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How to Benchmark Your Capital Equipment Service Contract Spend

Posted by Chris Heckler on May 12, 2015 8:00:00 AM
Chris Heckler

capital-equipment

Investment in capital equipment is a decision that shouldn’t be made lightly, particularly for health care organizations. There are many factors to consider when selecting equipment that best suits your needs, with the bottom line being the consideration of total lifetime costs associated with its use. Other factors may include:

  • Initial purchase costs.
  • Interest and financing options.
  • Indirect costs associated with efficiency and reliability, repair and maintenance fees (can your business handle a steeper initial investment in higher-quality equipment when doing so can mean lower lifetime maintenance fees?).
  • Service contracts and associated fees—this category is often overlooked when considering the overall cost of equipment, but is an area where savings can be found through proper research into service contract management.

Options for Service & Maintenance

Service and maintenance can be a tricky area to navigate when it comes to cost savings. Some equipment may only be able to be serviced by the original equipment manufacturer (OEM), while other equipment could be managed by your own organization or third-party contractors who specialize in maintenance and engineering.

Third-party contractors fall into the categories of smaller, independent vendors and large service contractors with multiple vendors. Smaller vendors tend to offer more customized solutions and better interpersonal support while large vendors often provide lower costs with higher degrees of versatility in service options. Each offers advantages that must be weighed against the needs of your business and the associated downtime—how much financial risk can your business tolerate?

The answer often lies in a combination of these solutions. Capital equipment service is not a one-size fits all solution; multiple avenues should be considered for the best overall savings.

Benefits of Service Contracts

The importance of proper service contract management is critical when calculating equipment costs. When you purchase new equipment, the OEM will provide a warranty that typically covers 90 days but might be longer. After that, they offer different levels of service contracts to maintain the equipment in case something goes wrong.

The primary benefit of purchasing an OEM’s service contract is that their team is guaranteed to be certified in that specific model of equipment. This is typically thought of as the safest option because you have greater certainty and reliability that the equipment will work correctly because the OEM will provide an up-time guarantee based on the level of service contract you purchase.

The problem is that you are typically paying about 10% of the cost of the equipment each year you have their service contract. This is a huge expense for you and very profitable for the OEM.

Crafting Service Contract Savings

The best way to look at your service contracts is by taking an inventory of your equipment. Then you need to note which equipment is serviced in-house and which is covered by a third-party service contract. The best-in-class hospitals have an 80/20 ratio between in-house maintained equipment to service contracts.

Cost/benefit analysis is essential in this process, as knowing indirect costs associated with equipment use is critical to crafting your service contract. Equipment downtime can have repercussions aside from losses in profits; inability to provide services can cause customers to lose faith in your brand and may even cost you clients in the long run.

Service contracts don’t always fit a specific mold. Different contracts will cover different expenses, ranging from normal wear on machinery parts to the costs of repair and service fees. An effective cost/benefit analysis will take into account your ROI for your capital equipment and help determine what type of contract will best suit your needs.

The Best Contract Support

Your goal as a healthcare executive is to make sure your patients have access to the best equipment for their care. Now you have to look at your internal clinical engineering staff to see what certifications they have and what their training budgets are each year to learn how to maintain all of this new equipment. If it’s cheaper to outsource the service to a third-party than maintain it in-house, then you should definitely go that direction. However, there are many options to buy parts nowadays and it is typically a lot cheaper to spend time and use materials on maintaining a piece of equipment than using a OEM’s gold level service contract.

A good rule of thumb is to add up your total cost for service contracts and divide it by the number of staffed beds at your facility. The best-in-class hospitals are spending around $8,000/bed. How much are you spending? This is a valuable feature we recently added to Valify’s purchased services intelligence platform.

Not all equipment will be best served by a single type of contract, and older models of equipment will likely require different coverage than newer equipment that may still have active warranties. Knowing the needs of your organization will allow you to customize your equipment contracts to your best possible benefit.

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