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
Service costs are one of
the major considerations
for David Natale, director
of technology assessment
services at Premier Inc.
(Charlotte, N.C.), the
country's largest alliance of hospitals and healthcare
systems, with more than 1,700 members.
"Service contracts for imaging equipment can run
tens of thousands of dollars per year," Natale says.
"We have an in-house service organization that we
often recommend to our hospitals to save some of the
cost."
If there is no in-house service group to turn to,
facilities must negotiate the best deal possible. When
doing so, one key component should be an uptime
guarantee. So advocates John Sutton, senior contract
manager for group purchasing organization AmeriNet
(St. Louis). He recommends uptime guarantees of 9?
or 98 percent and agreements that include a penalty if
the benchmark is not achieved.
"A lot of ultrasound companies guarantee 98 to 99
percent [uptime]," Sutton said. "There are some
companies that don't feel as comfortable and they
guarantee 95 percent or less. That means if you're
doing 100 scans on a CT scanner, it could fail five out
of every 100 times. That's not acceptable to me."
Supplies
On the supply side,
disposables and consumables
-catheters, contrast agents, X-
ray tubes, batteries, cryogens,
etc. - factor heavily in life-
cycle cost analysis.
"You need to figure the
number of times [the
equipment] will be used -
whether it be a week, a month
or year - and multiply the
costs of the disposables that go along with the
machine," says Premier's Natale. "With an X-ray
machine, you look at the X-ray tube. That's the
expensive part that goes [bad] vs. an MRI which
doesn't have an X-ray tube."
While the cost of supplies differs from modality to
modality, consultant Hibbs says the formula to
calculate life-cycle costs doesn't change. "Infusion
pumps have the same types of hot buttons and
concerns as MRI, PET and CT scanners and linear
accelerators."
APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT
Training
"If you're buying a new
CT or PET scanner, you
don't just take it out of the
box, turn it on and expect
your staff to be able to use
it," adds Hibbs.
The cost to train clinicians to operate new
equipment is usually negotiated as part of the initial
purchase price. Buyers also can figure into their life-
cycle analysis what it will cost to train their
biomedical engineers to perform in-house preventive
maintenance, thus avoiding service contract expenses.
The contract also should include follow-up training
sessions for new hires or as technology advancement
warrants.
Utilities
Electricity, gas, water and
site preparation also factor
into analyzing cost,
although there may be
relatively little healthcare
facilities can do to control
some of these expenses.
"Heating and air
conditioning are not the big
issues they once were,"
observes Robert Rusk president of manufacturing and
consulting firm Rusk Co. (Wichita, Kan.). "Today's
computers boil down to PCs and they're not the
environmental monsters early CT computers were."
Electricity costs, however, can be a huge problem.
Cath labs require 80,000 to 100,000 watts, while an X-
ray machine consumes 50,000 watts of power.
Expenses for heating, air conditioning and water to
cool a linear accelerator - figuring 25 to 30 cases per
day, six days a week - can run $150,000 a year. By
comparison, an ultrasound machine uses 1,100 watts
and can plug into a wall outlet.
In Rusk's view, energy efficiency may be in the eye
of the beholder. "I think there are sales people out
there trying to convince their customers that their
machine generates more X-rays per kilowatt. That's
absolutely false," he says. "It's a physical reality that if
you want to generate so many X-ray photons at a
certain penetrating power, it takes so many kilowatts.
Fifty kilowatts is 50 kilowatts, for anybody's X-ray
machine."
Efficiencies to be had, Rusk adds, exist in the image
reception and intensifying screens.
 Facilities also need to consider site preparation costs
for new equipment. Is the floor sturdy enough for a
5,000-pound CT gantry? Can the walls or ceilings
support mounted equipment? Can the wiring handle
the massive electricity demand and prevent power
surges and dramatic declines? And - as obvious as it
may sound - can the equipment fit through the doors?
More than one facility, Rusk says, has forgotten to
check that one.
Given equipment design differences within the same
modality, Rusk suggests making the room as generic
as possible. "The more complete the planning is on the
front side, the more cost effective it is down the line,"
he advises. And the more generic the floor plans, the
more flexibility a facility has in choosing one brand of
equipment over another. "That's where they'll save
money."
Utilization
Utilization is the number
of procedures equipment can
perform over a certain
period of time.
Hibbs cites the example of
a linear accelerator. A
facility buys it, installs it,
calibrates it and trains its
staff to operate it. "The very first patient you use it on
is very expensive," he says. "From that patient on,
there is a definite ramping up of efficiency until you
get up to the operating range when it's utilized 80
percent of the time. That's where you're most efficient
operation is.
"That's what life-cycle cost shows you - as you vary
the number of patients, what does it cost?" he
continues. "It doesn't make a difference if you're a for-
profit or not-for-profit hospital or a home healthcare
facility. What makes the difference in lifecycle cost
analysis is how much are you using the equipment?"
According to Comdisco, the average lifespan of an
ultrasound system in the U.S. climbed to 5.7 years in
1995 from 4.4 years in 1992. The lifespan of an MRI
system reached 4.5 years, up from 3.1, over the same
period, while CT scanners' longevity rose to 6.6 years
in 1995, compared with 4.5 years in 1992.
"If you have a good, hardy piece of equipment that is
relatively well-engineered, a 12- to 13-year life-cycle
is possible," says Helen D. Wilson, director of sales
and marketing for Siemens Medical Systems' (Iselin,
N.J.) managed healthcare service. "On the other hand,
there are companies selling low-cost radiology rooms
with five-year warranties. After five years, you just
throw it away. The truth of the matter is, that's not a
bargain. Even if ours is double the price, if it lasts 12
years, [our] deal is the bargain."
APRIL 1997 – HEALTHCARE TECHNOLOGY MANAGEMENT
As facilities hold on to equipment longer,
upgradeability is becoming increasingly important.
"The No. 1 question is: Is it upgradeable?" says
AmeriNet's Sutton. "The No. 2 question is: How long
is that company committed to upgrading that system,
for how many years and what will be the cost?" Many
OEMs do offer upgrade provisions in their service
contracts.
Ricker says Tenet is "willing to pay more money for
equipment, if it's going to be more productive," but
adds that it doesn't see "significant differences - and
this is a broad-based statement from one manufacturer
to the next in terms of throughput. I think the playing
field is pretty level.
"The challenge for the manufacturers is to help us
identify and then to communicate where these systems
can be more productive so we can impact our budget,"
Ricker continues. "I can't think of a product that comes
to mind that a manufacturer can clearly rationalize a
much higher price in exchange for documented
throughput and productivity."
Another factor buyers need to evaluate, opines
Premier's Natale, is the alternatives facilities can create
with a new piece of equipment.
"By buying one device, you may render a diagnosis
that enables you to avoid a more expensive
procedure," he explains. "Factoring in patient and
clinical outcomes to find out how well this item really
works is exceptionally difficult to quantify. Those who
are doing it are kind of wagging numbers they're either
pulling out of their hat or are published by some
manufacturer who's presenting that kind of data."
One company trying to quantify the numbers is
Hewlett Packard. HP has calculated the potential
savings of using ultrasound to avoid cath lab
procedures for valve problems, using `Friday
afternoon' ultrasounds instead of nuclear medicine
scans, replacing X-rays with ultrasound for women
undergoing chemotherapy and accounting for
reductions in liability insurance and documentation.
Over a five-year period, HP estimated the savings at
$297,642 when ultrasound is used as an alternative
modality (see chart "Potential Savings Utilizing
Ultrasound, "page 40).
Radiology information systems also can play a major
role in life-cycle cost analysis by preventing dollars
from slipping through the cracks.
Henry Soch, executive director of Philips Healthcare
Consulting (Shelton, Conn.), says facilities are
"underutilizing" their radiology information systems.
"Many systems have bar-coding capabilities that allow
facilities to capture additional charges at the point of
service, so they're not losing catheters, contrast media
and other consumables that may have been used in a
procedure."

In addition, most radiology information systems have
the ability to track patient cycle time, Soch adds,
enabling institutions to gauge the efficiency of the
patient process.
"The balancing act most folks are trying to get to is
how do you optimize your costs without quality
suffering?" Soch says. "People are being judged on the
quality of imaging service they provide and on their
individual facility. The real winners will be the ones
who can get the cost equation down, while maintaining
quality."
So, given the potential of life-cycle cost analysis,
everyone must be jumping on board the bandwagon.
Well, not exactly.
"It's a little frustrating when you get into discussions
with some customers and they say `Life-cycle cost
sounds good, but what's your best price?"' relates Eric
Keller, Siemens' director of service business
development.
"My experience is that facilities that belong to
networks – be they large or small - have the program
well in-hand," adds Siemens' Wilson. "Not everybody
wants to have a cardiac cath center or open-heart
program anymore. You see more hospitals
specializing. Competitively, they don't feel they need
to have the latest and greatest, especially in a network
where they're not competing for DRGs, because the
network still captures the patient."
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
"At this level," Premier's Natale says, "we're
negotiating contracts with preferred vendors and we're
looking at how much of a discount they're going to
give our members, as well as other value-added
enhancements to the contracts." With more than 1,700
members, Premier has significant buying power.
Tenet in December signed an agreement to buy 14
CT scanners from GE Medical Systems (GEMS of
Waukesha, Wis.). Along with an estimated savings of
$2.6 million in service and life-cycle costs over the
next five years, Ricker says Tenet "expects to use
those CT scanners for 10 to 15 years."
Despite all the financial belt-tightening, some old
habits are still hard to break. Keller and Wilson say
some institutions still insist on buying more equipment
with more options than they need.
"I think that's a legacy from the past when it was fee-
for-service and pass-through on capital equipment,"
notes Keller. "It was very easy to buy the biggest and
the best, because that's what the physicians wanted and
there was no negative incentive to the institution. In
fact, it was a competitive way to attract physicians and
referrals."
Whether you're a buyer or a seller, the bottom line is
that the influence of life-cycle cost analysis is
growing. "There were more CEOs and CFOs at [this
year's] RSNA than we ever saw in our lives," recalls
Wilson. "There are doctors who are on top of this, but
there are others who are being dragged forward."