Side-stepping capital crime and punishment: equipment assessment and acquisition should be a daily consideration

Healthcare Purchasing News, Sept, 2007 by Irwin A. Baker

For as long as I can remember, providers and suppliers have been attending conventions and conferences in search of innovative ideas on how to better understand their roles in the capital equipment supply chain. Yet how suppliers sell and providers buy capital equipment at the group purchasing organization, integrated delivery network (IDN) and hospital levels continue to confound even some of the most sophisticated healthcare professionals.

We have, for the most part, heard the same capital "partnership" rhetoric over and over in that one meager breakout session that usually seems like an afterthought to the proliferation of medical/surgical and pharmaceutical extravaganzas. I often observed that the capital breakout was cleverly placed either just before lunch or a break on the last day of a three-day conference. Coincidence?

From the days of providing a discount off of existing or preceding price books to now having the never ending product segmentation presentations to clinical product assessment committees, capital does seem to be "punishment" for both providers and suppliers.

Each product segmentation, especially within a clinical service line, requires the supplier to expend additional legal, administrative and operational resources. In other words, what previously required one contract now requires one contract per segment. Also, the contracts in a particular clinical service line may not be out for requests-for-information (RFI) or requests-for-proposals (RFP) at the same time. In addition, the potential of obtaining a savings for the provider if it properly purchases the capital along with the service and consumables may be difficult, if not impossible, to achieve.

Both sides, then, continue on the never-ending quest to find the answer of how to effectively communicate with each other and actually achieve MBO's (management by objectives) on both sides of the equation.

It seems that the RFP process is designed for both sides to achieve the best "deal or discount" rather than finding a way to establish the best "value." It is often forgotten or overlooked that capital acquisition is not a one time "purchasing" occurrence but an ongoing process.

Capital crimes

In spite of offering deep discounts and promises of value and services that would make any supplier CFO cry and probably recheck the value of national accounts, the problems of capital equipment suppliers persist. The process becomes too much transactional as the supplier is wary of the provider's compliance to an ongoing commitment that achieved the pricing. If the supplier feels that the provider will not continue their commitment to repair service or consumables the elusive "best price" can never be achieved. Unless there is shared risk each party most probably will hold something back. The medical/surgical and pharmaceutical product supplier can always find an open door when it comes to providing a deeper discount, but it's the wrong door for capital suppliers.

The issue is that the value of capital equipment cannot and should not be measured by some elusive "best price." A best price only shows that materials management is satisfied with the result of a negotiation related to a transaction. They are not tasked with achieving the best overall outcome to the top and bottom lines related to the ongoing operation and productivity of the product. We all know that sometimes the best value costs more but we rarely accept this reality. When I founded my company it took me about 10 seconds to choose RPM Healthcare Strategies. The RPM stands for "Revenue, Profit and Market Share."

Why is this significant and worth noting? Because this is the only way any provider should look at capital equipment. This means that the for-profit and not-for-profit provider can achieve a positive impact to the top and bottom lines by understanding the total impact of a capital purchase as part of the purchasing process. On the other side, if the supplier receives a viable commitment from the provider it will be more likely to look at the long-term benefit to its top and bottom line rather than purely a one-time transaction. Both sides win if they are on the same page.

One of the most egregious "Capital Crimes" is that the capital supplier is relegated, in most instances, to a materials management department that is almost solely judged on the "savings" it achieves. While that may be effective for med/surg and pharma supplies it is totally ineffective for capital equipment. This leads to an ongoing navigation of "land mines" that could have been avoided by defining the provider and supplier pain points earlier in the process.

The best price ever achieved in the civilized world on an aspirin or a glove will not bring another dollar of revenue to the hospital or increase their market share. However, a "fair and reasonable" price on a Volume Coverage CT or an HD Endoscopy Platform may.

This painfully points out the cavernous disconnect between the C-Suite mission and materials management. Even though materials management may achieve every capital budget MBO they are charged with and if the enterprise is not effectively managing their Capital an important C-Suite mission will never be achieved.