Play the Long (Financial) Game by Considering the Total Cost of Ownership of Biomedical Devices
Part one of a three-part series on how healthcare providers can reduce costs and protect revenue by managing the systemic total cost of ownership of biomedical equipment.
- Read part two here
- Read part three here
- Download the complete guide, How to Consider the Total Cost of Ownership when Making Biomedical Device Purchasing Decisions, here
The cost of delivering healthcare in the United States is staggering —and only increasing. Regardless of the price tag, IDNs and hospitals must have reliable, well-maintained and fully functioning biomedical devices and equipment in order to deliver high levels of care and patient satisfaction. Even though providers are mandated to cut costs and squeeze margins, they are faced with the fact that their inventory of medical equipment is aging. Medical device spending in the U.S. alone is expected to exceed $35 billion annually by 2022, with much of that investment being unavoidable.
Modern devices have a high level of complexity, including “hidden” cost factors such as installation and maintenance. And frustratingly, the more a hospital or health system spends on equipment, the more it digs into already-slim margins that can impact the level of care it’s prepared to—and committed to—deliver.
Cost Containment Ultimately Comes Down to Total Cost of Ownership
The challenge of systemic healthcare cost reduction affects every aspect of the delivery system. And, as many providers have come to realize, only so much can be done to reduce costs by reducing services or optimizing staff. As a result, one of the biggest opportunities to shave costs out of healthcare delivery is by a thorough analysis of biomedical device spending. Understanding not just the acquisition or maintenance cost of a piece of equipment, but comprehensively appreciating the entire total cost of ownership (TCO), allows an organization to make the right choices for its specific needs and applications.
There is often fierce competition across departments for the scarce budgets available for capital assets. When called upon to justify the investment of expensive equipment, managers and administrators must understand the difference between the acquisition price and the TCO of any biomedical device. An upfront-price-oriented approach can work well in the short-term, resulting in lower purchasing costs, but may not be at all cost effective over the lifecycle of the device, which can have a significant impact on aggregate bottom-line operating expenses over time.
How CAPEX and OPEX Costs Affect Overall Financial Health
Capital expenses (CAPEX) are typically planned, budgeted, expected, and visible, and result in purchase orders being generated and invoices being paid for physical devices that are then capitalized and depreciated over a useful life term. These costs are relatively easy to anticipate and track, such as the purchase price of a medical device (unless the purchase is not planned due to the failure of another piece of equipment—then it becomes an unplanned CAPEX).
Operating expenses (OPEX), incurred as a result of day-to-day running of a business, are often hidden or embedded, and are not included in the procurement process—which makes them difficult to measure at the time of purchasing equipment. For example, few organizations have all the data they need to understand how purchasing a new additional $1 million imaging device will inflate their day-to-day operating expenses. Even if they do understand the concept, communicating the impact so that the future OPEX forecast is adjusted may not happen. Depending on an organization’s procurement processes (i.e., preventive or corrective maintenance, training, upgrades and app support, consumables, accessories, and supplies), OPEX costs accumulate and can become extensive enough to negatively affect operating margins in an unanticipated way. That’s why it’s so critical to factor them into an organization’s purchasing process model.
For example, if an asset fails unexpectedly, it becomes an unexpected cost that hits both OPEX and CAPEX forecasts. This situation can rapidly become expensive due to lost revenue, lost productivity, the cost of coordinating unplanned repairs, and the potential negative patient impact. If the failure is catastrophic, it can also result in the need to suddenly replace or lease a replacement device, which your finance organization may not be prepared to fund—and thus require cuts in other budgeted capital expenditures. Having a more strategic view of real-world equipment lifecycle and reliability data informs the capital budgeting, procurement, and financial model— and helps protect against the unforeseen expenses that lack initial visibility in the equipment planning process.
Are you interested in learning more? Download the free guide: How to Consider the Total Cost of Ownership When Making Biomedical Device Purchasing Decisions