December 26, 2007
One of the largest expenses in any hospital's purchasing budget is the purchase of capital equipment. An average-sized facility can spend millions each year on expensive medical equipment such as MRI scanners, CT scanners, digital diagnostic equipment, and other vital pieces of medical equipment.
However, many hospitals are paying significantly more in this area than is necessary. Officials at VHA, Irving, Texas, the national alliance of 1,400 hospitals, recently analyzed the capital purchasing patterns of its member facilities and found that hospitals across the nation overpay between $3.5 billion and $5 billion annually for capital equipment purchases.
Whether it's a lack of information, a lack of automated tools, or a lack of staff resources, hospitals are limiting their effectiveness when it comes to capital purchase planning. The featured article in the November 2007 issue of Supply Chain Solutions newsletter points out that a number of strategies exist to keep hospitals from falling into costly purchasing traps when planning for capital equipment purchases.
Below are the top 10 things hospitals can do to streamline their capital equipment spend and get more from their capital equipment dollars.
- Develop a strategic, long-term capital plan. Forward-thinking hospital planners create a strategic/master business plan. However, capital planning doesn't always accompany that master plan. If the strategic business plan outlines that your hospital will be a leading cardiac hospital in five years, chances are that your hospital will need to purchase capital equipment to support this objective. By looking at future capital purchase needs, planners can uncover areas for bulk purchasing or standardization.
- Use automated budgeting tools. Using automated tools puts planners at an advantage because these tools reduce the chance of error, merge data from several sources, and keep prices up to date with little time and effort.
- Create a budget development process. Capital equipment planners must determine who on the purchasing team can submit equipment requests, as well as the process for submission and selection. In determining the selection process, it's important to keep the overriding goal in mind. Example goals include understanding whether your hospital is trying to standardize where possible or if your facility is trying to maximize its group purchasing organization (GPO) contracts.
- Access accurate pricing information. Everyone defines "accurate" pricing differently. For some, the manufacturer's price is accurate. For others, the price offered under a GPO contract is accurate. Establish what price will be the benchmark before negotiations begin, and keep the benchmark consistent for all equipment purchases.
- Leverage GPO contracts. Planners whose hospitals belong to a GPO should leverage the GPO relationship to gain the best pricing. There may be value to standardizing equipment purchases to GPO contracts, and GPOs also can help hospitals pool resources to obtain better prices based on purchase volume.
- Obtain current supplier information. By using automated budgeting tools, planners increase their ability to access the most up-to-date pricing information, avoiding a surprise later in the budgeting process. Manual budgets require constant research to keep information current.
- Look at purchases as opportunities to aggregate value over time, rather than treating purchases as single events. Many plans and budgets are time based, so planners should look at purchases over the course of the year. If your hospital plans to purchase five new beds each quarter, purchase 20 of those beds at the beginning of the year and stagger the shipment to receive five beds each quarter. You'll get a better price by buying in bulk.
- Develop a standardization plan. One of the best ways to gain better pricing is to standardize the items that your hospital purchases. This increases your purchase volume and creates efficiencies. In addition, training is easier and repair needs are streamlined when equipment is standardized.
- Use a functional negotiation process. As part of the budgeting process, planners should determine who is the one person authorized to negotiate for better pricing. Suppliers are accustomed to dealing with a handful of negotiators. Knowing this, suppliers start with a higher price. Cut to the chase and keep the negotiations between the supplier and an individual team member.
- Focus on life cycle costs versus purchase price. Focusing only on the price of equipment may result in a higher cost down the road. The single greatest chance to impact the lifecycle cost of a piece of equipment comes at the time a product is purchased. Ask the supplier about the service contract, equipment performance history, and references for other hospitals currently using that piece of equipment.
Managing these 10 aspects of capital equipment planning and purchasing won't guarantee that your capital plans will be foolproof. However, following these steps can prevent you from making foolish decisions that have expensive, long-term consequences.
Source: Nik Fincher, "10 Tips for Reducing Capital Equipment Costs," November 2007 Supply Chain Solutions newsletter. HFMA's Supply Chain Solutions provides healthcare leaders with strategies and tips for reducing costs and improving quality in the supply chain. You can learn more about this bimonthly newsletter at www.hfma.org/scs.
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HFMA Wants You to Know ISSN: 1540-0697. Volume VI, Issue 26. Copyright 2007, Healthcare Financial Management Association. All rights reserved.