Capital equipment represents about 20% of a hospital or health system’s non-labor spend and refers to long-lasting, durable equipment used by healthcare organizations to generate income. In contrast to consumable products, these equipment items typically surpass a price threshold set by hospitals based on their policy and other considerations.
Examples of capital equipment include:
- Ultrasound systems
- Laboratory analyzers
- MRI machines
- X-ray machines
Defining capital equipment
Typically, for a piece of equipment to be considered capital, it must exceed a predetermined price mark, which varies depending on the hospital's size, resources, and policy. A common threshold is $5,000-$10,000 for a mid-to-large health system. Given the significant price tag, there are often stringent policies and review processes in place to protect spending around capital equipment. The piece of equipment has a usable life that usually extends beyond a year, typically depreciates over time, and requires a detailed cost analysis to determine return on investment (ROI).
As capital equipment is not disposable, durability is another crucial aspect to consider when evaluating costs. A good analogy is a Keurig coffee machine and its associated K-Cup. A consumer might go through hundreds of K-Cups a year, but the Keurig itself, a much more costly purchase than a single K-Cup, is expected to last a significant amount of time and most likely has a warrantee to guarantee its function for a certain period. In this case, the Keurig represents capital equipment: long-lasting, durable, and a considerable investment, and the K-Cup is the disposable consumable that supports the piece of capital. And since capital equipment commonly dictates consumable use, it is critical that consumables are considered as part of the cost evaluation of the capital equipment.
For instance, a Keurig may not support other brand name pods or some generic brands. If the piece of capital ends up requiring expensive consumables, then the value of the capital equipment may be diminished. Total cost of ownership is a critical piece of capital evaluation and should always be evaluated when considering purchase.
Challenges facing capital purchasing
For even the most advanced health systems, capital purchasing remains a challenge, particularly in light of aggressive inflation and reduced staff bandwidth. When making decisions on capital budgets and purchases, numerous data points are needed, but a lack of transparency and access to critical data can leave health systems in the dark when navigating capital evaluations. For example, 64% of supply chain leaders say they are only somewhat confident their organization has the data necessary to make accurate capital budgets. Additionally, only 1 in 4 supply chain leaders are very confident their GPO pricing is competitive.
Hospitals and health systems lack transparency into:
- Market context
- Competitive and peer quotes with quote benchmarking
- Discounts
- Service & maintenance contracts
- Total cost of ownership
Meanwhile, they lack access to:
- Centralized equipment research
- Clinical expertise
- Decision-making workflows
- Vendor negotiation support
Strategies for effective capital purchasing
To make effective capital equipment purchases, “educated guessing” isn’t sufficient. The goal is to obtain the right piece of equipment at the right time and at the right price. Capital risk must be part of the conversation, and proactively uncovering costs before a quote from the vendor is even received is essential to budget planning. Hospitals must discover the current market landscape and compare equipment options, configurations, suppliers, and pricing data to drive strategic decision-making.
Bandwidth and staffing challenges, as well as aggressive inflation, make it more difficult than ever to unpack total cost of ownership and pinpoint savings opportunities. However, cost-conscious hospitals and health systems know that the discounted price isn’t always the bottom line and value the process of understanding the total cost of ownership to achieve well-negotiated terms and conditions. After all, a bad service agreement can quickly turn an attractive capital equipment price tag into an expensive liability.
Additionally, the needs of health systems are unique, which must be considered within the capital evaluation process. Just like vehicles, capital equipment can have multiple configurations with different price tags. Smart supply chain leaders are keen to understand these different configurations and map them to their individual facility’s needs. In many circumstances, they might not need the most expensive model, even if the supplier only included that configuration in the quote.
It is crucial to have accurate data and analytics to navigate these decisions and strategically budget for future purchases well in advance to achieve savings targets. Access to quote benchmarking, ROI, total cost of ownership calculators, and capital purchasing insights are all essential to streamlining the decision-making and acquisition process while containing costs. After all, one of the most common questions asked when it comes to capital evaluation is, how long before we recoup our investment and demonstrate a profit?
Is your healthcare organization evaluating the following?
- Peer hospital quotes with comparable beds to benchmark vendor quotes against
- Alternative supplier quotes for comparable equipment
- Service agreements, terms, and conditions
- Configurations
- Required consumables
- Speed to value
- Impact on future budgets
Having insight into the impact of capital purchases on revenue and ROI is vital. Effective purchasing strategies involve proactive research and budgeting, understanding terms and conditions, and benchmarking against comparable quotes. By utilizing aggregated quotes, unbiased market strategy data, healthcare sourcing experts, and deep negotiation expertise, organizations can optimize their capital equipment purchases and ensure they align with their financial goals.
Once evaluation is complete, it is important to ensure that targets aren’t just identified, they’re realized. Well-resourced hospitals with negotiation experts may execute and directly negotiate with the supplier internally. But group purchasing organizations (GPOs) aren't always the source of truth, and for most hospitals, a lack of resources and negotiation expertise means that it is more cost effective to leverage unbiased GPO-agnostic resources to protect against risk. They can help drive the negotiation process from initiation through vendor quote updates and contract revision without financial risk to the organization.
Ultimately, capital equipment is a significant investment for healthcare organizations, aimed at improving patient care and generating revenue. By following effective purchasing strategies and leveraging data-driven insights, organizations can make informed decisions, negotiate better agreements, and achieve savings while acquiring the right capital equipment at the right price.
