By Tom Watson

The costs associated with medical equipment services are rising, drawing heightened attention from hospital administrators and leaders. Over the past three to four years, hospitals have faced numerous challenges: the COVID-19 pandemic led to unprecedented hospitalizations, stretching critical care capabilities, staffing, technology, and supply chains to their limits. Consequently, capital equipment purchases were restricted to absolute necessities, with funding redirected to personal protective equipment and infection control solutions. This situation led to significant staff shortages, particularly among nurses, resulting in increased fatigue and burnout that took a toll on healthcare organizations.

Vendors were also affected by the pandemic through reduced capital revenue and the inability to implement usual price increases on services. While the worst of those challenging days are behind us, the repercussions continue to resonate. Medical equipment service support has, in many cases, increased as efforts were made to keep equipment operational for longer durations.

Vendor revenue trends and service cost dynamics
Estimates indicate that typical profit margins for medical technology vendors range from 20% to 30%. According to the Bureau of Labor and Statistics, the Consumer Price Index (CPI) for healthcare was projected to increase by 3.3% in 2023, signaling a return to pre-pandemic economic trends. The costs of both medical technology and the services associated with it are on the rise. Vendors are introducing new pricing structures and revenue opportunities, including both price hikes and the offering of additional coverage options that can enhance revenue streams.

Years ago, service and service revenue were a cost center for medical vendors. However, they’ve evolved into significant revenue centers complete with their own profit and loss statements and accounting systems with expectations to generate substantial income for the vendor. Vendors now offer six to eight levels of service solutions, each providing multiple optional services within each level. This evolution presents customers with a wider array of choices tailored to their clinical needs. It also grants vendors the opportunity to implement diverse pricing strategies, resulting in larger margins on services rendered. Service costs within healthcare organizations have traditionally remained sizable and largely unmonitored, lacking a centralized strategy to ensure the correct level of service is being procured. Equally important is assessing which technologies can be supported in-house without incurring unnecessary risk in terms of service repairs.

Strategic timing for service contracts and equipment purchases
Decisions regarding service must involve a coordinated and intentional review of patient volumes, procedure mixes, backup technology for system downtimes, potential revenue losses, and the impact of patient rescheduling. If patient volumes are low, downtime may have a lesser impact. However, in high-volume scenarios, the effects can be significant, especially in the absence of backup systems capable of accommodating patient loads.

Like value analysis workflows for evaluating and purchasing medical equipment, assessing service also requires collaboration with clinical teams and in-house engineering to account for all relevant variables. Hospital teams need a structured and detailed approach to manage service contracts, keeping track of start dates, end dates, service history, and utilization volumes. Planning and making informed decisions well in advance of contract renewals is critical for operational success.

The increasing trend of mergers, acquisitions, and partnerships within the U.S. healthcare market has created opportunities for consolidating service planning and pricing considerations. Many organizations have started to unify all contracts with a single vendor under a master service agreement. At the same time, efforts are being made to align contract renewal dates, simplifying contract management and decision-making processes related to service. This consolidation also allows for a thorough review of service levels to ensure that the appropriate service level is being maintained or determine if an adjustment is needed. In some instances, it may be beneficial to consider switching to at-risk models for aspects that can be efficiently managed through in-house services.

This approach also paves the way for preparing and planning for the replacement of outdated equipment approaching the end of its useful or service life. By coordinating this effort with annual capital budget planning, hospitals can foster a more controlled process based on data rather than emotional decision-making.

Innovative service options: Remote monitoring and non-obsolescence
Some vendors have also expanded their service offerings, introducing a variety of service levels with numerous optional inclusions and exclusions. Some of the more advanced—and costly—options include real-time remote monitoring to track system performance metrics and identify component-level degradation before it leads to system failure. Another notable option seen in certain technologies involves non-obsolescent features, where the contract includes hardware and/or software upgrades or refreshes during the agreement term. This can allow for operational expenses covered by the service agreement to upgrade or even replace a system entirely with a newer generation model as it becomes available, often resulting in lower costs compared to traditional agreements.

When establishing long-term service agreements, it’s crucial to include clear performance metrics that the vendor must meet or exceed, tailored to specific technologies and organizational needs. Common performance metrics might include guaranteed on-site response times, prompt parts delivery, and others. While many contracts mention these expectations, they often lack meaningful penalties for failure to meet them. A worthwhile penalty would be a substantial discount on the subsequent service agreement, rather than a mere extension of coverage.

As you can see, rising complexity and costs in medical equipment services present both challenges and opportunities for healthcare organizations. Balancing cost, service quality, and operational efficiency is crucial as hospitals navigate evolving dynamics. Adopting a strategic, data-driven approach to service contracts and exploring consolidation and alternative service models can provide potential cost savings but require careful evaluation.

Ensuring clear performance metrics and penalties in service agreements is essential to guarantee value and meet the needs of modern healthcare. Optimizing service coverage and costs is a strategic endeavor that demands attention, enabling healthcare organizations to manage complexities effectively and achieve financial sustainability.

About the author: Tom Watson is principal spend advisor at symplr.