THE DIFFERENCE BETWEEN PRICE AND COST –
A VALUE-DRIVEN APPROACH TO EVALUATING SERVICE PROVIDERS
Purchased services can account for up to 50% of a healthcare organization’s non-labor spend. They can include services such as clinical, facilities, corporate services, equipment maintenance, IT and administrative. Two of these categories – clinical and equipment maintenance – have a direct impact on patient care delivery. So, why is it so important to know the difference between the upfront price and true cost of these purchased services? Knowing that, as well as the benefits of a price-cost focused analysis can make a big difference to an organization’s overall bottom line.
Swarna Alcorn, vice president of service for Olympus Corp. of the Americas, says an upfront price-only strategy may negatively impact total budget spends when organizations choose purchased service contracts. She says an organization should understand the difference between purchase price and total cost in equipment service contracts and use best practices in demonstrating criteria to evaluate equipment service contract providers. The three tenets – efficiency, quality and risk management – that lead to a value-driven, price-cost decision should always be followed versus a price-only strategy when choosing service contracts supporting medical equipment spend.
The Journal of Healthcare Contracting (JHC): How does a price-only strategy limit decision-making in choosing purchased service contracts to support medical equipment?
Swarna Alcorn: When purchase price alone is the determining factor in evaluating service contracts, an organization may be at risk for a negative downstream experience in the form of clinician satisfaction, patient satisfaction and timely capture of reimbursement and revenue. The better alternative it to not only evaluate on purchase price alone, but instead to factor in total cost. In this way, the decision of which vendor to go with should include consideration for the downstream implications of the experience that the vendor you choose will deliver to your clinicians, and ultimately the patients you serve.
When clinicians are preparing for a day of patient cases, they need to know the equipment they need is available for use so that they can provide patient care without unnecessary interruption. Equipment service providers play a pivotal role in ensuring that this happens, and as part of their proposals, should be creating assurance that they will support your end users’ needs to have equipment ready to go.
We call this “uptime,” or the percentage of working days a department’s equipment is available for use. In evaluating equipment service providers, a key criterion to focus on is the average uptime that the vendor will be able to provide you. Seeing that number, and being able to compare it amongst potential vendors, will provide a better understanding of which provider can help to ensure that patient cases are not delayed due to equipment being down or unavailable.
If patient cases are delayed due to equipment being down and unavailable for use, a significant cost is placed on the unit’s efficiency, and this cost should be considered with the same weight as any upfront price savings. Having a high uptime means that both staff and patients will feel more satisfied – staff because they are able to provide uninterrupted care, and patients because they do not have to further adjust their schedules to compensate for a delay in procedure start time, or even more impacting, a reschedule of their procedure due to equipment being unavailable.
From a financial standpoint, feeling confident in the uptime a vendor can deliver also provides more confidence in knowing that unanticipated overtime for staff will be curtailed and reimbursements and revenues will flow as expected. If cases are happening on schedule, reimbursements will flow on schedule.
JHC: How does a price-cost analysis make a difference to the overall bottom line for purchased services?
Alcorn: To be complete, a bottom-line analysis for purchased services should include data from across the continuum of care, and not just at the point of sale. The economic value that a medical equipment service provider delivers should not be solely measured through an upfront purchase price analysis, but instead through a more comprehensive uptime analysis. Doing such an analysis will create the level of transparency needed to substantiate the level of value the vendor has delivered to your organization.
To start, ask your current vendor what uptime they have delivered to you for the past 12 months. If the vendor is unable to provide this information, that is an indicator to assess on its own merit. If they can provide this information, the next data point needed is the economic value of what each percentage point of uptime is worth to your organization. On the top line, this is a calculation of what it means to capture reimbursement revenue in a timely manner. On the bottom line, this is the additional calculation of being able to manage costs, like staff overtime, in a measured manner. Vendors should be able to provide this layer of detail as well through a collaborative discussion about the number of equipment in your unit, the number of procedures per day, average labor costs and average reimbursement per procedure. To think about uptime in terms of financial metrics, consider, for example, the difference between having equipment available to cover caseload 20 days out of the month versus 17. Based on the calculations I have seen, even a few days of downtime can have noticeable impact on a unit’s financials.
If comparing vendors, the uptime criterion is an important measure in determining what level of value each provider can deliver. As a general rule, look for an uptime number in the mid to high 90s. If a vendor you are considering has not provided service to you before, and can therefore not provide a specific uptime that they’ve delivered to your organization, ask them what the average uptime they deliver nationally is.
JHC: Which team members are required in a valuable cross-functional, decision-making process and why are their roles important for success?
Alcorn: Choosing an equipment service provider is an important decision, and one that should undergo the same rigor as the precipitating capital equipment investment. To ensure the decision is reviewed and informed holistically, it’s beneficial to bring a cross-functional team to the table, with representation from the following departments:
- Supply Chain • Clinical
- Clinical Engineering/Biomed • Finance
- Infection Prevention • Risk Management
Each of these functions will have a different perspective and focus area, and combined, their input will help to inform an equipment service provider selection that will serve all interests of your organization. Supply chain and finance, for example, will have a financial orientation to their decision making, while the clinical representatives will be primarily concerned about the end user experience – everything from repair quality and turnaround time to access to educational resources and availability of loaners. Clinical engineering will have focus on things like value for money, the support a vendor can provide in maintaining accurate inventory lists and access to technical assistance centers and remote troubleshooting support.
Two audiences that we see becoming more involved with vetting equipment service providers are infection prevention and risk management. Including these team members in the decision-making process is an important way of mitigating the unknown of hidden costs that can result from poor patient outcomes. Both infection prevention and risk management are looking at ways to minimize risk exposure for patients, staff and the broader organization. For these audiences, the vendor’s quality measures will be most important, as will ensuring that the vendor is performing equipment repairs with OEM parts and OEM protocol. There will also be a key focus on validating that the vendor is able to assure that the equipment can be properly cleaned or reprocessed post repair.
In understanding the pertinent areas for each member of the vetting team, the organization is ensuring the most optimal experience in the care and use of the equipment being covered. The decision to select an equipment service provider is much more than comparing two quotes; instead, it is a decision that requires a holistic approach to review a variety of key performance and key quality indicators.
JHC: What are the tenets that set price-cost decisions apart from price-only decisions? [Efficiency, Quality, Risk Management versus Savings alone]
Alcorn: Price-cost decisions represent a more comprehensive approach to evaluating equipment service providers than those that consider purchase price alone. Analyzing price and cost holistically means understanding the impact of vendor selection from point of sale (purchase price) to the real-time, end user experience that the vendor chosen delivers (cost.) If you are engaging in a price-cost analysis, there are three key areas to evaluate: Efficiency, Quality and Risk Management.
Efficiency is, at its core, a measure of uptime, or the number of working days that your department’s equipment is patient ready and available for use. Uptime is calculated by assessing factors like a vendor’s turnaround time, loaner pool, advanced replacement capabilities and repair reduction resources. Taken together, these factors will give you a better sense of the true value that the vendor is able to offer to meet the needs of not only Supply Chain, but also end users. Uptime is also heavily influenced by the approval process the vendor requires before processing a repair. Requiring a PO prior to execution of a repair can lengthen the turnaround time, sometimes in drastic ways if the internal approval process mandates multiple checks or touch points. To mitigate, look for vendors who can offer alternate coverage models that take the hurdle of requiring a PO for each repair out of the way.
Efficiency can also be evaluated by understanding what the vendor’s average repair frequency is. Repair frequency is the average number of times one unit (same model and serial number) is sent in for repair. Whether or not the vendor offers a capitated contract, risk share model or is strictly time and materials, they will be able to calculate repair frequency. Request repair frequency for a model that is especially important for your unit, whether it is a frequently used product, or one that is used for specialty procedures and must be available when the need arises.
From a Quality perspective, the first area to understand is the vendor’s ability to source OEM parts. If a vendor is reverse engineering parts, or is accessing parts from third party sources, ask questions about how parts are inspected and what percent of parts fail quality checks. It’s also important to understand how non-OEM parts affect the cleaning process for the equipment being covered. Ensure that Infection Prevention counterparts are included to confirm the OEM cleaning protocols can be effectively executed with the parts being used to complete repairs. Similarly, understand from the vendor how their repair technicians are trained on the repair process. Medical device equipment can be intricately designed, and especially when it is equipment that is going inside the human body, it is important to confirm what level of training the vendor mandates for its employees, and how frequently that training is being conducted. Finally, a critical question to ask the vendor is how they are regulated. All service providers require oversight. While OEM service providers are FDA regulated, third party, or independent service providers, may be FDA registered or may use ISO certification. To get an understanding of the level to which the vendor is regulated, ask when their last FDA audit was, and what the results of that audit were. Did FDA representatives pass the audit, and if they did, were there findings that needed to be remediated. Understanding the specific relationship between the vendor and the FDA provides an additional layer of transparency that will help to inform the Quality criteria.
And finally, Risk Management. Assessing risk is important on two fronts: clinical and financial. On the clinical side, it goes back to bringing Infection Prevention counterparts in to confirm that they are comfortable with origination of parts used to complete repairs, the level to which repair technicians are trained and the ability of the vendor to complete repairs according to OEM protocol. On the financial side, the risk that should be evaluated is really a measure of your organization’s need for fixed costs. Some vendors will offer a capitated contract, ensuring that payments will be predictable through the term of the contract. Other vendors will only offer repairs on a time and materials basis, making monthly costs variable depending on the number of repairs needed. And still other vendors may offer a mix of the two—capitated, time and materials and risk share models that offer a limited amount of predictability based on your organization’s ability to manage repair volume. If fixed, predictable costs are important for your budgeting needs, a capitated contract will work best. Ask the vendor what their ability is to offer a capitated schedule, and if they are unable to, ensure that you are budgeting conservatively to cover unanticipated costs. Also confirm that the agreement covers all repairs, even accidental ones, so that you limit your exposure to unanticipated costs.
JHC: Why are the following questions important to ask?
- [Efficiency] Why should you ask vendors what the average uptime they deliver is and what their average repair frequency is?
Alcorn: When clinicians are preparing for a day of patient cases, they need to know the equipment they need is patient ready and available for use. Equipment service providers play a pivotal role in ensuring that this happens, and as part of their proposals, should be creating assurance that they will support your end users’ needs to have equipment ready to go. In evaluating equipment service providers, a key criterion to focus on is the average uptime that the vendor will be able to provide you. Seeing that number, and being able to compare it amongst potential vendors, will provide a better understanding of which provider can help to ensure that patient cases are not delayed due to equipment being down or unavailable. If patient cases are delayed due to equipment being down and unavailable for use, a significant cost is placed on the unit’s efficiency, and this cost should be considered with the same weight as any upfront price savings. Put yourself in your end users’ shoes… if there is poor uptime and equipment is not available, they could potentially be scrambling for loaner units, having to work overtime hours and spending time on repair follow-up instead of patient care. Having a high uptime means that both staff and patients will feel more satisfied – staff because they are able to provide uninterrupted care, and patients because they do not have to further adjust their schedules to compensate for a delay in procedure start time, or even more impacting, a reschedule of their procedure due to equipment being unavailable. From a financial standpoint, feeling confident in the uptime a vendor can deliver also provides more confidence in knowing that reimbursements and revenues will flow as expected and staff overtime will be minimized.
- [Quality] Why should you ask vendors what their final inspection metrics are and how much of their repairs go through an extra audit check?
Alcorn: Understanding a vendor’s final inspection metrics will give you a view into the level of commitment the vendor has into making sure the repair was done right the first time. Vendors should have a robust inspection process in place, and, in addition, should ideally be randomly selecting repairs for an additional audit check. Being able to compare final inspection metrics between potential vendors will provide a sense of what the end user experience will be with respect to repairs being completed to a clinician’s expectation. Often, repairs that seem to not be completed correctly the first time or require sending the equipment in again for repair shortly after it was received are the reason that clinicians will express dissatisfaction about an equipment service provider. Head this off as much as possible by finding out what the vendor’s quality metrics are before making your decision.
- [Risk Management] Why should you ask vendors how their sales representatives are compensated for their service agreement?
Alcorn: End users want the right repair done the first time. Supply chain and finance want to ensure that costs are contained. If you understand how the sales representative selling the service offering is compensated for the service agreement they are selling, it will help to provide a view into how these two needs – minimizing frequency of repairs and containing cost – are handled by the vendor. For example, if the compensation structure pays more as repair frequency increases, additional questions may be warranted to find out how the vendor will support uptime goals to ensure that end users will have access to loaner units so that caseload remains as uninterrupted as possible.