I think that every search committee assembled for nominating academic medical center leaders should be required to watch the movie The Replacements before starting their search. In the movie, Gene Hackman...
It is one of those sayings that everyone’s father or grandfather told them at some time and it basically means that you get what you pay for. An inexpensive tool that has to be replaced because it wasn’t well made costs you more in the long run than the well-made expensive tool. Same goes with hospital purchases.
In hospitals, we buy expensive stuff. An MRI machine is going to run you $1 million. If you want to buy a da Vinci surgical robot, you’re going to need $2 million. A pair of endoscopes to do ERCP is about $50,000. When you are buying equipment that is this expensive, there is a good chance that your hospital is going to put out an RFP (“request for proposals”) and then use those proposals to work the price down as low as possible by creating a bidding war between different manufacturers.
Before I go on with this post, I have to make a confession. I used to hate to buy cars. No matter how much I paid for one, I was always sure that at some level, I was getting ripped off. Now, however, it’s not so bad. You can check on Edmunds or Consumer Reports and get a good idea of what a fair price is. And you can get an on-line price so you don’t have to spend horribly unpleasant time in a dealer showroom while the salesman “…checks with the manager about your counter offer price”. But buying equipment for the hospital still has that car dealer feel to it. You can’t go to consumer reports to get ratings and average prices on ultrasound equipment.
So, it takes a little bit of work to decide if the equipment that you are buying is really a good deal or not. First, talk to the physicians who will be using the equipment. Second, meet with the manufacturer representatives (but only after you have done enough homework and reading to know what questions to ask them). Third, check on-line and with other hospitals that have recently made similar purchases. Fourth, work with your purchasing department in case the purchase can be bundled as a part of a larger equipment purchase or an exclusivity contract. Fifth, don’t be in a hurry – if you are buying a car, it is best to wait until the end of the month or during the winter to get your best price, similarly, waiting will get you a better price if the sales rep or the company needs to move medial equipment inventory before the end of their fiscal reporting period. You are usually not going to just pay the sticker price for medical equipment.
Once you have a price, you’ll need to determine if there is an adequate return on investment or whether you’re going to lose money on it. To do this, you’ll need to draft a “pro forma” which is a document that projects the future net revenue that a new capital purchase will bring. Here is where you have to be particularly careful because a pro forma can be manipulated to show almost anything you want. Here are some of the steps you’ll need to take:
- Accurately project how often you’re going to use it. Your physicians are going to over-estimate how much they’ll use a piece of equipment – it’s just human nature. If you have children, when they reach age 11, they’re going to come home and tell you that “…every single one of their classmates is allowed to see PG-13 movies”. It may seem like it to them but the reality was that 2 of their classmates snuck into a PG-13 movie when they told their parents that they were going to see the Finding Dory at the multiplex cinema. If you aren’t sure how often equipment will really get used, call some of your counterparts at other hospitals to get an idea of actual equipment use frequency.
- Determine depreciation. If you depreciate a piece of equipment too quickly, then the cost of that piece of equipment will appear to be too high. For example, let’s say you need a new bronchoscope that costs $18,000 and you expect to use it 100 times a year. If you depreciate it over 3 years, that will be an equipment cost of $60/bronchoscopy. If you depreciate it over 6 years, then the equipment cost drops to$30/bronchoscopy. Accurately projecting the life expectancy and frequency of use of a piece of equipment is critical to calculating your return on investment.
- Project revenue. To do this, you’ll need to know how much the hospital is going to get paid for using the equipment. This is pretty easy to do for outpatient procedures since you can determine how much Medicare, Medicaid, and commercial insurance companies are going to reimburse for a particular CPT code. Just be sure you are not mixing “charges” with “receipts” since your charges are always going to be a lot higher and do not reflect what you will actually get paid for the procedure. For inpatients, this can be difficult because the hospital is going to be paid by the DRG and not by the individual procedures done during the hospitalization.
- Make sure you account for all of your expenses. We are starting an endoscopic ultrasound program at our hospital. In this case, it wasn’t just the expense of the equipment but also the disposable needles, the depreciation on the machine that cleans the equipment, the time for a cytopathology technician to do real-time microscope slide preparation, and the depreciation cost of a tele-pathology microscope so that a cytopathologist at a remote location can do real-time preliminary interpretation of those slides. The best way to be sure that you captured all of the expenses is to map out the procedure and include the time cost of every person involved in the procedure, preparation, disposables, cleaning, etc.
Buying a piece of medical equipment is a lot more complicated than buying a car. Getting your hospital purchasing department involved early can help keep you from buying a cheap tool that ends up becoming an expensive tool.
September 13, 2016