Total Cost of Ownership

Total cost of ownership and justifying an upgrade or purchase of capital equipment

Re-imagining cost analysis in capital acquisition is an imperative in today’s environment. Managers need to consider the scope of capital project planning differently. Every project should be a part of a capital planning framework.

Why do we need a coherent capital planning framework? Isn’t each instance unique? In many cases it is reasonable to assert that each situation is different, but there are predictable areas of opportunity and pitfalls to navigate. Many cost drivers, which are initially opaque, can be identified and mitigated with a planning framework.

The answer is that managers should adopt the capital framework to ensure their capital project request has the best chance of approval. Each manager’s request for capital funds is probably in competition with multiple other managers’ requests. Compliance with the planning framework should provide adequate documentation to justify the manager’s request by illustrating the value to the organization, not just the requesting department. Also, making sure costs are correctly anticipated minimizes the chance that there will be cost over-runs, ultimately freeing up contingency funds for other capital requests.

Unfortunately, not all projects can wait for the planning cycle to run its course. Here some best practices in managing emergency projects are offered:

Flexible frameworks for evaluation

The enlightened planner seeks to find commonalities across different categories of equipment and purchased assets. One of the most frequently used techniques employed to achieve this goal is the use of Total Cost of Ownership (TCO) analysis. TCO adds the cost of the piece of equipment to the cost of service, construction, retrofitting, installation, technical support, software upgrades and other relevant follow-on costs, stemming from the purchase. Using TCO allows purchasers to compare different pieces of equipment according to a unified set of cost related criteria.The best practice cost evaluation approach is Total Cost of Technology Acquisition (TCTA). This approach considers multiple purchasing and leasing options. TCTA is more flexible than TCO analysis because it forces the analyst to dig into the expected useful life of the asset, instead of the norm useful life. The norm for useful life expectancy can come from a survey of providers, and equipment manufacturers can also aid in this determination. However, the expected useful life of the asset can be vastly different from the norm. For example, a piece of equipment can be maintained in service well beyond the norm. Equipment like radiation linear accelerators or urinalysis machines traditionally have longer than expected useful lives, especially if they are well maintained. In other cases, the equipment can fail to keep up with changing patient characteristics such as the addition of a bariatric program creating the need to replace standard MRIs with large bore types, for example. Therefore capital planning should consider the usage condition of the equipment as specified, but also ask stakeholders where change could come from, and where this change would impact operation of the equipment. This approach allows for the determination that TCTA may be lowest under an operating lease, or rental configuration.

Templates for procedural implementation, instead only equipment and facilities implementation

Another best practice in capital planning and acquisition is the utilization of templates for implementation. There are software packages available that document, streamline and integrate the implementation considerations and constraints. Sometimes, robust templates useful for urgent projects exist within these programs, as well as within Group Purchasing Organization (GPO) capital contracting departments. Use of these templates can help ensure that specialized procedure focused equipment is placed in a suitable environment. For example, beds, trash-cans, etc. that are used in a MRI room need to be able to function properly and not disassemble, or become hazardous in a strong magnetic field.

Generalized value analysis procedures

Value analysis is designed for situations where asymmetrical alternatives, or incomplete/imperfect substitutes are being considered to solve a Clinical, Operational, or Financial problem. Value analysis is not designed to defray controversial supply decisions; project champions and organizational leadership are charged with managing controversy. Therefore, a narrow set of situations are suggested as triggers for the value analysis process. These situations are those where a facility encounters decisions that include:

1. Ambiguous or emerging potential benefits in patient care, outcomes, or satisfaction resulting from a technology, process, or vendor change.
2. Outsourcing a core organizational function, e.g. food service, or biomedical engineering.
3. Innovative and new supply options that displace multiple current modalities, e.g. new diagnostic or therapeutic options that replace current care pathways.

 
Value analysis can be employed in vendor substitute selection, where one vendor displaces another one entirely; orthopedic or cardiac implants are a prime example. However, if the clinical studies and medical opinion support the notion that vendor A can substitute for vendor B, value analysis is arguably unnecessary. Justification can be done on basis of proof statements, without the diversion associated with the Value analysis process.

Furthermore, the Group Purchasing Organization (GPO) affiliation of the organization can be used to justify most vendor replacement decisions. GPOs, typically, have well-developed processes for value analysis and clinical advisory boards. As a member of a GPO, the hospital can reduce cost and increase speed by adhering to contracted supplier schedules for most requirements. Replicating the GPO assessment rarely has a positive return for the hospital.