Taking the Mystery Out of Your Cost of Service To Understand Your Cost-to-Value Ratio and Savings Opportunities

 

By Stephen Taylor

What is the cost of service to maintain all of your clinical equipment?

That’s pretty easy to answer, right?

Now let’s get real — what is your actual cost of service?

Chances are you aren’t counting the hidden costs of your program in your cost of service.

But you’re not alone. In fact, far from it. It’s our experience that the majority of hospitals and health systems today underestimate the true cost of service for their clinical equipment maintenance.

We recently worked with a large urban health system to determine its actual cost of service. Our client thought their cost of service of $18 million — the contracted cost of their existing vendor for clinical equipment maintenance. We determined the total cost of service to be $38 million, once we uncovered all of the hidden costs that hadn’t been considered in the original figure. Obviously, it was a real eye-opener for our client.

If you don’t have a true, accurate picture of your cost of service, it’s virtually impossible to understand your cost-to-value ratio so you can efficiently and effectively monitor, plan, and manage your expenditures as well as discover savings opportunities.

Why Cost-to-Value-Ratio?

In absence of an industry standard to evaluate spending, we at TKA use a cost-to-value ratio to even the playing field for cost comparisons and help clients determine strategic ways to reduce their clinical equipment maintenance program spend. We use the cost-to-value ratio as a benchmark to evaluate spending and identify savings opportunities.

A cost-to-value ratio is easily calculated:

Cost of Service ÷ Asset Value = Cost-to-Value Ratio

Most hospitals and health systems we’ve worked with are in the 10% cost-to-value ratio zone, though we’ve seen as high as 12.8% and as low as 3.5%. A 10% cost-to-value ratio is too high — indicating a high level of inefficiencies and many opportunities to reduce costs. We’ve found the sweet spot to be a cost-to-value ratio of 5%. It’s the optimal cost-to-value ratio we strive for when working with clients to achieve savings in their clinical equipment maintenence programs.

That brings us back to the challenge of understanding your cost of service. If your cost of service figure isn’t accurate, it will skew your cost-to-value ratio — and limit your ability to achieve those much-needed savings.

How to Calculate Your Actual Cost of Service

If you think your cost of service is just the cost of your clinical equipment maintenance program provider, think again. It’s so much more!

Your true cost of service includes many “hidden” costs hospitals and health systems typically don’t consider, including:

  • All service contracts for your clinical equipment, including imaging, sterilization, and more
  • All time and materials charges
  • All labor costs for employees who contribute to clinical equipment maintenance, including Environmental Services and Central Sterile Supply
  • Everything not covered by your current clinical equipment maintenance program provider, including extra charges for after-hours service, for example

While it’s easy to see the total picture of your cost of service once you consider all contributing elements, it’s much more difficult to bring it into focus with actual, accurate figures. It’s a process that can take several months to dig into. But the investment of time and effort more than pays off with uncovering those hidden costs and gaining a true understanding of your cost-to-value ratio — so you can then evaluate all costs to find the savings.

Using another real-world client example, we recently worked with a health system and found they had 8 vendor service contracts for their 8 linear accelerators in 8 different hospital locations — contracts that were independent of the vendor who was providing their clinical equipment maintenance. Those 8 contracts were all individually negotiated, signed, and executed, despite the fact that they were for the same health system. Each was for about $140,000 per year, or $1.12 million, which our client also wasn’t including in its cost of service calculation. Once we identified the opportunity for savings, we recommended renegotiating those 8 individual contracts to better benefit the health system — to ensure the health system was getting what it needed but at a much more effective price.

It goes without saying that in today’s healthcare environment, all savings matter — because incremental costs add up to a big impact on your bottom line.

The cost-to-value ratio is as much a service model as an operational one. It’s the best tool to understand how to drive down total costs — by taking the mystery out of the actual spend.

What would you do with savings you could achieve in your clinical equipment maintenance spend?

 

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At TKA, we believe in a smarter way to transform your medical technology program to give you the performance and peace of mind you need.
We strive to exceed expectations, and thrive on accountability and transparency, giving you the confidence to trust that your program, your goals, and your patients are all in good hands. That’s the smarter way. Partner smart with TKA.