Mdulo 1-S6

Wayne Forrest

Analyzing equipment costs, cradle to grave
En: Healthcare Technology management. Vol. 8, nmero 4.
Abril, 1997

Conozca un modelo para identificar los costos de propiedad
asociados a los equipos mdicos 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 legislacin de derechos de autor:
D. Leg. 822-Articulo 44





Diploma en Gestin de Recursos Tecnolgicos en Salud-GeTS














Analyzing
Equipment Cost:
Cradle to Grave


F
or better or for worse, managed care, cost
pressures and the subsequent need to
maximize revenues have dramatically
changed the way healthcare facilities
evaluate equipment purchases.

during their cradle-to-grave life-cycle.
C. Wayne Hibbs, principal of the consulting firm C.
Wayne Hibbs & Associates (Dallas) and formerly of
MDB Information Network (Dallas), has set up a
Seven Compartment Model to determine life-cycle
costs for more than 30 types of equipment ranging
from infusion pumps to PET scanners. The model
consists of labor, financing, service, supplies, training,
utilities and
utilization (see chart
above).
Institutions can no longer pick the biggest, brightest
and high-techiest piece of equipment on the trade show
floor while ignoring the price tag.
Instead of the
traditional
doctor-knows-
best approach,
facilities - if they
have the
resources to do
so - are basing
their equipment
purchases on life-
cycle cost
analysis models
previously
reserved for
manufacturing
and other
industries.
"The level of
financial acumen
in the
administration of
healthcare is
increasing
dramatically,"
observes Robert Ford, operations manager in the
Finance and Technology Management Services group
of Hewlett Packard's Medical Products Group
(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
say `You may be the wizard of cardiology, but youre
also the cardiology product line manager.
On the outside, one box may look just like the nest.
What makes them different? How much theyll cost

"Everybody thinks
the No. 1 item is
how much the
equipment costs [to
purchase]," Hibbs
says. "The primary
considerations in the
cost of ownership
are typically the
labor costs to
maintain the
equipment and the
supply costs to keep
it up and running.
Hibbs places price
including how the
facility will pay or
finance the
equipment. The
third tier includes
training staff on the
equipment, utilities such as electricity and site
preparation - and utilization, or the frequency with
which the equipment is used.


The Calculations
To properly conduct life-cycle cost analysis, Hibbs
advocates that a facility compile a database with as
consideration for purchase. Each profile must include
items such as the costs of supplies, materials to
APRIL 1997 HEALTHCARE TECHNOLOGY MANAGEMENT
grew from 43 percent in 1993 to 51 percent in 1995.
Rentals gained in popularity from 5 to 21 percent
during the same time.
maintain and operate the machine, labor and utility
costs.
That information - represented as a single piece of
equipment or one of several units within an entire
department - is then entered into a computer modeling
program capable of performing multiple calculations
simultaneously, such as Lotus 1-2-3 or Microsoft
Excel.
"There are private physicians' practices and small
hospitals that don't want to buy a big piece of
equipment, because they may be consolidating with
another hospital or network," says John Carroll, senior
product manager of AT&T Capital Leasing Services'
Health Care Group (Framingham, Mass.). "Similarly,
if a facility wants to buy an MRI or an ultrasound that
they feel may be upgradeable in four or five years,
they may not want to own the entire asset."
"You end up with a spreadsheet-type presentation
that shows what the total budget of the department
ought to be as a benchmark for the year," Hibbs says,
"based on the number of procedures it is doing and
how much equipment and staff are there." The most common leasing options include a "fair
market value" lease or a "dollar out" lease. The benchmark is the critical component to
determine how efficiently a department is operating
and - more importantly - if and where changes are
necessary in equipment, staffing and other related
expenses.
Under the fair market value lease, a facility chooses
the length of the lease at the time of purchase. At the
end of the agreement, the leasing company takes
ownership of the equipment and sells it on the
secondary market. The facility's monthly payments are
based on the length of the lease and what the leasing
company predicts the equipment will fetch as a pre-
owned or refurbished system at the end of the
agreement.
It is a complex model that - in Hibbs' words - "is not
for the light-hearted."
If you make a mistake, it can be expensive. A
misplaced decimal point on the utility costs can blow
your model out of the water," he says.

Labor
Labor is the most
important factor in
analyzing cost over the life
of a piece of equipment
simply because
approximately 55 percent of
a hospital's revenues are
consumed by wages, salaries
id benefits. An American
Hospital Association (Chicago) study which includes
hospitals of all sizes - calculates that expenses for
medical supplies, pharmaceuticals, utilities, food,
housekeeping supplies and administration take up 34
percent of a hospital's income. The remaining 11
percent goes toward capital costs (interest and
depreciation on the facility and equipment), as well as
fees for contracted professional and administrative
services.
"A good leasing company should take some risk,
other than just providing financing," said Kenneth
(Chip) Halverson, president of equipment lessor and
refurbisher Comdisco Healthcare Group Inc.
(Rosemont, III.). "We're saying that if you return [the
equipment] in two years, we know it will be worth X.
We'll find another user and we'll earn our profit - if
we're right. If we're wrong on the value, then we don't
earn a profit."
Because the leasing company makes its return on the
sale, the borrower will receive a very low interest rate
on the lease, possibly close to zero percent.
Under the dollar out lease, a facility can buy the
equipment for $1 at the end of the agreement.
Facilities looking to utilize equipment long term often
choose this option. Monthly payments are based on the
length of the lease and the price of the equipment, with
interest rates generally two or three percentage points
above the prime rate.

Financing
One key decision in
life-cycle cost analysis is
whether to buy, lease or
rent equipment. In recent
years, leasing and
renting have become the
most popular options.
On the flip side, with 126 hospitals under its wing,
Tenet Healthcare Corp. (Santa Barbara, Calif.)
prefers to buy its equipment outright and use it as long
as possible.
"Leasing can be very expensive," maintains David
Ricker, Tenet's vice president of Materiel Resources
Management. "We would rather buy the equipment,
because we are a liquid company. We get our
disposable costs or service costs down as low as we
can, take advantage of the [equipment's] depreciation
and avoid interest rates."
According to medical equipment financing firm
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

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.
country's largest alliance of hospitals and healthcare
systems, with more than 1,700 members.
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.
"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." The contract also should include follow-up training
sessions for new hires or as technology advancement
warrants.
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.

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.
"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.
"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."
"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."
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."
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."
Efficiencies to be had, Rusk adds, exist in the image
reception and intensifying screens.



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.
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. 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.
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.
"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."
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.
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).
"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.
Radiology information systems also can play a major
role in life-cycle cost analysis by preventing dollars
from slipping through the cracks.
"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."
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."

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.
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."
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."
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.
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.
"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."
"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."
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