The need for continued cost cutting by hospitals is not news and most hospitals have already taken aggressive steps to drive down labor and supply costs.
But as the pressure on revenue and reimbursements continues to challenge hospital leaders, finding new sources of savings is both increasingly critical — and difficult.
While many hospitals suspect they may be overpaying for medical equipment and the expensive service contracts covering equipment, they really don’t know by how much or how to find out. If they did, they would be shocked at just how much they can really save, and benefit from a new source of savings they had previously overlooked.
Over the last 14 years working with hospitals across the country, the data we track and analyze consistently shows that less than 3% of medical equipment quotes provided to hospitals reflect the truly best pricing available in the market. In addition, more than half of all the service contract quotes covering equipment after the warranty expires contain savings of at least 15%. This happens because the playing field isn’t level when it comes to negotiating medical equipment purchases and service contracts. Suppliers have a huge information advantage and hospitals don’t have the necessary information to know what they should pay.
Budgeting and contracting for medical equipment, and related technology and service, is very different from buying supplies, medicine and other standard products hospitals buy as often as every 5, 7 or 10 days. Medical equipment is highly complex, is always changing, and hospitals may only buy certain types of expensive equipment such as MRIs or linear accelerators once every 5, 7 or even 10 years.
Adding to the imbalance in equipment negotiations is the fact that medical equipment sales teams are best-in-class experts at selling their products. Not unlike Olympic athletes, world-class musicians or elite military units who train for years to perfect their craft, equipment sales executives receive months of specialized training, possess domain expertise and deep product knowledge, and sharpen their skills by selling the same equipment and services to many different hospitals on a given day.
For all these reasons, many hospitals are at a distinct disadvantage in their equipment negotiations. And if they are paying too much for equipment and service, this will impact their bottom line not just once but every year for the entire life of the equipment. But there is good news and there are steps hospitals can take to level the playing field.
Strategies to Level the Playing Field and Pay Less for Equipment and Service
It all starts with the right information. Armed with the right information and proven negotiation strategies, hospitals can set the stage to achieve better results, more savings and lower total cost of ownership (TCO) through more informed and effective equipment negotiations. Here are three best practices that can help you level the playing field in your negotiations.
1- Create (Credible) Competition
The absence of credible competition for equipment or service can cost hospitals a significant amount of money. A credible competitor must provide a product or service that meets established technical, financial and other requirements, and that your clinical team would actually consider using. When selecting a competitor, be certain to pick one that offers comparable clinical capabilities and market acceptance that will be credible in the eyes of your clinical team, as well as sales representatives from competing suppliers. Clinicians often have strong preferences and may voice their opinion in support of a single product from a specific supplier. However, without genuine competition from multiple suppliers, it’s hard to gain any meaningful negotiation leverage that can get the preferred product at the truly best price.
Even in the absence of legitimate competition for specialized clinical technologies only available from a single supplier, consider sourcing a used version of the same model from a third party supplier or even another hospital. This still creates competitive pressure on new equipment suppliers and ensures your hospital won’t get stuck in a situation where the supplier knows they have won the business before the negotiation starts.
For example, a 600-bed level 1 trauma center was recently renewing multi-vendor service covering 51 imaging systems from multiple manufacturers. The hospital was planning to renew coverage with its existing OEM service provider, but reconsidered after market data showed they could save a substantial amount of money. By introducing another competitive service provider into the process, the hospital was able to reset the bar for what they were willing to pay, and negotiated annual savings of $220,000 or $1.1 million over a five-year contract.
Be certain to introduce competition well in advance of the final decision and avoid telling the preferred supplier that any decisions have been made or budgets approved until you are confident you have secured the best deal.
2- Communicate Early … and Often:
The negotiation process starts internally and well before you actually engage with the supplier to finalize their best offer. Set the stage for an effective, productive and efficient negotiation by making sure all key hospital stakeholders are on board with the final decision before you start negotiating. Make your process and anticipated timing for final decisions completely transparent — both internally and with your suppliers. In contrast, having unplanned questions or issues pop up at the last minute can frustrate everyone involved and derail the momentum of your negotiations.
Remember that your suppliers are also on the hook for setting and managing the expectations of their colleagues and bosses. Good communication with suppliers — even if it is not always positive news — helps set them up for being successful on your behalf and keeps “surprises” and unwanted disruptions of negotiations to a minimum.
For example, a community health system was implementing a system-wide patient monitor upgrade and some common pitfalls had delayed the hospital’s final decision. The incumbent vendor assumed they had won the business, but was not aware of last- minute budget issues that were impacting project approval. The hospital was transparent with their supplier about the budget challenges, and enlisted their help to carve out additional savings that allowed them to fit the full scope of the project into a reduced budget and secure the approval needed to move forward. Communicating key information to the supplier led to additional, incremental savings of $1.1 million, or 19.7% of what they had planned to spend.
Ineffective communications are a surefire way to derail any negotiation, and medical equipment and service contract negotiations are no exception. And while having an aligned and consistent message seems like it should be a no brainer, it’s often not as easy as it sounds.
3- Don’t Fear Commitment:
As you close in on the final steps in your negotiations, don’t overlook what may be the most powerful weapon in your arsenal for extracting final concessions: the actual purchase order. Many hospitals fail to realize that the purchase order — which for them is a routine formality — can be like gold for their supplier. The purchase order is the prize that cements the supplier’s “win” and allows them to declare victory to their managers. Use the promise to deliver a P.O. promptly (and only if you really can do so) as a final “carrot” to dangle in front of the supplier representative to get them to go to bat with their management for any final price discounts or incentives you are requesting. Too many hospitals get to the end of a negotiation, and then can’t deliver the P.O. without weeks of delay. This can leave suppliers anxious and wondering if the deal is truly solid, or if you are “just shopping” and may not actually have the approval to move forward.
For instance, a community hospital was expanding its facility to add more private rooms with a project budget of more than $100 million. Faced with a hard deadline of an official grand opening and ribbon-cutting ceremony, the hospital experienced serious supply chain system/IT issues that delayed the procurement process by weeks. Key equipment suppliers were becoming skeptical and anticipating ongoing delays, and had not made provisions to ship the needed equipment. Only by dangling the promise of a valid P.O. was the hospital able to both negotiate a final $3 million in additional savings and get agreement from its suppliers to expedite delivery to meet project deadlines.
The P.O. is an easy and cost-free way to put everyone’s mind at ease. Your supplier has worked hard during the negotiation process, and once they have delivered, it is only fair that they receive what they need to be successful in their role.
Be Confident, Be Prepared, Be Successful
Hospitals that use the strategies described above can consistently realize better outcomes in all their medical equipment purchase and service contract negotiations — typically incremental savings of 12-16%. By leveling the playing field in the negotiation process, hospitals benefit both from immediate savings on purchase costs, as well as long-term savings and lower TCO on all equipment.
About the Author
Peter Robson, CEO of Miga Solutions, is passionate about opportunity to reduce the cost of healthcare. In addition to his role overseeing day-to-day operations at Miga, Peter is a thought leader that frequently writes articles about healthcare cost reduction and speaks at industry conferences.