Twenty years of hospital budget committee meetings and hearings have provided me with some personal insights on the capital equipment process, one often opaque to vendors and even many hospital department heads.

Yet, the process isn’t going away, since it’s demanded by fiscal discipline and mandated, of course, by CMS and governing boards everywhere.

The drivers for capital need can be categorized, and each analyzed for approval differently.

First, there are basic infrastructure needs, such as sterilizers, boilers, carpet…all of which provide no return on investment unless measured against costs of ongoing repairs or doing without.  Opinion leaders here are those facility personnel, charged with basic maintenance and upkeep.

Second, regulatory requirements mandate a myriad of capital investments, including record keeping devices or storage, JCAHO recommendations, OSHA issues, etc.    Requests for any equipment in this arena are privileged, since punishment for regulatory non-compliance can be swift and sure.  Opinion leaders here are the respective department heads, charged with adhering to all such codes in their areas.

Third, revenue-generating equipment has two facets in the approval process, although not unrelated.  Any CEO that is recruiting a physician must provide the clinical tools the physician needs at the same time addressing the tools he wants.  This ticklish calculation usually takes the form of the expected return on investment exceeding a pre-established hurdle rate, a cold measure of approval but a great tool for ranking all requests for capital.  The less sophisticated “payback method” converts net revenue streams over the number of months it takes to pay for the capital investment.

The variables in such calculations, however, are very dependent on projected patient volumes and mix, reimbursement rates and possible changes thereto, and, of course, acquiring the equipment at the life-cycle cost projected.   A critical component of the equipment selection process here sometimes fouls the most prudent purchasing process, since physicians are often loyal to equipment brands they have used before, or new equipment that offers new and exciting new treatments.  If the CEO is recruiting a new physician, trying to convince his family to move to a new city can often take precedence over debating a brand choice.  The new guy gets his brand, almost always, in spite of contracts, equipment incumbency, or otherwise.

A Beta Gap Theory, first written in an industry newsletter Hospital Materiel Briefings in 1984, suggests that GPO contracts for capital benefit the hospital 30% of the time, those times being when incumbency or preference reduces brand options.  The GPO contract pricing establishes a floor price, assuring a “no gouge” price.  Keen hospital negotiators then will reserve their best efforts for capital not covered by contract by demanding a Two-Brand approach whenever politically possible.  Setting up a competitive dynamic, allowing enough time to entice and then frighten vendors….will always end up with a sweetened deal for the hospital.  Vendors have every right to scream if their contracted equipment is competing with a non-contracted vendor, but most recognize the realities and have developed nimble adjustments to compete when their GPO price is vulnerable to competition.

One of those nimble adjustments any capital equipment maker can employ is the “trade-in” value, whenever the transaction is a replacement.  This device allows a de facto adjustment to the GPO contract price by allowing more than market for displaced equipment, even if the vendor doesn’t want or need it. The industry’s dirty secret here is the fact that much such equipment is landfill bound.  If only Greenpeace knew, they would demand better disposition efforts for medical equipment to free landfills, while the truly frugal would realize the value left in medical equipment too-soon discarded.  Amazingly, only recently has used medical equipment found outlets for recovery and reuse, joining now the status enjoyed by automobiles and aluminum cans.

In summary, the blind spots in the hospital capital equipment process can discourage vendors and hospital personnel alike, but the winners will always watch and know:

• Who the drivers are (the real buyers), since their titles can mislead
• What the ROI is, especially against the incumbent’s
• The timing of the approval (always subject to change)
• When sweeteners are required
• And how to assist in the disposition of the existing equipment to remove that burden from the buyers

Finally, a blank copy of the Capital Equipment Budget Request or whatever internal form the hospital uses….can be very instructive.  Get a copy.

David Baker

Vice President

Med1Online