 |
 |
 |
|||||
|
|
 |
|
|||||
          |
Products &
Services What the fine print will cost you by Dan O’Neill Service contracts may seem like a cost-effective maintenance option for most healthcare organizations. Administration of the contract is easy and response time is generally timely, and if not, most managers feel they have the "clout" to demand good response time if a contract is in place. However, if a healthcare organization looks closely at the fine print of a service contract, it could find high, hidden costs that result in the organization paying more money than they thought and may not be providing them with any additional leverage to receive proper service levels.
True costs are not known It is no secret that manufacturers will always try to sell service contracts to healthcare organizations, claiming that the benefits offset the high costs. Closer investigation typically reveals an expensive contract price for expected inflated maintenance costs, an absence of contract comprehensiveness and a lack of accounting for maintenance dollars. The greatest cost is the healthcare facilities’ inability to factually know how it spends its maintenance dollars over time, and therefore, clarity on how to lower their maintenance costs going forward. Under a service contract, only the manufacturer knows the true cost that is spent to maintain a piece of equipment, and it is probably much lower than what the organization believes. By not having detailed maintenance records and accounting of those costs, the organization cannot determine if it is receiving the services it paid for or analyze if the vendor reduced the amount of service (such as not performing all of the preventive maintenance (PM) visits promised thereby increasing their profit. The healthcare organization also cannot plan or budget for the future because they do not have a breakdown of the true costs to perform maintenance on specific equipment items. When a healthcare organization requests a report detailing the actual cost of service, the response typically shows the service provider losing money compared to the cost of T & M (time and material) service. In an attempt to justify the cost of the service contract, list charges (instead of exchange price) are reported, many which would not be billed for under time-and-material basis. The requested report usually does not detail the cost of labor, parts or travel for repairs completed, identify what went wrong or how long it took the manufacturer to repair the piece of equipment. Without this information, the organization has no knowledge or control over their equipment and costs. For example, a rural Idaho hospital purchased original equipment manufacturer (OEM) service contracts for years. Unhappy that he never had the information to know or evaluate his true maintenance costs to determine true cost/benefit analysis, the CFO eliminated service contracts in 2000 and his facility has saved over $250,000 since then. Prices based on "what ifs" The price of service contracts are based on worst-case scenarios, such as high-cost, complex and frequent repairs and do not necessarily reflect the facilities’ actual equipment performance or cost of service. Service contract costs do not take into account the number of lower-cost alternatives that can turn a potentially high-cost repair into a routine and reasonably priced repair. The manufacturer’s reported costs are based on list prices, and these prices can be as much as 50 percent to 70 percent higher than the true cost. The only thing that is certain about a service contract is that it is priced to favor the vendor and that price will not go down. Typically, the cost of the contract rises every year at renewal, regardless of the number of repairs completed on the equipment. A manufacturer may offer a fixed price service contract for three or five years. However, they will average the costs and increase over the life of the contract period, and amortize that increase over the life of the agreement. If a piece of equipment is taken out of service, make certain that this is reflected as a decrease in your monthly invoice. Unfortunately, this is not always done automatically by some vendors and must be requested by the facility. Beware of vague terms Always read the fine print! This is sound advice that we are given repeatedly throughout our lives. Reading the fine print of a service contract is dry and sometimes difficult, if not confusing. But it’s the only way to understand what you really have purchased and what will be covered by the service contract and what will not. Service contracts are often vague about the terms and benefits included. It is not uncommon for facilities to find themselves paying extra for X-ray tubes, operator-related errors or service performed outside of regular hours. Because these extra costs are not included in the contract and rarely gathered and recorded by the organization along side the cost of the contract, the total cost to maintain a piece of equipment under service contract is not captured. For example, a Connecticut medical center has service contracts on a sizeable group of imaging equipment, and is frequently billed for overtime service, which is difficult to track and verify. Manufacturers promote future software upgrades as the primary reason to purchase long-term service contracts. The only software updates that a healthcare organization should have to pay for are upgrades that allow the equipment to do more than what was originally promised when the equipment was purchased. It should be noted that there costs are not included as part of the typical service contract. Any other upgrade simply makes the equipment easier to work with or makes a piece of equipment that does not function properly, work better. The equipment owner should not be responsible for that cost regardless of the service method. Before purchasing a contract, the healthcare organization should clarify with the manufacturer the types of software upgrades included in the contract and make sure they understand the benefits to the organization. The facility may find that an alternative upgrade is available or that the majority of the upgrades should be provided at little or no cost. Some manufacturers have offered discounts on the purchase of capital equipment if the organization purchases a long-term service contract with the equipment. This discount needs to be verified as there have been documented cases where a purchase price has been inflated, and then reduced, if they buy the contract, to give the appearance of a cost savings to the facility. Cancellation terms Some healthcare organizations assume they can cancel a contract before it expires, but it could be extremely costly if the organization does not negotiate reasonable out clauses before they sign. Every healthcare organization should negotiate two out clauses into their service contracts, "with cause" and "without cause" terms. Canceling with cause allows an organization to cancel because of a deficiency by the service provider if the quality of service is unacceptable. There should be no financial penalty to the organization in this scenario. Typically, there is a time period allotted for the vendor to correct the deficiency prior to severing the contract. Cancellation without cause allows you to cancel for any reason. Typically, there is a cancellation fee associated with this type of out clause which should be negotiated up front. For example, you might consider canceling if you decide to use a different maintenance methodology, such as managed time-and-materials or change service providers, such as your in-house staff or an independent organization. If this is not addressed prior to signing, the cancellation fee may be extremely high. Some manufacturers charge as much as 25 percent of the unused contract. Some manufacturers do not include any out clauses in a service contract, especially long-term contracts. This should not be acceptable to any organization, as it completely negates any opportunity to evaluate or pursue other service alternatives. Some contracts include a one-way termination where only the vendor can cancel the contract. Others include an "evergreen clause" where contracts automatically renew after the term is over unless the facility gives written notice within a specified period of time prior to expiration that they will not renew the contract. Due diligence requires that there be a thorough understanding of your options and some type of expiration clause that is reasonable and in your facility’s best interest. Extended warranties The goal of many manufacturers is to sell extended warranties at time of purchase, typically for five years. Five-year extended warranties are actually four-year service contracts layered on top of a one-year warranty. Healthcare organizations should be wary of extended warranties at the time of equipment purchase. Extended warranties are simply standard warranties combined with a multi-year service contract, usually with very punitive out clauses, or none at all. Any contract considerations should be evaluated during the final stages of the warranty period. Standard warranties typically last one year for the majority of high-end, clinical equipment. For equipment with no mechanical or electromechanical parts, a shorter contract length may be acceptable. The facility should ensure that the warranty starts after the equipment is installed and working reliably, and that this date is properly documented with the vendor. The importance of fine print Healthcare organizations today need to analyze all the fine print as well as all available options before evaluating service options. Some facilities do not realize that they can receive the same benefits as a service contract – response time, quality service and ease of use – at a much lower cost on a controlled time-and-materials basis that includes the proper operational and technical resources. Managed time-and-materials also allows for greater flexibility and ownership of maintenance costs. Buyer beware is the ultimate advice – understand the terms and conditions and your options before signing on the dotted line. HPN About the Author:
CLICK HERE
|
|
|||||
|
|
|||||||
 |
|||||||
