Choosing capital maintenance and service contracts
October 21, 2014
By Katie Regan and Kevin Hodges
Outside of a hospital’s capital equipment and supply costs, service contracts can have the most significant impact on overall costs — particularly with service rates increasing at 2 to 3 percent annually. There is also the issue of lost revenue when equipment is down, and the potential liability issues if equipment malfunctions due to improper maintenance. As a result, determining the best service option can be a daunting task.
Here are four considerations for achieving the most effective and risk-adverse equipment support:
Determining the level of risk
To assess the level of risk, you need to review your system maintenance and utilization logs. The system maintenance log records all maintenance performed on a machine. System utilization shows the activity over a given period of time (e.g., weekly, monthly).
It is not uncommon for hospitals to switch to a higher risk contract that offers less coverage to save money if these reports show that the most expensive or at risk parts have been replaced within the past 12 months.
Evaluating coverage amount needed
When assessing a service contract, it’s important to look at four primary factors:
Types of Contracts
Most new technology purchases have at least a one-year warranty, in which case the OEM has full responsibility for maintenance and repair. However, the time to consider additional service options starts before signing the final purchase order, when the buyer has the most leverage. Medical equipment maintenance programs exist today that can shave 10 to 40 percent off the cost of vendor service contracts. After the initial warranty period, hospitals have several maintenance options:
Style of coverage
Additional details to consider include hours of service and preventative maintenance. Hours of service typically run from 8 a.m. to 5 p.m.; extended hours to 9 p.m. or even 24/7 coverage. For a hospital with backup systems, the typical coverage time is sufficient.
Preventive maintenance can significantly reduce the likelihood of mechanical failure. PM should be built into the service contract and should not interfere with patient schedules. Typically, most contracts include one to four PM visits per year; however technologies like CT and MR can require PM monthly.
Important contract language
You want the contract to protect your facility. Below are some important issues to consider:
In summary
When negotiating an equipment purchase or maintenance contract, it is important to understand that the vendor’s goals differ from those of a hospital. Unless otherwise instructed, most vendors will automatically quote hospitals a full service contract. Keep in mind that 40 to 60 percent of a vendor’s revenue comes from service contracts and they will typically negotiate the highest level of service at the highest price. Service costs are a vital part of any purchasing discussion, and for some technologies they can be the difference between profit and loss.
About the authors: Katie Regan is the clinical publication manager at MD Buyline. She joined the company in 2013. Regan leads all clinical, financial and health care publishing projects. She holds a BS from Texas A&M and a master’s degree from Rice University.
Kevin Hodges is the director of operations and joined MD Buyline in 1996. Prior to his current role, he served as director of member services where he assisted MD Buyline members in cost-saving purchasing strategies.
Outside of a hospital’s capital equipment and supply costs, service contracts can have the most significant impact on overall costs — particularly with service rates increasing at 2 to 3 percent annually. There is also the issue of lost revenue when equipment is down, and the potential liability issues if equipment malfunctions due to improper maintenance. As a result, determining the best service option can be a daunting task.
Here are four considerations for achieving the most effective and risk-adverse equipment support:
- Determine the level of risk
- Evaluate coverage amount needed
- Understand types of contracts and styles of coverage available
- Include important contract language
Determining the level of risk
To assess the level of risk, you need to review your system maintenance and utilization logs. The system maintenance log records all maintenance performed on a machine. System utilization shows the activity over a given period of time (e.g., weekly, monthly).
It is not uncommon for hospitals to switch to a higher risk contract that offers less coverage to save money if these reports show that the most expensive or at risk parts have been replaced within the past 12 months.
Evaluating coverage amount needed
When assessing a service contract, it’s important to look at four primary factors:
- Consider the technology as a whole: Depending on its complexity, some types equipment require more preventative maintenance than other types, while some requires more concentrated calibration and adjustment.
- Determine the utilization of the technology: Will it be used for a high volume of patients? Is downtime unacceptable for throughput? Typically, equipment with low utilization rates will have a low failure rate. Use this information to determine the overall level of coverage necessary.
- Assess in-house support: This includes the training level of the BME staff and availability of backup systems. Some equipment only requires routine inspections which can be performed in-house. If backup devices are available, the demand for immediate service is less, but these backup systems require maintenance too.
Types of Contracts
Most new technology purchases have at least a one-year warranty, in which case the OEM has full responsibility for maintenance and repair. However, the time to consider additional service options starts before signing the final purchase order, when the buyer has the most leverage. Medical equipment maintenance programs exist today that can shave 10 to 40 percent off the cost of vendor service contracts. After the initial warranty period, hospitals have several maintenance options:
- OEM: This is the most costly service option but also has the lowest level of risk and is often the most convenient. OEM contracts generally offer quicker repairs but multiyear agreements can limit leverage in the future. In addition, costs are not always completely capped. Facilities that utilize OEM contracts are encouraged to have in-house maintenance personnel monitor and record all service.
- Multi-Vendor Programs: Multi-vendor contracts have one vendor servicing multiple brands of equipment. Bundling can lead to lower costs and simplified contract management, however, this can lead to shortened equipment life and longer repair times.
- Time & Materials: Choosing a T&M option requires knowing which equipment is “high risk” and better maintained under a contract. This option allows hospitals to choose the best service provider for each service event. However, the “pay as you go” model can make it difficult to budget for the cost of parts and labor.
- BMEs (In-House) Training: This option is practical for large facilities that have multiple types of the same equipment and suitably trained BMEs. In-house service provides immediate onsite support and potential cost savings. In some cases, however, the expense to train BMEs can be higher than the cost of a full service contract.
- ISO Local or regional independent service organizations can provide many of the same options as an OEM. ISOs often cost less than the OEM option and their personnel may be located closer than the OEM’s service representatives. However, ISO personnel may not be adequately trained to service certain models or types of equipment and may have difficulty obtaining parts available only from OEMs.
Style of coverage
Additional details to consider include hours of service and preventative maintenance. Hours of service typically run from 8 a.m. to 5 p.m.; extended hours to 9 p.m. or even 24/7 coverage. For a hospital with backup systems, the typical coverage time is sufficient.
Preventive maintenance can significantly reduce the likelihood of mechanical failure. PM should be built into the service contract and should not interfere with patient schedules. Typically, most contracts include one to four PM visits per year; however technologies like CT and MR can require PM monthly.
Important contract language
You want the contract to protect your facility. Below are some important issues to consider:
- Multi-Year Service Contracts: These contracts are typically priced lower. You should negotiate paying on a yearly basis. The option to modify the contract or renegotiate price depending on the service quality should be included.
- Performance Guarantee Clause: This ensures that the equipment is performing to the agreed upon performance specification, and will eliminate any finger-pointing if an issue arises.
- Response Time Guarantee: Response time is vital in choosing a service contract, especially with systems that can’t afford downtime. This must be provided in writing and acceptable to the hospital.
- Uptime Guarantee: Many vendors will provide a 95 to 98 percent uptime guarantee. Vendors typically calculate this on a 24/7 basis, but it should be calculated based on your actual hours of operation.
- Termination Clause: All contracts should have a penalty-free termination clause that allows you to void the entire agreement or specific items within the contract.
In summary
When negotiating an equipment purchase or maintenance contract, it is important to understand that the vendor’s goals differ from those of a hospital. Unless otherwise instructed, most vendors will automatically quote hospitals a full service contract. Keep in mind that 40 to 60 percent of a vendor’s revenue comes from service contracts and they will typically negotiate the highest level of service at the highest price. Service costs are a vital part of any purchasing discussion, and for some technologies they can be the difference between profit and loss.
About the authors: Katie Regan is the clinical publication manager at MD Buyline. She joined the company in 2013. Regan leads all clinical, financial and health care publishing projects. She holds a BS from Texas A&M and a master’s degree from Rice University.
Kevin Hodges is the director of operations and joined MD Buyline in 1996. Prior to his current role, he served as director of member services where he assisted MD Buyline members in cost-saving purchasing strategies.