CAPITAL EQUIPMENT PLANNING
Understanding Total Cost
of Ownership in Capital
Equipment Planning
TriMedx (www.trimedx.com), an
Indianapolis-based healthcare
equipment services provider.
Ensure accurate performance trending and cross-facility
benchmarking throughout the many phases of equipment lifecycle
management. By Dale Hockel & Terry Hamilton
T
Terry Hamilton is a senior vice
president, clinical support
he TCO — total cost of ownership —
approach for your health organization’s
capital equipment planning enables you
to effectively boost your bottom line by planning for all lifecycle costs and options related
to capital equipment. TCO is a five-step methodology used for comprehensive lifecycle planning to ensure that all associated costs over a
given time period are considered when acquiring an asset.
services for St. John Providence
Health System in Warren, MI.
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ADVANCE for Executive Insight
These costs may include:
QPurchase price
QInstallation costs
QFinancing costs (including the
option to lease or rent)
QEnergy costs (or savings)
QRepair costs
QUpgrades
QMaintenance
QDowntime
QProductivity
QTraining
QDisposal
TOM WHALEN
Dale Hockel is the senior vice
president of operations at
CAPITAL EQUIPMENT PLANNING
FIG. 1 - CT SCANNER TOTAL COST OF OWNERSHIP
Year of
Purchase
2nd Year of
Ownership
3rd Year of
Ownership
4th Year of
Ownership
5th Year of
Ownership
6th Year of
Ownership
7th Year of
Ownership
8th Year of
Ownership
9th Year of
Ownership
10th Year of
Ownership
$1,500,000
-
-
-
-
-
-
-
-
-
Renovation Costs
$250,000
-
-
-
-
-
-
-
-
-
Installation Costs
$200,000
-
-
-
-
-
-
-
-
-
Productivity Costs
(may be + or -)
Purchase Price
$6,000
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
Financing Costs
-
-
-
-
-
-
-
-
-
-
Energy Costs
-
$10,000
$10,300
$10,609
$10,927
$11,255
$11,593
$11,941
$12,299
$12,668
Upgrade Costs
-
-
-
$150,000
-
-
-
$200,000
-
-
Maintenance
Costs
-
$50,000
$51,500
$53,045
$54,636
$56,275
$57,964
$59,703
$61,494
$63,339
Repair Costs
Downtime Costs
Disposal Costs
Total Annual Costs
-
$50,000
$50,000
$50,000
$50,000
$50,000
$50,000
$50,000
$50,000
$50,000
$25,000
$5,000
$10,000
$25,000
$5,000
$10,000
$25,000
$5,000
$5,000
$10,000
-
-
-
-
-
-
-
-
-
$50,000
$1,981,000
$103,000
$109,800
$276,654
$108,564
$115,531
$132,556
$314,643
$116,792
$174,006
Total Cost of Ownership $3,432,546
Let’s examine how the TCO model may
work for your organization, and in turn
may save you thousands – even millions –
of dollars in equipment purchases.
1. Capital equipment planning
2. Selection and procurement
3. Implementation
4. Management and monitoring
5. End of life management
USING THE TCO METHOD
When developing your organization’s
360-degree TCO grid, think of it as a fivestep process:
Remember that TCO looks at total cost
of ownership — not just acquisition costs,
but also installation, financing, energy, re-
pair, maintenance, downtime, productivity, training and disposal costs — so across
the top of the grid you’ll see first year costs,
second year costs and so on. You may wish
to coordinate your TCO timeline with your
organization’s fiscal year. It’s easier for the
finance department to coordinate costs if
you put things in terms of fiscal year.
Along the side of Figures 1, 2 and 3
FIG. 2 - BREAST MRI TOTAL COST OF OWNERSHIP
Year of
Purchase
2nd Year of
Ownership
3rd Year of
Ownership
4th Year of
Ownership
5th Year of
Ownership
6th Year of
Ownership
7th Year of
Ownership
8th Year of
Ownership
9th Year of
Ownership
10th Year of
Ownership
Purchase Price
$3,200,000
-
-
-
-
-
-
-
-
-
Renovation Costs
$1,000,000
-
-
-
-
-
-
-
-
-
Installation Costs
$150,000
-
-
-
-
-
-
-
-
-
Productivity Costs
(may be + or -)
-
-
-
-
-
-
-
-
-
-
Financing Costs
-
-
-
-
-
-
-
-
-
-
Energy Costs
-
$10,000
$10,300
$10,609
$10,927
$11,255
$11,593
$11,941
$12,299
$12,668
Upgrade Costs
-
-
-
-
$400,000
-
-
-
$400,000
-
Maintenance
Costs
-
$320,000
$329,600
$339,488
$349,673
$360,163
$370,968
$382,097
$393,560
$405,366
Repair Costs
-
-
-
-
-
-
-
-
-
-
Downtime Costs
-
-
-
-
-
-
-
-
-
-
Disposal Costs
-
-
-
-
-
-
-
-
-
-
$4,350,000
$330,000
$339,900
$350,097
$760,600
$371,418
$382,560
$394,037
$805,858
$418,034
Total Annual Costs
Total Cost of Ownership $8,502,505
ADVANCE for Executive Insight
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CAPITAL EQUIPMENT PLANNING
FIG. 3 - CYBERKNIFE TOTAL COST OF OWNERSHIP
Year of
Purchase
2nd Year of
Ownership
3rd Year of
Ownership
4th Year of
Ownership
5th Year of
Ownership
6th Year of
Ownership
7th Year of
Ownership
8th Year of
Ownership
9th Year of
Ownership
10th Year of
Ownership
Purchase Price
$3,200,000
-
-
-
-
-
-
-
-
-
Renovation Costs
$1,000,000
-
-
-
-
-
-
-
-
-
Installation Costs
$150,000
-
-
-
-
-
-
-
-
-
Productivity Costs
(may be + or -)
-
-
-
-
-
-
-
-
-
-
Financing Costs
-
-
-
-
-
-
-
-
-
-
Energy Costs
-
$10,000
$10,300
$10,609
$10,927
$11,255
$11,593
$11,941
$12,299
$12,668
Upgrade Costs
-
-
-
-
$400,000
-
-
-
$400,000
-
Maintenance
Costs
-
$320,000
$329,600
$339,488
$349,673
$360,163
$370,968
$382,097
$393,560
$405,366
Repair Costs
-
-
-
-
-
-
-
-
-
-
Downtime Costs
-
-
-
-
-
-
-
-
-
-
Disposal Costs
-
-
-
-
-
-
-
-
-
-
$4,350,000
$330,000
$339,900
$350,097
$760,600
$371,418
$382,560
$394,037
$805,858
$418,034
Total Annual Costs
Total Cost of Ownership $3,432,546
you see rows, each representing a department or input entity in TCO. Within Excel
you’ll be able to expand detail in certain
categories by adding tabs. For example, if
you’re planning for an upcoming renovation, you can add detail on the bids you
received, who provided them, etc.
One often-overlooked area is disposables. Typically we think of TCO in terms
of big, expensive pieces of equipment.
Consider IV pumps, for example. When
you order IV pumps you’re typically getting
hundreds at a time, and your TCO decisions around them can make a huge difference in what becomes most cost effective.
MAKING TCO WORK FOR YOU
While it may seem complicated, the key to
effective TCO planning is to adjust it to fit
your organization’s personality and needs.
Consider the following to ensure effective
TCO planning:
QStandardize the items you include in your
TCO planning, so when you evaluate
equipment, you’re doing it the same way
each and every time.
QDetermine how your organization will
measure results. When you look back at
your purchase in 3 years, how will you
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decide whether it was successful?
QMeasure your results. You’ll only know if
your purchases were successful if you’ve
set benchmarks.
QAnalyze what worked and why. What
happened during your TCO planning that
contributed to the success or failure of a
purchase?
Remember that it’s not just operations
and finance that need to be included in
TCO planning. From the beginning of
your planning process, involve information technology, telecommunications,
physics, construction/real estate, clinical
engineering (CE), supply chain, materials, legal and the end-users — doctors,
nurses and other clinicians. Ensuring that
the typically “last to know” people are part
of the planning process means you’ll make
smarter decisions that will benefit the entire hospital. It will also save you valuable
time and money, making the right decision
up front.
BREAST MRI MACHINE
A busy breast surgeon decided to purchase a new breast MRI machine due to
an increasing number of patients requiring operations. The surgeon and his hos-
pital entered into a joint agreement, and
more partners were added. They purchased the breast MRI machine and then
realized that the space in which it was to
be installed was inadequate. To accommodate the new machine, lead-lined walls
and additional points of egress, they needed an extra $700,000. Because the capital
approval was $2 million, and the project
was now over $2 million, they needed new
approvals. The project was delayed several
months. TCO planning would have been
very useful here.
CYBERKNIFE
It’s important to note that newer technologies have special considerations when it
comes to TCO planning because there is
no experience curve.
That’s what a group of doctors learned
when they decided to purchase a CyberKnife when it was new to the market.
It was to be installed at a clinic location
approximately 40 miles from the main
hospital in the doctors’ network. They
purchased the equipment, and then
found that the location required new a
new phone and Internet network, one
that would cost approximately $150,000
to install because of the clinic’s distance
CAPITAL EQUIPMENT PLANNING
from the main telecom hub.
In addition to those unexpected costs, the
OEM gave the doctors a certain number of
“points” to be used for future technology upgrades. By the time the equipment was up and
running, the OEM had issued an upgrade, and
the doctors used all of their points to install it.
They now had their working CyberKnife, but
were out $150,000 and would be required to
pay full price for any future upgrades. TCO
planning won’t eliminate these costs, but it
helps an organization to know they are coming
and to be ready.
LIMITATIONS OF TCO
It’s important to note that TCO is not a perfect
model. While it’s the best method we have for
evaluating equipment lifecycle costs, keep in
mind:
It requires extra effort. Completing a TCO
analysis does take time to complete, and therefore will drive costs up just a little. In spite of
this, it’s still very important and worth those few
extra dollars.
There is no agreed-upon formula. Do a web
It requires extra
effort. Completing a TCO analysis does take time
to complete, and
therefore will
drive costs up just
a little. In spite of
this, it’s still very
important and
worth those few
extra dollars.
search for “TCO model” and you’ll find a dozen
or more different formulas. That’s why it’s important to find the one formula that works for
your organization and stick to it.
It’s not useful for assessing risks. Will your
physicians use the model for planning? What
about accounting for all those “what if” scenarios? There’s really no way to tell for sure.
It’s not helpful when aligning investments
with strategic goals. TCO planning does not
take into account a healthcare organization’s desire to have the leading-edge equipment, or to
be the number one bariatric medicine provider,
for example.
AVOIDING TCO PITFALLS
TCO planning isn’t a perfect science. Avoid some
common mistakes by considering the following:
Q Know when warranties are worth it. For
example, a warranty on a 64-slice CT scanner is
typically worth it because each time a tube fails,
you’re looking at $250,000 to replace it (in the
first year).
Q Involve clinical engineering, always. Your CE
department can help you evaluate whether the
OEM service agreements are necessary. Maybe
you have someone in-house that’s suited to
repair equipment. Or maybe you don’t, and you
need to evaluate whether it’s worth it to spend
money on a very expensive service contract.
You just need to be able to account for that
money in your TCO planning.
Q Ignore the Joneses. Avoid comparing your
hospital to others in the area when possible.
Maybe the hospital across town is getting new
MRI machines, and patients are asking about
yours, too. In these tough economic times, it
may make sense for your hospital to make do
with its older-yet-functional equipment. Buying
new isn’t always the best option – a refurbished
unit may be exactly what you need for a fraction
of the cost of a new one.
Q Remember the cost of OPM (other people’s
money). If you take out a loan to purchase
capital equipment, you’ll need to account for
financing costs in your TCO planning.
These days, there’s a lot of talk and scrutiny
when it comes to the cost of healthcare services.
We owe it to our patients and community to
keep costs under control, and TCO capital planning helps us do just that.
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