10 proven strategies for reducing equipment costs: cutting costs is a way of life in health care. Given the pressure to squeeze out savings wherever possible, senior financial executives would do well to put into practice a number of tried and true strategies for saving money when acquiring and financing equipment and software

Healthcare Financial Management, May, 2005 by Richard J. Henley, Martin A. Zimmerman

Each stage of the acquisition and financing process provides opportunities for savings--from ensuring that your business operations are driving your equipment decisions to getting the best deal by negotiating the equipment and the financing separately with multiple bidders. Although each element may seem unimportant in itself, the opportunities to save on the equipment acquisition, financing, and ongoing operating expenses can add up rapidly, particularly in light of prices of $1 million or more on major medical equipment, picture archiving and communication systemfs, and enterprise IT systems.

To help minimize these significant equipment acquisition and financing costs, there are 10 useful strategies that financial executives can adopt.

Acquisition Strategies

Healthcare providers would do well to consider their equipment acquisitions in light of their business strategy. To optimize results, it is helpful to create a technology flowchart to track current and future equipment needs, conduct separate negotiations for equipment price and financing, and give manufacturers a detailed bid document.

Strategy #1:

Tie equipment decisions to your business strategy. What is the driver behind your equipment decision? Most equipment in a healthcare setting today is expected to either generate revenue or reduce expense in some way. Certain equipment is absolutely mission-critical and calls for regular replacement. The latest 64- or 128-slice computed tomography technology, for example, may be necessary for your organization to remain competitive in your marketplace. But if you conduct only a few simple procedures each day or do not perform major cardiac studies, a refurbished CT might be perfectly adequate. It's important to tie equipment acquisitions to your organization's business strategy so that you can prioritize your equipment needs. Our experience suggests that the demand for new equipment in a healthcare delivery environment always exceeds the supply of available budgetary dollars.

Strategy #2:

Create a technology flowchart. The flowchart can assist in tracking your current equipment assets and your expected needs and timing for future upgrades and replacements. It can also help you make more informed decisions on acquiring and financing capital equipment.

An annual inventory of existing equipment is a good place to start. As part of that process, each department should predict when equipment replacements and upgrades are likely to be needed over the next two to five years. New capital equipment acquisitions should also be forecast several years in advance whenever possible. Equipment acquisition plans for each department should be evaluated against your institution's overall business strategy and budget to determine which equipment requests should take priority.

Strategy #3:

Separate the buying decision from the financing decision. The selection of equipment should be driven first by clinical or operational needs rather than strictly economic considerations. You are in the strongest position when you know exactly what equipment you want to buy up front so that you can separate the equipment purchase negotiation from the financing negotiation. Working with the manufacturer on purchase price first, apart from the financing, allows you to negotiate the best possible price for the equipment. Then you can focus on obtaining the lowest-cost financing available.

Another element in minimizing equipment cost is timing. The best time to negotiate the equipment price with manufacturers is at the end of a calendar quarter, and especially at year-end, when the pressure is on suppliers to hit sales targets. It's surprising what savings may be possible when the timing is right.

Keep in mind that manufacturers frequently use low-rate financing to lure customers. But even a great deal can actually turn out to be a rather poor bargain if you are moved to make a decision with excessive haste. Perhaps you might have obtained a lower purchase price or a greater discount on the maintenance contract or parts. Perhaps your facility didn't really need the equipment for another year, when changing technology and market forces would have forced the manufacturer to reduce prices. It's easy to get swayed into a less than optimal purchase by a low interest rate.

You may also be able to realize significant savings in negotiating the service contract and replacement parts. If you have your own biomedical engineering staff, you may want to negotiate for free training from the manufacturer so that your staff can handle most of the regular maintenance. You can also negotiate for the best discount on expensive replacement parts, such as X-ray tubes for CT scanners, as well as for limits on annual increases in maintenance and supply costs.

The most important figure to calculate is the total cost to acquire, finance, and operate the equipment, including maintenance and supplies, over its useful life. Like a computer primer that is inexpensive to purchase but drinks up money in ink cartridges, consumable supplies and maintenance for medical equipment have grown to become major factors in the overall costs of operation. The difference in costs between manufacturers can be significant. In the case of a laboratory analyzer, for example, one manufacturer's equipment cost half as much to purchase but twice as much to operate as the other, resulting in a higher cost over the life of the asset.