Uncovering the real total cost of ownership

Sept. 23, 2014

Total healthcare spending in the United States is expected to reach $4.8 trillion in 2021, accounting for nearly 20 percent of gross domestic product (GDP), or one-fifth of the U.S. economy, by 2021.1  In an attempt to reduce spending, many hospitals around the country are doing their part and taking drastic measures to cut costs. Although being more frugal is prudent behavior in not just healthcare but all global markets, it doesn’t always require cutting necessary patient services or cutting valuable staff. In fact, some hospitals are reducing costs without making these perceived necessary cuts.

They’re doing this by taking a long, hard look at clinical engineering (CE) operations and its impact on the total cost of ownership for capital equipment. By gaining a better understanding of CE and its role, hospitals are able to optimize the total cost of ownership by eliminating on-going and escalating expenses in hidden areas and identify significant and sustainable savings opportunities in the process.

Total cost of ownership (TCO) is a calculation method used to ensure all associated costs are considered over the life of each asset. These may include purchase price, installation, financing (leasing or renting), utilities, upgrades, CE costs, training and disposal. In this article, we’ll focus on the CE spend, explore how those costs contribute to TCO and how you can use this information to save thousands – even millions – of dollars without eliminating valuable assets.

Dale Hockel, Senior Vice President of Operations, TriMedx
Michael Kintner, Capital Equipment Strategist, TriMedx

The CE spend

Having a clear picture of CE operations, expenses and effectiveness is critical in achieving optimal TCO.  An effective CE department should be one area in which your hospital is consistently saving money, not spending it. The challenge is many CE departments are full of hidden costs, making it difficult to uncover ways to save. There are obvious costs like repairs and preventive maintenance (PM). But some costs may be hidden within other departments, making it nearly impossible to track expenses – and even more difficult to find ways to save. 

Further complication comes when the CE budget is not clearly visible to hospital management because it is combined with other departments within the hospital such as IT, facilities, etc. Uncovering the true CE spend will help you make educated decisions and drive short-term and long-term savings.

Hidden costs

Hospitals can assume undue financial risk when medical equipment service costs are not centralized in CE and are instead fragmented across hospital departments. Fragmentation creates opportunities for costs to stay hidden. Tracking and assessing all costs within CE can provide significant savings opportunities to a hospital if you can find the hidden costs. Here’s where to look:

1. Service contracts

When CE doesn’t manage all equipment service costs, it results in the hospital having no systematic cost controls. This is most evident in service contracts with the original equipment manufacturer (OEM) at the time of purchase. These contracts come at a high cost because they commonly don’t take into consideration the internal CE talent and resources you’re already paying for.

Service contracts tend to create an environment of unwarranted dependency where staff immediately calls the OEM for repair/PM rather than relying on the in-house team. Unmonitored costs begin to mount when services outside of the contract are rendered. We call these “bill-aboves,” which include labor or parts excluded from the contract. For instance, if a CT tube fails at 5:15 p.m. Monday, you are now outside business hours, and if glassware coverage isn’t included it will cost even more than the initial investment in the contract.

Many service contracts have an auto-renewal clause, too. If you don’t notify the OEM a few months prior to the end of the agreement, you’ll automatically be enrolled for another costly long-term contract while likely experiencing a cost increase over the previous term. The Medical Consumer Price Index industry standard for inflation is about 3 percent annually; however some contracts can be up to 6 percent. If you consider a five-year agreement for $100,000 per year: a 5 percent increase each year adds $52,563 in additional costs over the life of the agreement for nothing more than staying in contract.

What’s worse, fragmentation in the management of these expenses commonly results in having no plan to right-size service contracts or bring services in-house in the future. Now each department is independently renewing without considering the cost of the contract, the bill-aboves, coverage levels, exclusions, auto-renewals or the skillset of the in-house CE team.

2. Miscoded expenses in the general ledger

Although many financial professionals live by the general ledger (GL) for budgeting and forecasting, when it comes to CE, expenses are often miscoded in the general ledger, creating a false reliance on this tool when accounting for expenses. This is a result of incorrect coding of expenses. For instance, the expense may be listed under a completely different department like radiology or surgery and misclassified as “Other Med Care Materials” and “Other Expenses” when it’s actually a CE expense.

When it comes to service contracts, the GL will likely provide visibility into only 50 percent of the total expenses.  This is because costs could be miscoded or coded as pre-paid, or there could’ve been missed payments in the year being reviewed. This makes it difficult to see the total value/expenses, which offers a false reading of the data or worse, false information.

3. Underdeveloped clinical engineering

Centralization of medical equipment service costs in CE is a critical step in reducing TCO for capital assets, but this act alone is not enough. To fully realize the opportunity that centralization can provide, you must have an appropriately staffed CE program properly equipped with technology and training. Oftentimes, this is not the case, and an underdeveloped CE program can itself become a source of missed savings opportunities. One common symptom of an underdeveloped CE program is the ineffective use of (or lack of) a computerized maintenance management system (CMMS) to track, manage and report on medical equipment assets. Lacking an effective CMMS can quickly put your facility at risk of having too much or too little inventory, expose you to excessive service costs and limit your ability to develop strategic plans for capital acquisition and cost management.

4. Current-state assessment

After exploring some areas where hidden costs can lurk, you can begin identifying the total cost to service your medical equipment. To develop a complete CE budget, conduct a current-state assessment that examines all areas of expenses – both listed in CE and in each department throughout the GL. An assessment will examine current costs for the run rate of service contracts, parts and vendor service expenses and annualized labor rates for technicians to include benefits, overtime, call backs, training, etc. The assessment should scrutinize all CE expenses over several years to uncover trending. It’s a daunting task and may be easier and more cost effective to accomplish by partnering with an advisor who has experience in uncovering the true CE spend.

Solutions for sustainable savings

Optimizing CE operations can deliver high utilization of equipment and support, achieving your organization’s financial goals. To do so, you must build and fully leverage a best-in-class CE department that brings maximum value to your medical equipment assets. The end result is the elimination of hefty, expensive service contractsnot staff, services or other valuable resources.

1. Centers for Medicare and Medicaid Services, National Health Expenditures Projections 2011-2021. www.cms.gov/Research-Statistics-data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2011PDF.pdf