Bridging the capital divide: believe it or not, equipment is part of the supply chain

Healthcare Purchasing News, Sept, 2007 by Rick Dana Barlow

When it comes to what comprises the supply chain more often than not capital equipment gets short shrift.

High-dollar, high-tech purchases tend to be driven by the clinicians that use the equipment and the department heads overseeing and responsible for the budgets that bring them in. Materials management may or may not be recruited to "rubber stamp" a decision, according to Niklaus Fincher, senior director of capital asset services for VHA Inc., Irving, TX.

"Over the years, elements have worked to segregate the supply chain from capital," Fincher told Healthcare Purchasing News. "We need to bring these back together and re-establish the link between the two. In today's environment, by the time [the materials manager] is engaged in a capital equipment acquisition event it's too late.

"It's time to get serious about capital again, particularly with the Deficit Reduction Act," he added. "Hospitals are leaving a lot of money on the table."

But price shouldn't be the defining factor, he noted. "There's a lot that has to be determined before you get to price," he said.

"A handful of hospitals do an excellent job in capital purchase planning, the majority do a good job, and a few on the bottom end of the bell curve need significant help to better manage their resources," he stated. "Nevertheless, there's room for improvement across the board."

Furthermore, materials managers need to recognize and emphasize to clinicians that "I don't treat patients but I know how to negotiate prices. And if I'm good I can get the doctor what he or she needs."

Hospitals generally come into capital equipment negotiations at a costly disadvantage, according to Fincher. They lack information, automated tools and staff to focus on the strategic management of capital spending. In fact, Fincher and his team analyzed the capital purchasing patterns of VHA's 1,400 member hospitals and estimates that hospitals, by and large, may be overpaying between $3.5 billion to $5 billion annually for capital equipment.

As a result, Fincher identified 10 ways for hospitals to gain control over their capital spending. HPN asked Fincher to explain the reasoning behind each tip, how to achieve it and how difficult the process is on a scale of I to 5 with I being a cinch and 5 being incredibly complicated.

1. Develop a strategic long-term capital plan

Why: You need to know when your clinical managers are submitting requests for capital and how these requests compare to the mission and business plan of the organization. Look at what equipment you have today, and develop a prioritization plan that specifies which units to replace and when and how, according to the budget. Think about what you're giving up to get a replacement for something else. For example, you may add a new CT scanner but have to retain the old defibrillators for another year, flagging them for replacement at that time. Capital planning should not be a one-time, annual event. It's an organic process.

How? You should have a solid business plan and a maintenance plan for equipment. It may make sense to rely on an outside firm to develop the plan with internal input. In fact, it may cost you less in the long run to go outside for this than to dedicate internal resources to doing it because you won't be removing clinicians from the care delivery process. It may not be necessary to use them anyway because they may not have a global enough vision for long-term equipment planning beyond their own facility's experience. This needs to be accomplished based on life cycle costing and not just what's wanted.

Difficulty Rating: 3 or 4. People that do this professionally know the questions to ask, the issues involved. It's more painless to tap outside experts with a global view and without the political skin of helping doctors with referrals.

2. Use automated budgeting tools

Why: The budgeting process most facilities use [for this] is not effective and cosily. Department managers may be spending hours surfing the Web, making telephone calls and getting padded numbers from suppliers. What's needed is a software tool that serves as the single point of information needed to make budgetary decisions. It doesn't matter whether you use the manufacturer list price or your GPO's contract price you should be using one source as a benchmark. Most automated budgeting tools can compare pricing when linked to a common database--an equipment catalog. Without this you'll find that department directors worded about budget cuts will estimate the dollars they need as high as possible.

How: Ask your GPO whether it offers a tool like this or simply go out and find some budgetary and planning software tools yourself. Some consulting firms that offer equipment planning services may have their own tools. You'll need to sign for a license.

Difficulty Rating: 3. The key issue involves return on investment (ROI). The software license itself is not very expensive but you have to adopt the tools, which requires behavioral and process change. You don't have to call the vendor reps anymore for a price. You just log into the system and find the product. Such a change could be an obstacle.