Utilizing
period, while CT scanners' longevity rose to 6.6 years Ultrasound, "page 40).
in 1995, compared with 4.5 years in 1992. Radiology information systems also can play a major
"If you have a good, hardy piece of equipment that is role in life-cycle cost analysis by preventing dollars
relatively well-engineered, a 12- to 13-year life-cycle from slipping through the cracks.
is possible," says Helen D. Wilson, director of sales Henry Soch, executive director of Philips Healthcare
and marketing for Siemens Medical Systems' (Iselin, Consulting (Shelton, Conn.), says facilities are
N.J.) managed healthcare service. "On the other hand, "underutilizing" their radiology information systems.
there are companies selling low-cost radiology rooms "Many systems have bar-coding capabilities that allow
with five-year warranties. After five years, you just facilities to capture additional charges at the point of
throw it away. The truth of the matter is, that's not a service, so they're not losing catheters, contrast media
bargain. Even if ours is double the price, if it lasts 12 and other consumables that may have been used in a
years, [our] deal is the bargain." procedure."

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT


"At this level," Premier's Natale says, "we're
In addition, most radiology information systems have negotiating contracts with preferred vendors and we're
the ability to track patient cycle time, Soch adds, looking at how much of a discount they're going to
enabling institutions to gauge the efficiency of the give our members, as well as other value-added
patient process. enhancements to the contracts." With more than 1,700
"The balancing act most folks are trying to get to is members, Premier has significant buying power.
how do you optimize your costs without quality Tenet in December signed an agreement to buy 14
suffering?" Soch says. "People are being judged on the CT scanners from GE Medical Systems (GEMS of
quality of imaging service they provide and on their Waukesha, Wis.). Along with an estimated savings of
individual facility. The real winners will be the ones $2.6 million in service and life-cycle costs over the
who can get the cost equation down, while maintaining next five years, Ricker says Tenet "expects to use
quality." those CT scanners for 10 to 15 years."
So, given the potential of life-cycle cost analysis, Despite all the financial belt-tightening, some old
everyone must be jumping on board the bandwagon. habits are still hard to break. Keller and Wilson say
Well, not exactly. some institutions still insist on buying more equipment
"It's a little frustrating when you get into discussions with more options than they need.
with some customers and they say `Life-cycle cost "I think that's a legacy from the past when it was fee-
sounds good, but what's your best price?"' relates Eric for-service and pass-through on capital equipment,"
Keller, Siemens' director of service business notes Keller. "It was very easy to buy the biggest and
development. the best, because that's what the physicians wanted and
"My experience is that facilities that belong to there was no negative incentive to the institution. In
networks – be they large or small - have the program fact, it was a competitive way to attract physicians and
well in-hand," adds Siemens' Wilson. "Not everybody referrals."
wants to have a cardiac cath center or open-heart Whether you're a buyer or a seller, the bottom line is
program anymore. You see more hospitals that the influence of life-cycle cost analysis is
specializing. Competitively, they don't feel they need growing. "There were more CEOs and CFOs at [this
to have the latest and greatest, especially in a network year's] RSNA than we ever saw in our lives," recalls
where they're not competing for DRGs, because the Wilson. "There are doctors who are on top of this, but
network still captures the patient." there are others who are being dragged forward."
Smaller, stand-alone facilities, which naturally have
fewer resources, tend to be behind the learning curve
on life-cycle cost analysis. For them, group purchasing
organizations may be an option.

APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT