Life is complicated. Would that be a fair assessment? Our personal lives often include the schedules for our kids’ sports or extra-curricular activities, our relationships, and our hobbies and church or club responsibilities. Our work lives are another story altogether. Most jobs are more complex than they appear on the surface and can include a learning curve and a language all their own.

Biomed department managers and those responsible for contracts are not exempt from this web of complexity. As a matter of fact, they face multiple complexities when it comes to managing numerous service contracts. The challenges of getting the best pricing from OEMs or ISOs or ascertaining that every nuance of a contract is considered or that all contracts are properly monitored can be daunting.

On the cost side, service contracts can include a number of extra costs that shouldn’t – but often do – surface later as a surprise. As much as they can include
extras, they can also be missing certain important provisions. Staying on top of multiple contracts for various pieces of equipment and from different sources is a challenge.

A STRUCTURED APPROACH

Larry Sheppard, Director of FirstCall Clinical Technology Services at Eastern Texas Medical Center Regional Healthcare System sees real benefits to a methodical, organized approach to contract management.

“Managing service contracts can provide tremendous growth for an in-house or system-based biomedical program if properly reviewed, supported by the caregivers and endorsed by hospital administration,” he says.

Sheppard says managers should consider all options after gathering all of the relevant information. “Service contracts are looked at by caregivers or supporting departments within a health care facility as a necessary requirement to maintain the quality of patient and health care delivery.”

“However, in today’s health care market, where service and parts now represent up to 40 percent of an equipment provider’s annual income and service rates are anywhere from $175 to $500 per hour, many equipment owners believe their path of least pain and operational expense would be with a service agreement. In some cases this may be true, but with a strong knowledge and history of the equipment, the doors for other options can be made available.”

The business reality that faces every department manager in a hospital in a challenged economy means that management of both service contracts and in-house resources require extra scrutiny.

To address this, Sheppard suggests the “4-H” approach.

HOW COME?

Is this a technology that does not afford the opportunity to explore an alternative method of service? It may be, for example, a multi-slice CT where the replacement costs of glassware and certain major parts may not produce a justifiable reason to be without coverage. Also, it may be a technology that there is no redundancy within the facility in the case of failure, or a technology that is so new that there is no training available and there is a monopolized vendor.

HOW MUCH?

If there is no alternative but to have a service agreement in place on a particular piece of equipment, then I look at how we can get the best price for the service we need. Why order from the dinner menu if you are just doing lunch? Can your service needs drive the price of the agreement down? Do you need 24/7 coverage on an item when you may have a backup, or in certain emergency service times, you can pay for the out of scope service since the parts may be covered under the original agreement. There are a lot of times where vendors will work with you because that service sales person wants to make something of a commission, and that service manager wants a contract base within his service territory.

HOW CAN I DO IT INTERNALLY?

If this is equipment that you believe is within the scope of abilities within your department, and that with sufficient training your department can make a financial savings for your facility, then you must explore the opportunity to expand your capabilities and on the average reduce the operational expenses by 30 percent the first year and once a history is developed, additional savings may be possible. Of course, if the equipment is redundant within your inventory, the savings could be even more substantial.

HOW DO I lIVE WITHOUT IT?

When looking at contracts, don’t sign a long-term agreement for the first few years so that if you need to make changes, you can do so. Develop and maintain a performance history by capturing all service events, software upgrades and hardware enhancements. Most of the hospitals today that have purchased 64-slice CTs, anesthesia equipment, beds or physiological monitoring will not be upgrading if replacing for a good while. Track the performance and compare it to the other devices within your system. Develop a cost per item, track commonly used parts and or components, and the products reliability compared to utilization. Then look at ways to get out of the agreement.

A FEW KEY FACTS

“Service contracts have a bad reputation in our field,” says Kenneth Maddock, Vice President of Clinical Engineering and Telecommunications Services for Baylor Health Care System. “The perception is that if you use service contracts you are not providing cost-effective service. The reality is that, as a manager, you need to select the service method that provides the appropriate level of quality for the best value. If your organization has the clout to get outstanding pricing on service contracts, they may be the best value.”

Maddock also points out that there is no such thing as a cookie-cutter service contract. There are as many variations as there are situations where they apply. He suggests that every avenue should be investigated before finalizing the deal. “I think many understand the variety of types of service contracts that are available, but some may not,” he says.

“There are more options than full service versus in-house. You can get partsonly contracts, parts-only with a fixed number of service calls, software only, software with remote support, software with remote support and upgrades – you get my point,” he says. “Don’t assume because a vendor doesn’t advertise different variations they aren’t willing to work with you. Determine the level of coverage you need and ask for it – firmly!”

The realities of today’s high tech equipment are also an area of consideration. “With today’s equipment, some sort of software contract that includes remote support and updates is almost a requirement on high-end equipment,” Maddock says. “While you could go at risk and pay for updates on an “as-needed” basis, the reality is that you may not get funding if budgets are tight. You end up several versions behind and when you have a problem you find you have to pay to get caught up before you can even pay for the repair. That can get very expensive.”

Maddock concludes with some thoughts about economies of scale. “The size of your budget and your organization’s tolerance for budget variance factor into the decision on service contracts,” he says. “As a very large department, we purchase contracts because in our experience they offer the best value, not to minimize variation. Our budget is large enough that we can self-insure. A smaller department that doesn’t cover a large volume of equipment may need to purchase contracts on the more expensive equipment because they don’t have enough equipment across which to spread the risk.”

CONTROLLING COSTS

Randy Sullivan, CBET, Medical Equipment Asset Manager for HSS, whose primary location is Poudre Valley Health System in Fort Collins, Colo., confronts the contract management issue all day, every day.

Sullivan has managed service contracts as an employee of HSS, Inc. for five years. HSS has a Medical Equipment Management division as a shared service. Poudre Valley has used HSS for biomed since the 80s. Poudre Valley Health System includes Poudre Valley Hospital, Medical Center of the Rockies, Mountain Crest Behavioral Health Center and numerous clinics. Poudre Valley won the Malcolm Baldrige National Quality Award in 2008. The hospital’s best practices include its contract management program.

Sullivan attempts to find the right service at the right price. This involves negotiating contracts with vendors or alternate sources. He looks at failure rates so departments can pool money internally in a general ledger line. “The key is you have to move the money out of the department’s EOC and into a pooled General Ledger line that can carry over from year to year and is not controlled by the department,” Sullivan says. “It may sound trivial, but it really does make the whole plan work.”

The department owns the money. This prevents the department from getting hit with a lump sum charge in a given year. For example, X-ray, lab, sterile processing and the floors’ central stations all pay into the fund. “This means that the possibility of a catastrophic failure in any department, just like an insurance company, is pretty low,” Sullivan says.

A TALE OF TWO HOSPITALS

Sullivan compares two hospitals using the pooled money concept. The first “sets up the concept but leaves the service Fund money in each department’s separate EOC,” he says. The second “sets up the accounting so that contract agreements all come from a departmental level EOC and are transferred to the one common G/L set up for this internal HSA type of account.”

The problem with the first example, according to Sullivan, is “that each department ends up putting in more than needed because they are trying to cover their own individual needs and are not looking at the holistic needs of the institution. If they do get to carry over the funds to the following year and see it building even more, the money often gets reallocated to cover other expenses. This is done not knowing that it may take up to five years or more to cover an expensive service event, like an X-ray tube outage.”

He explains that the second example works better this way: “In this case, the department is happy to see that their line item in the budget stays on track as expected, but they do not have vision to the common G/L. They end up putting only what is needed into the maintenance fund (HSA type account) and are covered for service events in the short and long run. Also, the way the common G/L is managed, credited, debited and is dispersed in the case of unneeded overages, or how it is funded in the unlikely event of a negative account balance, are all set up ahead of time. Once set, the service fund manager can pay bills as needed per the instructions of the individual service strategies that are set per system or per item.”

The other model that Sullivan employs with smaller institutions is called the “saver program,” an HSS program. The lower numbers of equipment in a smaller institution, don’t allow for an internal insurance approach. The smaller institutions have a harder decision to pick and choose contracts. They also don’t have the resources to go with the pool concept. The institution can bring in someone with expertise with service contracts.

“Don’t think that you are out of options. You should be able to find, in almost any situation, three options to service the equipment. In general, it would be service direct from a company, service direct from in-house or a combination. A lot of people will skip that combination piece. How do you research that or how do you find that? If you can’t figure out how to set up a service strategy that would have three different options, you might want to get on Google and do some research. You might call other institutions and ask. Through that, you will start developing the knowledge.”

Sullivan also talks about considering “day’s cash on hand.” He explains that this amount speaks to your financial solvency and how quickly you can fund other projects or cover for times when funds are low.

He points out that negotiating a contract the right way can improve the day’s cash on hand. By breaking up annual payments into quarterly payments is an example.

Sullivan says that creating a method for tracking history is very important. From a historical perspective, with plenty of data, it’s easier to make decisions. He also points out that using a spreadsheet application like Excel allows you to create an “options log.” The top section is demographics – who you talk to and the dates that you start and end things – the reasons for reviewing the contract in the first place. He has a section that is background and research and three sections that are the options with pros and cons and a section for approvals such as purchasing or IS or CE management.

After the best option is decided, he captures pieces of information about what was negotiated, from where to where. What the initial proposal was and what was the final cost. He also captures specifics about the contract. That information can be referred back to on similar pieces of equipment or specifically on a same contract when it comes up a second time.

SOFTWARE HELP

Beyond useful spreadsheets, companies produce applications that can be used. Daniel Cosh, Manager of Biomedical Engineering at Crystal Run Healthcare in Goshen, N.Y., suggests that software is an important element in successfully managing contracts. “We manage our service contracts by utilizing our computerized maintenance management system (CMMS) Four Rivers. The program allows us to set renewal dates in advance to the contract expiration so we can review the utilization of the contract to determine any need to downgrade, upgrade or eliminate the contract,” he says.

Randy Sullivan can be reached with questions at 800-846-0096 or rsullivan@hss-us.com.