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What’s Your
Best Bet? Most companies provide quality service on their equipment through service agreements. Can you get the same level of service for less? It makes sense to evaluate your service options. Should I buy the service contract with that medical equipment? Many times the answer is no, according to Daniel O’Neill, a vice president of sales for Thermo Asset Management Services, a company that makes those decisions for its clients. It should come as no surprise that a man whose company competes with original equipment manufacturers (OEMs) to manage equipment service might see those contracts with the OEM as a less favorable option, but the questions O’Neill suggests asking about service options are good. Three Keys 1. Response time. O’Neill says many organizations believe service from an OEM or independent service organization will somehow be faster if you have a service contract with the company. O’Neill contends that typically is not the case. “Vendors want to maintain their sales and service base, so historically, they have responded on a timely basis regardless of whether the service is provided under contract or not,” O’Neill says. “When a healthcare organization purchases equipment from a manufacturer, the manufacturer typically commits to a high level of client satisfaction, including timely and quality service. This commitment does not, and should not, change if a service contract is not in place.” When negotiating an equipment purchase, O’Neill suggests asking the manufacturer whether there will be a difference in their response to service requests provided under contract vs. service requested on a time-and-materials basis. He says that if the response is not acceptable to your organization’s needs, involve your sales representative and his or her manager to obtain the satisfactory response in writing before you buy. Vendors realize that a content client is good for business and will result in positive referrals and future business opportunities. As an example, he tells the story of a California medical center that had been using service contracts on its equipment for years and was researching alternatives. In the process, they met the service manager of a large OEM to ask whether their response time would change because they no longer were under contract. The service manager informed them that the service contract would not affect response time, commenting, “We treat our customers no differently if they are on a service contract or time and materials.” 2. Uptime Guarantees. Some equipment and service contracts include uptime guarantees that the piece of equipment will operate at a 95% (often 99% for PACS) uptime capacity. This idea sometimes works better in theory than practice. It can be challenging to pinpoint and quantify whether the guarantee has been met, making it difficulty to monitor. That can make the consideration the company offers for failing to meet the standard—which may include cost reductions, service contract extension, or a credit on future purchases from that company—difficult to actually collect. Such a situation may lock the facility into a service contract without receiving any tangible benefits from an uptime guarantee. “Uptime Performance” requires a thorough understanding before signing, according to O’Neill. He notes that the following conditions are not included in most uptime guarantees: misuse, operator error, and inadequate environmental conditions such as temperature, and humidity. Also, in some contracts for CT scanners, remote consoles and laser cameras are not included in the uptime guarantee, as well as preventative maintenance calls and tube replacements, and therefore not used in the calculations. Service organizations use a formula to calculate a number called the percent uptime and your discount depends on that number. The higher the percent uptime, the smaller your discount. Most formulas are based on an eight-hours-a- day, five-days-a-week schedule. While it may seem beneficial to include 24-hour coverage in the uptime clause, this could actually put you at a greater disadvantage. If your facility’s schedule reflects typical daytime business hours, like some medical practices and imaging centers, adding 24/7 uptime coverage to your equipment increases the number of down hours that would still meet the uptime standard. When negotiating uptime guarantee terms, make sure they are clear, reasonable, and reflect your facility’s work patterns. O’Neill suggests the following key things to watch: • know who is responsible for monitoring the guarantee; • clarify whether the guarantees are based on an eight- or 24-hour workday and a five- or seven-day workweek; • understand what service events are excluded from the uptime calculation; and • know the specifics of what the uptime compensation will be. 3. Long-Term Service Contracts. OEMs heavily market long-term service contracts when equipment is purchased. A number of hospitals and medical practices purchase them almost reflexively. In the days of fatter profit margins, both hospitals and practice administrations focused primarily on keeping everything up and running. That alone ensured financial success. Times have changed for many facilities. Paying closer attention to service costs can significantly help a department or facility’s financials. Like extended warranties on cars, it is in the manufacturer’s economic interest to lock the buyer into a long-term service relationship. Obligating the customer to the OEM’s service ensures revenue after the sale and strengthens the reliance on the company if it has few or no other service options. Termination Clause O’Neill strongly advocates for negotiating a reasonable out clause into any service contract. A “with cause” out clause allows you to cancel your service contract because of a deficiency by the service provider and should not include a financial penalty. A “without cause” out clause allows you to cancel your service contract for any reason other than a deficiency, such as a change in methodology or expanded in-house capabilities. O’Neill says facilities should expect to pay a reasonable cancellation fee if they terminate a contract “without cause.” O’Neill suggests evaluating service contracts by comparing them with other options to determine what will work best in your facility. In addition to an OEM service contract, he suggests exploring the following options: • the facility’s in-house maintenance capability; • paying for service as you go on a time-and-materials basis; and • using an independent service organization. The most cost-effective arrangement may prove a combination of paying for service on a time-and-materials basis, using an independent service organization, and keeping OEM service on some equipment. For example, some experts have advocated service agreements for modalities such as CT and MRI, where downtime can easily translate to more than $1,000 per hour. Many OEMs offer several levels of service agreements; the most comprehensive agreement may not always be the best fit for your facility. For example, some experts advocate not purchasing a service agreement on PACS hardware but contracting for software-only support. While not directly related to the service contract purchase decision, it’s also important to budget for noncovered maintenance costs in your financial planning for equipment. Admittedly, it can be daunting to evaluate the service agreements for every piece of equipment in a sizable radiology facility. Thermo Asset Management Services and other similar companies provide that service. It will evaluate and manage a facility’s equipment and service agreements and configure the most cost-effective combination of OEM agreements, time-and-material support, and third-party support to meet your service needs. It will also manage the entire process. Its business proposition is that a facility’s savings will significantly outstrip the cost of services. O’Neill offers this example: “A large healthcare facility in Minnesota signed a number of long-term service contracts and was then unable to take advantage of a lower cost methodology for service,” O’Neill says. “This could have saved them in excess of $540,000 over four years while still utilizing the same service vendor.” O’Neill reiterated that if your facility’s analysis finds that a long-term contract seems desirable when purchasing new equipment, you should negotiate acceptable escape terms before finalizing your purchase. However, he believes it’s smarter to discuss and evaluate this at the end stage of the warranty period, not during the purchasing phase. So what is your best bet? You have to look at the specifics of your situation and determine which model offers the most cost savings without losing the quality of service and uptime. It must also allow your facility to continuously keep its options open throughout the life of your equipment. — A Radiology Today staff
report
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July
17, 2006
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