It is generally accepted in the healthcare industry that service contracts are expensive and are typically the least cost effective way to pay for service on equipment. But healthcare organizations do purchase service contracts to avoid high-dollar, unexpected repairs which can be devastating to a department’s budget. Those selling service contracts point out that they are easy to use, there is little paperwork and a simple phone call is all that is needed for service. But the ease of use comes at a price: The cost of maintenance is higher, service options are eliminated, and there is a lack of verifiable management reports.

Service contract drawbacks
When you purchase a service contract, the ability to use alternative service providers or methods to reduce your costs are eliminated. If your organization decides to expand its in-house repair capabilities, costs and downtime cannot be reduced because you are locked into using that service company for the length of the contract. If a preferred service engineer leaves the original equipment manufacturer (OEM) to start his or her own business or join an independent service organization (ISO), you will not be able to utilize that engineer. If you want to utilize another, lesser-cost option to manage the cost of service, such as a time-and-material asset management system, you cannot until the contract expires or you cancel the contract and pay cancellation fees.

The price of service contracts is based on worst-case scenarios, such as high-cost, complex and frequent repairs. Price is not based on your equipment performance or actual cost of service. When a report detailing the actual cost of service is requested, it typically shows the service provider losing money. In an attempt to justify the cost of the service contract, every possible service call and list charge (instead of exchange price) is reported, many that would not be billed for under a time-and-material contract. Under a service contract only the service company knows the healthcare organization’s true maintenance costs.

Sometimes companies threaten poor response time when you question the need for a service contract. Healthcare organizations should not have to put their equipment under service contract in order to receive good quality and responsive service. Reputable service companies provide high-quality service to all customers regardless if they have a contract with that facility or not. The reality is that they are in the business of selling both equipment and service and will properly respond to your service needs to keep your business. If you are hearing comments about receiving poor service response as a means of keeping you under a service contract, this is an occasion to have a conversation with both your sales and service manager to ensure your facility is provided with the timely service promised when you purchased the equipment.

Service contract protections
All service contracts should have an out clause. There are two types of cancellation clauses – with cause and without cause. Negotiate both of these clauses into every service contract you enter into. It is absolutely necessary to include clear cancellation terms in the signed contract – don’t rely on your standard purchase agreement language to do this.

If you cancel with cause because of a deficiency (for example, if the quality of service is not acceptable), there should be no penalty to cancel. Typically, there is a reasonable time period for the company to correct the deficiency. In most contracts it’s 30 days. If you decide to cancel without cause (for example, if you decide to use a different management program, or expand in-house service), your healthcare organization will most likely pay a penalty for canceling mid-term, but this penalty should be a reasonable charge. Some service contracts have penalties as high as 25 percent of the unused contract. Unless negotiated upfront, service providers will not refund or cancel a service contract if a healthcare organization wants to expand their in-house maintenance department.

OEMs try to tie three other important management issues into the service contract rather than the purchase of the equipment. Take steps to negotiate them at the time of purchase. First, ensure that OEM diagnostic software installed in your equipment continues to be at the highest-level revision. Second, make sure all software upgrades and field modifications will be provided for the realistic life of the equipment at no additional cost to you. Finally, require the OEM vendor to make its remote diagnostic software service feature available to you for the life of the equipment, regardless of how you pay for the post-warranty services.

Service contract negotiations
Beware of extended warranties at the time of purchase. These are simply standard warranties combined with a multiyear service contract. Standard warranties should last one year for the majority of high-end, clinical equipment. For equipment with no mechanical or electromechanical parts, a shorter period may be acceptable. Make sure the warranty begins after installation is complete, and the equipment is working reliably before you sign any service contract.

Many OEMs aggressively pursue signing multiyear service contracts at the time of equipment purchase by offering discounted service contracts for multiple year terms. One hospital was told that they would receive a 1 percent discount on the purchase price of their new CT scanner if they purchased a five-year service contract at the same time. After further analysis it was determined that they were actually being charged 10-12 percent more for the cost of the CT than others nationally, by far negating the 1 percent savings that had been promised.

Long-term service contracts are even harder to cancel and have steeper penalties. In fact, some companies have no out clauses in their long-term contracts. They don’t allow for effective management control or cost reductions and greatly limit or eliminate options to reduce costs in the future.

The following steps can help you manage service while under contract. First, implement a mandatory check-in and check-out procedure for vendors. Second, monitor the progress of the repairs closely. Third, make sure to ask questions. Find out what is being done, how long the repair will take and if there are delays find out what is causing them. If the vendor’s service engineer requires additional service expertise from the service company, it should happen as soon as possible and at the vendor’s expense.

Next, be aware of all updates, upgrades and modifications, and understand the impact it will have on your equipment. Get complete written service documentation on all activities. Remember, you have the right to any information that pertains to your equipment’s operation and/or maintenance. Many service reports will not give a detailed list of repairs that were completed, identify what went wrong or provide the number of hours spent on the repair, but if you request this information from the service provider, you will receive it. Finally, if you have work scheduled outside the terms of the contract, require authorization from the appropriate management and a new purchase order before you allow the vendor to proceed.

Make sure that the parts not included in the service contract are approved by you for quality and cost before they are installed. Also remember, it is almost always cheaper to repair instead of replacing components, so it is in your best interest to get a second opinion if a vendor recommends replacement of a part not covered by the service contract. For example, one facility was told that they would need to replace a damaged ultrasound transducer at a cost of more than $14,000. However, they discovered an ISO that provided a loaner and repaired the transducer for $850. MRI surface coils are another prime example, where vendors offer savings of $3,000 to $20,000 over the OEM replacement prices by repairing the coil. Understanding repair-versus-replacement options will allow you to make the best decision for your facility. It’s important to note that maintenance management programs from reputable firms like Thermo Asset Management Services do not – and should not – affect an existing warranty or service contract. Instead, the maintenance management program comes into play after the existing warranty or service contract expires, or the facility itself chooses to cancel its service contract. The key factor with managing service contracts is making sure the vendor knows you are monitoring and actively involved with managing the maintenance and service of your equipment.