Managing the Cost of Technology in a Disruptive Era

Today, hospitals and other healthcare facilities face a challenging operating environment resulting from lower payment rates, rising operational costs, consumers who are more invested in their healthcare experience, and an evolving regulatory landscape.  

Facing unprecedented financial pressures, many of these organizations are rethinking their assets. Whether the “end of ownership” is here, as some have claimed, the traditional model of purchasing and using medical technology for a decade or longer has become unsustainable.

MES: A Different Approach for Managing Capital Assets

In response, many healthcare organizations are adopting a holistic approach to managing their assets, designed to boost productivity and performance in challenging times. Managed equipment services (MES) is a long-term integrated service model that includes equipment, financing, service and planned replacements, offering providers the capabilities to boost an organization’s bottom line and help alleviate the financial burden of equipment ownership. 

Through this approach, technology banding can help institutions deliver incremental procedures that are not always feasible with outdated equipment, and capitalize on new trends in imaging and other areas. Physician and patient satisfaction also are maximized. For example, by leveraging newer magnetic resonance (MR) technology through MES, patients and health systems can benefit from fewer re-exams because the technology can correct patient motion or reduce artifacts from metal implants. Newer MR technology can also deliver shorter exam times and an improved environment that helps reduce patient anxiety.

Furthermore, healthcare systems can expect a boost in ROI. MES is a holistic solution and the whole can be cheaper than the sum of the parts. If an organization opts to piecemeal their equipment (sometimes from different original equipment manufacturers), services and training, and financing, the resulting costs can be much higher than if they bundled them together under a MES program. The holistic approach can also reduce cancellations due to guaranteed uptimes and performance levels, and it enables long-term budget planning and stability. 

In response to these benefits, the capital budgeting process is evoling to meet the “bundling” trend, shifting the focus from simply replacing old equipment to a holistic view that involves strategy, data analytics, technology banding, utilization, service costs and other considerations.

Rising Productivity Needed to Maintain Profit Margins

Businesses can no longer just keep up with the status quo to be profitable. According to a 2016 Congressional Budget Office (CBO) study of approximately 3,000 hospitals that provide acute care to the general population, productivity can have a critical impact on an institution’s financial performance. ^a

Even if a hospital improves its productivity and aligns with the U.S. economy’s productivity growth—by about 0.8 percent per year on average through 2025 according to CBO’s estimate—then the share with negative profit margins would increase to 41 percent in 2025, and the organization’s average profit margin would fall to 3.3 percent.

If the hospital improves productivity by just 0.4 percent per year, the share with negative profit margins would increase to 51 percent in 2025, and its average profit margin would fall to 1.6 percent. 

However, if healthcare institutions do not increase productivity or reduce cost growth in some other way, then the share or percentage with negative profit margins would increase to 60 percent in 2025, and the average profit margin would fall to negative 0.2 percent. 

To maintain aggregate profit margins in 2025, the CBO study reports that hospitals would have to boost total revenue (without increasing costs), reduce total costs (without reducing revenues), or achieve a combination of revenue increases and cost reductions at about the 2011 level of 6 percent, more than six times the average, according to the study. These findings clearly suggest that to improve profit margins, healthcare organizations require disruptive change.

Disruptive Medical Technology Model Gaining Traction

Disruptions in the medical technology industry aimed at boosting productivity are playing out in two ways. First, assets are being developed to address more than just a healthcare organization’s immediate clinical needs. They are being developed to incorporate smart technologies that collect and analyze data, and deliver critical insights on how to improve patient care, efficiency and productivity. 

New ways to access the latest state-of-the-art technology are also being introduced based on the premise that purchasing it with funds from the capital budget is no longer practical, desirable, or in some cases, even feasible. Objections to funding capital equipment purchases include cash flow restrictions, risk of equipment obsolescence, and extremely prohibitive up-front expenses and lifetime service and maintenance costs. 

Meanwhile, MES is emerging as a remedy to the accelerating cost of technology and the need to plan for an uncertain future. 

A research study by Global Industry Analysts projects that the market for medical equipment rental and leasing will reach $70 billion by 2024. ^b Already popular in the United Kingdom, Germany, Spain, and Australia, MES is just now gaining traction in the United States and Canada. 

The Benefits of MES

In addition to potential cost savings, the economic advantages of MES include financial predictability, operational flexibility, and a marked risk transfer from the healthcare facility to the equipment provider, which contributes to operational and capital sustainability. With its fixed monthly costs over a set period of time, MES helps improve financial forecasting. 

Finally, MES gives providers the flexibility to decide where and when they should deploy equipment. A health system can transfer a piece of equipment from one facility to another based on patient need and foot traffic. This capability is particularly relevant to hospitals with community, statewide or regional networks that include standalone testing facilities and satellite offices. Many ultrasound devices, for example, are being transferred out of the hospital and into a medical office or diagnostic facility. 

Through an MES service agreement an organization’s patient trends and makeup, room layouts, and the asset’s condition (should it be retired, updated, or refreshed), are critically examined before deployment. By strategically considering the “why,” systems using MES can expect to satisfy patient needs with a defined roadmap that is supported by a strong underlying financial plan. 

Flexibility for Healthcare Systems: Case Example

The experience of Heritage Valley Health System, based in the Pittsburgh area, underscores the benefits of MES. Heritage Valley pursued this approach as a means to improve its ability to disperse and reassign equipment. The system has a large network of hospitals and community satellite facilities across four counties in Pennsylvania. Through an MES program, Heritage Valley could provide state-of-the-art magnetic resonance imaging and computed tomography (CT) scanners for Heritage Valley Beaver and Heritage Valley Sewickley hospitals, new ultrasound equipment for its hospital and medical neighborhood locations, upgrades to an existing CT scanner, and additional nuclear imaging cameras. 

Potential Pitfalls of MES

As health systems consider their options for adopting new assets, it’s important to remember that MES is a tailored solution that requires extensive engagement between the OEM and health system. It is a longstanding commitment because the program extensively incorporates clinical, financial, and operational considerations for the organization’s long-term sustainability.  

Furthermore, MES is not an “off-the-shelf” solution. It is specifically structured to meet the long-term needs versus short-term wants of a healthcare provider. The cycle time varies based on the organization’s size and scale. 

Innovation and Evolution

For many healthcare organizations, the future can be daunting. Disruptive technologies and operational models such as MES are emerging as innovative solutions to help providers meet the challenges facing them in this uncertain future. Another solution is big data, discussed briefly in the sidebar. The ultimate test of the effectiveness of these solutions will be seen in their implementation, as hospitals and health systems deploy them as part of their strategies to become more competitive in the delivery of high-quality patient care. Forward-thinking healthcare leaders will want to keep apprised of the effective application of such industry disrupters. 

Footnotes

a. Hayford, T., and Nelson, L., “CBO’s Analysis of Financial Pressures Facing Hospitals Identifies Need for Additional Research on Hospitals’ Productivity and Responses,” Congressional Budget Office blog, Sept. 8, 2016.
b. Global Industry Analysts, Inc., “High Cost of New Equipment and Protection for Technology Upgrades Drive the Global Interest in Medical Equipment Rental and Leasing,” April 2018.