Service Contracts: Balancing Risk vs. Savings to Lower Cost without Compromising Care

Yesterday, my colleague Kevin Hodges and I completed the webinar “Balancing Risk vs. Savings: Lowering Cost without Compromising Care.”

MD Buyline has been reviewing service and maintenance proposals for over 30 years, so you can imagine all the different types of contracts that have come across our desks. And, while the conversations with our members surrounding service over the years have been quite varied, it usually comes down to a few questions: What level of service should I consider? Am I paying too much? How can I reduce service costs without putting my facility at risk? What options do I have when selecting service providers?

In addition to regulation compliance, there are lost revenue consequences if equipment is unable to be used for a procedure and liability consequences when malfunctions occur as a result of improper preventive maintenance. Therefore, balancing risk vs. savings is more important than ever. So, how do you determine if a piece of equipment can have maintenance below the manufacturer’s recommendations?

We discussed in detail the following a 4-step process:

  • Step 1: Assign a risk factor to the technology
  • Step 2: Document the history of the technology
  • Step 3: Evaluate how critical the equipment is to the hospital’s mission
  • Step 4: Add up the values for each technology

Next, we talked about who might be initiating the process of obtaining a service contract. We see differences across our 3,300+ member hospitals; it could be the Vendor, Department Director, Purchasing/Materials, or Biomed Engineering. There are benefits and pitfalls for each of these.

We also covered the types of service contracts MD Buyline evaluates and recommends, including advantages and disadvantages of each:

  • Original Equipment Manufacturer (OEM) service contracts
  • Multi-vendor programs
  • Time & Materials
  • Managed Time & Materials
  • In-House
  • Third Party
  • Asset Management

 

It is very important to make sure that the service provider’s goals and objectives line up with your organization’s goals and objectives when considering service coverage. The more confident you are about the type of coverage you need and what you will be willing to pay, the quicker the process.

If you are an MD Buyline member, we encourage you to submit all of your maintenance proposals for review. As previously mentioned, we have been evaluating maintenance contracts for over 30 years and can provide you with insight on the quoted level of coverage, make recommendations, and offer price benchmarking as well.

At the end of our webinar we opened up the session for questions from the registered hospital participants. The response was overwhelming, so we didn’t have the opportunity to answer them all. I have listed them below for your review and invite you to offer feedback or post additional questions.

Questions
1. Do you have any statistics on service costs as a % of purchase price you can share with us?

Yes. As a rule of thumb, service contracts for capital equipment generally cost between 6% and 8% of the Average Replacement Value (%ARV) of the equipment. The age of the equipment, models covered, type of coverage, and condition of the equipment all influence the price. However, to demonstrate the variability of service pricing, we have seen a range of approximately 2-24% overall; it truly is dependent upon the technology. When looking at IT, hardware is often seen in the 8-10% range, while software can be seen at 18-24%. Software support is higher in part due to future upgrades, enhancement packs, and 24/7 support. As you can see, there are many variables to consider; therefore, we recommend that all of our MD Buyline members submit their service proposals for a detailed review.

2. With 6-8% for new modalities as an average, how do you gauge the percentage of cost for service renewals for older technology

Older equipment obviously carries higher risks of failure, thus we may see higher service costs in some instances; however, pricing is very dependent upon the technology and/or configuration. Just because it’s older doesn’t necessarily guarantee that pricing will be higher – the exception might be if a system was reaching sunset (no longer supported due to obsolescence). Older equipment may be easier to maintain as opposed to newer technologies. Also, an older system may be used as a back-up system, allowing more flexibility with service options. The percentage of cost can sometimes be higher on low-tech equipment and lower on extensively configured high-tech equipment. Because we have a large database of maintenance contracts for new and older model equipment, we can benchmark service for older or obsolete systems (i.e., a 7-year old CT scanner). We encourage all of our MD Buyline members to submit your service/maintenance proposals for a detailed review.

3. Do you find in general service contracts are negotiable?

Absolutely. When reviewing maintenance agreements, we consistently find additional dollars on the table, and often make recommendations for our members to consider other levels of service. We also can tell them if they have been under or over-quoted, or where time & materials may be more appropriate depending upon on a particular technology. In some cases, service may not even be warranted and relying on the hospital’s BME could be sufficient. In addition to capital, IT, and consumable acquisitions, our members are negotiating their service/maintenance agreements every day. Again, service contracts are best negotiated at point of sale. Your greatest leverage is prior to the purchase of the equipment. However, this does not mean service can’t be negotiated post-sale.

4. I didn’t negotiate our service contracts at point of sale. What do you recommend I do now?

You always have the ability to conduct a comprehensive review of your service agreement. Many vendors will work with you or offer options for reducing the cost of coverage. If you are already in a binding agreement, you may have less flexibility, but I would not hesitate in contacting the provider and discussing your goals and objectives. Please feel free to contact member.services@www.mdbuyline.com to speak with an analyst for further discussion.

5. How do I know how much service coverage I need?

As we discussed in the webinar, it’s very important to evaluate the complexity of each piece of equipment and the hours needed for operation. Also, you will want to consider the service history of existing systems in your facility. Every organization utilizes equipment differently – some experience more wear and tear than others based on patient load. You will need to assess how critical the equipment is to your workflow and if you have back-up systems that will allow you to continue treating patients when the primary system is down. For example, having no back-up on a critical system would probably necessitate having coverage with a faster response time so you can get it up and running as quickly as possible. The expertise of your BME will also help to determine the amount of coverage needed. Don’t forget, MD Buyline members may access our clinical analyst at any time to discuss particular technologies and what we are seeing in the industry.

6. Do you recommend standardizing with one service vendor?

For the most part, no. There are several things to consider with this type of contract:

  • What is your track record with this provider, if any?
  • How much equipment do you have from that vendor, provided that the service provider is also a manufacturer? You must realize that a single service provider may not be able to fix all systems, thus, they would have to contact the OEM for service which could cause delays.
  • Track downtime and response time to ensure you are not seeing longer times in service response time from the provider. If they have to reach out to the OEM for assistance, it will extend the response time.
  • Lastly, these types of contracts many times will include equipment that really doesn’t need a service contract. You would need to closely review the contract for these types of equipment.b

 

7. Can a second source (3rd party) vendor really save my organization money and provide the service needed?

In some cases yes, but this should be looked at on a case-by-case basis. For high-end or other technologies that require specific expertise, you may want to stay with the OEM because their service engineers are trained specifically on that type of technology. For low-end technologies that may require minimum service, a 3rd party may make more sense.

8. Do you also evaluate research/laboratory equipment maintenance agreements?

Yes, we do. MD Buyline members are encouraged to submit their service/maintenance proposals for review.

9. I have had vendors refuse to allow my biomed staff to accompany them on service calls and I don’t think that is legal. Isn’t it our right to watch what they are doing when it is our own equipment being worked on?

It is essential that all service proposals are reviewed for language that includes what your organization does or does not have access to during the term of an agreement. These and other types of considerations should be discussed and negotiated at point of sale. Most providers offer biomedical training and/or BME First Call contracts so that your BME can take first call to help your organization reduce service cost. Most importantly, I recommend having your legal team review your agreement.

10. Where do you get your User Satisfaction Ratings from and how can I access them?

Our ratings are gathered for current medical capital equipment and IT technologies after an extensive discussion with the end-users (i.e, department managers, technologists, physicians, nursing staff, therapists, BME, IT, etc…). Our inquiries are made to hundreds of MD Buyline members and non-members from hospitals, clinics, outpatient centers, etc…throughout the year, and the ratings are updated and posted on our website quarterly for our members. Ratings remain valid for 12 months. Ratings are obtained in numerous ways; i.e. direct phone interviews, emailed surveys, trade-shows, technology meetings, site visits, etc…

As always, if you have any questions, please contact Member Services at member.services@www.mdbuyline.com

Rod Faulkner, BS
ABOUT THIS EXPERT
Rod Faulkner, BS, Analyst — Mr. Rod Faulkner joined MD Buyline in 1996 with over 15 years of business management experience. At MD Buyline, Mr. Faulkner works as an analyst in capital and purchased services, which enables him to consult with MD Buyline members as they work through researching, budgeting and purchasing projects. Mr. Faulkner graduated from Texas Tech University with a Bachelor of Science in sociology.