Capital equipment contracting is most successful when contracting professionals consider all of the pieces.
Editor’s Note: The participation of those in the following articles does not constitute an endorsement of the sponsor’s products or services.
Contracting for capital equipment may never be a snap. But it doesn’t have to be a painful experience, either. Carefully thought out, long-term planning that begins with clinical needs assessment and equipment projections can lead to purchases that satisfy quality, safety, service and price requirements. In fact, the strongest contracting strategies are a factor of long-term planning, according to experts.
“The time to [initiate] a capital purchase is not when a product fails,” says Dennis Robb, senior VP of supply chain management, The Health Alliance of Greater Cincinnati. “This won’t serve you in the long haul. The process should be ongoing so that [a hospital system] can plan for replacement.”
Mistakes to avoid
One of the most common oversights of IDNs contracting for capital equipment is to look at the process as a transaction, rather than considering the total cost of ownership of a product, says Robb.
“The biggest mistake I’ve seen is not looking at the whole picture,” says Joy Barnett, director of administrative and support services, Louisiana State University Health Care Services Division, LSU Health Sciences Center (New Orleans). “[Contracting professionals] have to consider installation and costs, service and support, interface and supply issues and costs, and then look at the return on investment.”
Indeed, the total cost of ownership of a piece of equipment may far exceed the purchase price. “The price of one year of service on a major piece of capital equipment is equivalent to 10 percent to 15 percent of the acquisition cost,” says Ed Swierenga, vice president, capital equipment, Broadlane. The total cost of ownership addresses all of the issues associated with the life cycle cost of the equipment, including service maintenance, parts, repairs, consumables, upgrades and more.
“Contracting professionals don’t always consider all of their facility’s infrastructure needs,” says Chris Mantel, senior director of contracting, Consorta. “Questions they need to ask are, ÔWill the new equipment align itself with the facility’s current capabilities? Is a new power source needed?’ This will result in better long-range planning.”
It’s not surprising that such important factors are overlooked during the contracting process. Capital equipment contracting is a very complex process that involves a lot of scrutinizing and comparing of quotes, Swierenga says. And, when it comes to the big-ticket items, such as MRI systems, materials managers may only have to look at such a purchase once every five to 10 years. “[Contracting professionals] are often very relieved when everyone involved in the contracting process agrees on the product,” he says. “Often, the [long-term] package sounds good, but vendors are savvy. A price and package may sound better than it is, depending on a vendor’s sales pitch.”
Many IDNs rely on their GPO’s contracts, says Darrel Weatherford, chief operating officer, Consorta. “The GPO builds extensive contract language into their agreements, including warranty and service provisions.”
“In addition, the GPO looks at several vendors when evaluating contracts,” says Mantel. “This gives the GPO a better handle on the negotiating process.”
Key points to consider
Contracting professionals should have a solid understanding of local equipment markets before entering negotiations. “Understanding the details related to each diverse industry and utilizing that knowledge during the negotiation phase is critical,” says Shari Thomas, materials manager, Jameson Health System (New Castle, Pa.).
Understanding their local market provides contracting professionals with a better sense of competitive positioning, adds Swiegenga. If a hospital system is looking for a new PET scan due to an internal demand or as a means of driving reimbursement, it’s critical to understand what competing hospitals have at their facility. “Do they have better technology?” He asks. “Will referrals still go to these other hospitals?”
Before finalizing any capital equipment contract, contracting professionals should consider the following points:
- Clinical needs. To ensure that clinical needs are met, all parties must be involved in the contracting process, including clinical department heads, financial and administrative professionals and IT specialists. Is everyone aware of which product features will be included in the contract quote and which features will be considered added options?
- Ongoing education. Ongoing education can greatly contribute to the operational success of capital equipment, according to Thomas. “We often include initial training in negotiations, but planning ahead for education related to technology upgrades over the next several years can be equally important,” she says. Without the investment in proper training and education, a hospital may not fully realize the added value of new technology, such as improved patient flow and better reimbursement, Swierenga adds.
- Future technology. If a vendor plans to offer a new technology in three to five years, how will this affect the IDN’s purchase today, asks Robb. Will the vendor address this with future software upgrades? Or, what if administration is planning to move a procedure, such as an orthopedic implant, out of the hospital and into specialty clinics, asks Barnett. This should be a red flag not to invest in that type of product, she warns.
- Reimbursement. An expensive acquisition can be a financial drain without adequate reimbursement. “PET scanning is not in place at every hospital because it is not well reimbursed and [facilities] can’t pay for the systems through routine billing,” says Robb. Conversely, the IDN may miss a financial opportunity if it does not fully understand a new reimbursement code for new technology, Swierenga says.
Developing a partnership with suppliers and manufacturers is an excellent contracting strategy, suggests Thomas. “Often, [these people] are a marvelous source of knowledge and expertise,” she adds.
It is important for both the IDN and the vendor to leave negotiations satisfied, says Swierenga. “Besides, the vendor will make its margin no matter what,” he says. “If the IDN pushes too much on price, the vendor will make it up in service or a later charge.”
Replacement vs. new
The contracting strategy for replacing existing equipment is different than that for purchasing new technology, according to some experts. While planned utilization, total cost of ownership and technological requirements are important considerations when purchasing new equipment, the strategy for replacement equipment should focus on utilization of existing equipment, historical service costs and the remaining life cycle of the equipment. With regard to new equipment, a hospital must look at the big picture to ensure that the technology will facilitate the institution’s ability to meet patient needs, says Barnett.
Swierenga recommends upgrading existing equipment rather than replacing it when:
- The facility can achieve an appropriate clinical solution for less.
- Sufficient funding is unavailable for the purchase of new equipment.
- The technology associated with the equipment is subject to near-term change and the hospital is uncertain of the long-term applicability of the current equipment or technology.
When sufficient funding isn’t available for new purchases, or the return on investment is unclear, the facility may choose to lease the new equipment, he adds. Leasing may also be appropriate when a particular technology associated with new equipment is subject to frequent change.
However, some IDNs stand firm that financing a purchase is less expensive then leasing. “In the end, you own the equipment and can sometimes get trade-in offer,” says Barnett.
Decisions to replace, upgrade, lease or finance are largely determined by a facility’s budget constraints, which is why some GPOs advocate continual monitoring of budgets. “To a great extent, a budget cycle is ongoing,” says Weatherford. “While an IDN can’t plan everything, it can do a better job if it knows the estimated life span of a piece of equipment.”
“Hospitals should balance their long-term strategic capital plans against their short-term financial and economic situations,” adds Swierenga. “As market demographics and reimbursement rates shift, capital budgeting must remain a top issue.”
Sometimes, however, it is the vendor itself that creates pressure for the IDN. “I dislike nothing more than for a vendor to cram a contract down my throat, pressuring me that if I don’t close the deal by a certain date, I will lose the price,” says Barnett. “Vendors have 12 months to make a sale.” It’s a problem when they try to close a deal quickly, just to make the sale before the end of the budget year.
Ideally, the IDN should establish a relationship with the vendor that can provide support and service for the life of the equipment, says Barnett. “It is always beneficial when a vendor provides a local rep who is readily available at a moment’s notice,” she says.
Other considerations in selecting a vendor may include:
- Ability to provide interfaces
- Financial stability
- Track record
- Available new technology
Working with the GPO
While IDNs do not necessarily look to their GPO to determine their equipment needs, they can benefit from the GPO’s broad marketplace knowledge and negotiation experience. “Sometimes the GPO is aware of new pieces of equipment about to hit the market,” says Barnett. “The GPO also generally provides a nonbiased opinion of [product] features we might want to consider. In some cases, we might not need all of the bells and whistles that a physician is enamored with, and the GPO can [help] balance that.”
GPOs can work with their IDNs to provide member hospitals with the latest DRG and reimbursement research, along with national and regional patient volume trends, backlog data, patient delays and other market-driving statistics, adds Swierenga.
“Broadlane has developed a capital equipment services program to help educate its customers on emerging technologies and assist with the selection and procurement of major capital through a group buy approach,” Swierenga says. The GPO also offers budget analysis, quote reviews, equipment and facilities planning and aggregated equipment purchases across its customer base, as well as a portfolio of nationally negotiated capital equipment contracts and customer contracting services.
Consorta works with its IDNs to educate them on the newest technology. “Our members have access to Web casts powered by SG2 to instruct and guide the purchase of state-of-the-art technology,” says Weatherford. In addition, Consorta works with Attainia, a San Jose, Calif.-based software company, to provide its members with an interactive electronic tool designed to help them manage their annual capital equipment budgets and construction projects. The software tool contains built-in Consorta pricing, which enables members to better control costs and manage their equipment purchases, says Weatherford.
Because most healthcare institutions do not purchase major capital equipment on a frequent basis, Broadlane has developed a capital equipment services program designed to educate its customers on emerging technologies and assist with the selection and procurement of major capital through a group buy approach.
Regardless of the relationship that evolves between the GPO and its IDNs with regard to capital equipment contracting, IDNs generally look to their GPOs to leverage suppliers through aggregated purchasing volume and identify purchases that can maximize the return on investment. Beyond that, IDNs should look at capital equipment contracting as a science, says Robb. If an IDN stops to consider the total cost of ownership associated with a purchase, the many steps involved in the contracting process will probably piece together quite well.