TCO can ensure accurate performance trending and cross-facility benchmarking within equipment lifecycle management

TCO is a methodology used to ensure that all associated costs over a given time period are considered when acquiring an asset. These costs may include purchase price, installation costs, financing costs (including the option to lease or rent), energy costs (or savings), repair costs, upgrades, maintenance, downtime, productivity, training and disposal.

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.

First, 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 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.

When developing your organization’s TCO grid, think of it as a three-step process: 1. Acquisition and procurement; 2. Operations and maintenance; and 3. End-of-life management.

Consider the TCO grid (Table 1). Remember that TCO looks at total cost of ownership, not just acquisition 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 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.

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 hospital 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 more than $2 million, they needed new approvals. The project was delayed several months – TCO planning would have been very useful here. (See Table 2.)

CyberKnife: It’s important to note that newer technologies, such as CyberKnife, have special considerations when it comes to TCO planning because there is no "experience curve." It’s hard to learn from others’ experiences when the oldest comparable project is only four years old. (See Table 3.) [Editor’s Note: Accuray Inc. manufactures the CyberKnife Robotic Surgery System.]

That’s what a group of doctors learned when they decided to purchase a CyberKnife, which would enhance their patient care. 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 a new phone and Internet network – one that would cost approximately $150,000 to install because of the clinic’s distance from the main telecom hub. In addition to those unexpected and unaccounted for 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.

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:

• Standardize the items you include in your TCO planning, so when you evaluate equipment, you’re doing it the same way each and every time.

• Determine how your organization will measure results. When you look back at your purchase in three years, how will you decide whether it was successful?

• Measure your results. You’ll only know if your purchases were successful if you’ve set benchmarks.

• Analyze 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), materials and legal. 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.

As previously mentioned, TCO planning isn’t a perfect science. Avoid some common mistakes by considering the following:

• Know when warranties are worth it. For example, a warranty on a 64-slice CT scanner is always worth it because each time a tube fails, you’re looking at $250,000 to replace it.

• 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 it is 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.

• Ignore the "Joneses." Avoid comparing your hospital to others in the area. 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.

• 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.