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OBSERVATIONS AND INSIGHTS
Do Group Purchasing Organizations Really Save Money on Capital Equipment? Patrick K. Lynch
About the Author Patrick K. Lynch, CHTM, CBET, CCE, is a longtime leader in the healthcare technology management (HTM) field. Email: [email protected]
Everybody believes that group purchasing organizations (GPOs) are the saviors of healthcare. Every hospital I know of brags about getting “a better deal than anybody else in the country” on their equipment purchases. Prices paid hover around 60% of the list price. Whoop dee doo! I pay in that same range when I go out to purchase a new car. Have
While GPOs may drasticially reduce the list price of medical equipment, leading to short-term cost benefits, these initial savings often disappear as a result of high service costs in subsequent years of multiyear service agreements.
170
Biomedical Instrumentation & Technology March/April 2017
you seen the ads on TV, promising a 15,000% reduction on a $35,000 vehicle? List prices don’t mean anything anymore. They are created artificially high so that everybody thinks that they are negotiating for a great deal. Everybody wants to think that they beat up the big company and walked out a winner. GPOs came along to offer group-buying power to hospitals in ways that they could never achieve individually. They can bundle purchases. Maybe 10 hospitals are going to buy new computed tomography scanners. They can bid all 10 together and make their choice in concert, hopefully receiving a better price than each hospital can individually. And the GPO can be the conduit for making it all happen. GPOs report huge savings on all sorts of purchases, from consumables to capital equipment. I believe that the cost savings we hear about are erroneous and vastly overreported, especially for capital equipment. As a clinical engineer who has been participating in the purchase of capital medical equipment for more than 40 years (and who worked for Premier for 21 years, from 1977 to 1998), I believe that the life cycle cost of medical equipment is largely unaffected (and may even be increased) by the GPOs. Vigorous bidding and multiple buys, as well as the lure of “preferred vendor” status, encourage large manufacturers to reduce the list price of medical equipment by an average of up to 50%. This looks amazing to a C-suite
© Copyright AAMI 2017. Single user license only. Copying, networking, and distribution prohibited.
Columns and Departments
executive. And it is—in year 1. But these capital purchases are often linked to multiyear service agreements that are carefully designed by the manufacturer to recoup most, if not all or more, of the dollars sacrificed at the time of the sale. GPOs, supply chains, and materials management measure their impact in 1-year increments and regularly make unwise decisions about the downstream service of complex medical equipment without the involvement of healthcare technology management (HTM) professionals. These hospital-employed experts have dedicated their careers to this very field, ensuring quality, timely, low-cost medical equipment service that combines the best of cost, uptime, safety, reliability, and patient care. HTM has developed a metric that measures the cost of maintaining medical devices: cost-of-service ratio, or COSR. This is merely the cost of an asset divided by the annual cost of maintaining it. This cost can range between 4% and 35%. Equipment that is serviced by in-house staff usually can be
I argue that the money reportedly saved through the use of GPOs may be accurate when you talk about band-aids and gloves. But for medical equipment, the savings disappear when the initial savings are gobbled up by service costs in years 2, 3, 4, 5, and beyond. maintained for approximately 4% to 8% per year. A manufacturer’s service agreement can be as expensive as 20% to 28% per year for imaging equipment. This amounts to millions of dollars for the average hospital each year. I argue that the money reportedly saved through the use of GPOs may be accurate when you talk about band-aids and gloves. But for medical equipment, the savings disappear when the initial savings are gobbled up by service costs in years 2, 3, 4, 5, and beyond. I encourage further dialogue regarding this subject and encourage closer scrutiny of the GPO purchasing model. n
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Biomedical Instrumentation & Technology March/April 2017
171
Columns and Departments
OBSERVATIONS AND INSIGHTS
Do Group Purchasing Organizations Really Save Money on Capital Equipment? Patrick K. Lynch
About the Author Patrick K. Lynch, CHTM, CBET, CCE, is a longtime leader in the healthcare technology management (HTM) field. Email: [email protected]
Everybody believes that group purchasing organizations (GPOs) are the saviors of healthcare. Every hospital I know of brags about getting “a better deal than anybody else in the country” on their equipment purchases. Prices paid hover around 60% of the list price. Whoop dee doo! I pay in that same range when I go out to purchase a new car. Have
While GPOs may drasticially reduce the list price of medical equipment, leading to short-term cost benefits, these initial savings often disappear as a result of high service costs in subsequent years of multiyear service agreements.
170
Biomedical Instrumentation & Technology March/April 2017
you seen the ads on TV, promising a 15,000% reduction on a $35,000 vehicle? List prices don’t mean anything anymore. They are created artificially high so that everybody thinks that they are negotiating for a great deal. Everybody wants to think that they beat up the big company and walked out a winner. GPOs came along to offer group-buying power to hospitals in ways that they could never achieve individually. They can bundle purchases. Maybe 10 hospitals are going to buy new computed tomography scanners. They can bid all 10 together and make their choice in concert, hopefully receiving a better price than each hospital can individually. And the GPO can be the conduit for making it all happen. GPOs report huge savings on all sorts of purchases, from consumables to capital equipment. I believe that the cost savings we hear about are erroneous and vastly overreported, especially for capital equipment. As a clinical engineer who has been participating in the purchase of capital medical equipment for more than 40 years (and who worked for Premier for 21 years, from 1977 to 1998), I believe that the life cycle cost of medical equipment is largely unaffected (and may even be increased) by the GPOs. Vigorous bidding and multiple buys, as well as the lure of “preferred vendor” status, encourage large manufacturers to reduce the list price of medical equipment by an average of up to 50%. This looks amazing to a C-suite
© Copyright AAMI 2017. Single user license only. Copying, networking, and distribution prohibited.
Columns and Departments
executive. And it is—in year 1. But these capital purchases are often linked to multiyear service agreements that are carefully designed by the manufacturer to recoup most, if not all or more, of the dollars sacrificed at the time of the sale. GPOs, supply chains, and materials management measure their impact in 1-year increments and regularly make unwise decisions about the downstream service of complex medical equipment without the involvement of healthcare technology management (HTM) professionals. These hospital-employed experts have dedicated their careers to this very field, ensuring quality, timely, low-cost medical equipment service that combines the best of cost, uptime, safety, reliability, and patient care. HTM has developed a metric that measures the cost of maintaining medical devices: cost-of-service ratio, or COSR. This is merely the cost of an asset divided by the annual cost of maintaining it. This cost can range between 4% and 35%. Equipment that is serviced by in-house staff usually can be
I argue that the money reportedly saved through the use of GPOs may be accurate when you talk about band-aids and gloves. But for medical equipment, the savings disappear when the initial savings are gobbled up by service costs in years 2, 3, 4, 5, and beyond. maintained for approximately 4% to 8% per year. A manufacturer’s service agreement can be as expensive as 20% to 28% per year for imaging equipment. This amounts to millions of dollars for the average hospital each year. I argue that the money reportedly saved through the use of GPOs may be accurate when you talk about band-aids and gloves. But for medical equipment, the savings disappear when the initial savings are gobbled up by service costs in years 2, 3, 4, 5, and beyond. I encourage further dialogue regarding this subject and encourage closer scrutiny of the GPO purchasing model. n
1,500+ Jobs are available right now.
www.aami.org/career
Biomedical Instrumentation & Technology March/April 2017
171
