Reclaiming Operating Margin: How Equipment Sharing is Changing the Paradigm of Capital Planning
In a report from Moody’s, the median hospital operating cash flow margin fell to 8.1 percent in 2017, the lowest it has been in over a decade.
Top-line revenue is also being impacted. Without ways to cost-effectively extend operations, many hospitals are losing once-profitable services like surgery and diagnostics to physician-owned outpatient facilities.
The need for innovative approaches to cost cutting is becoming increasingly critical, especially for health systems seeking to maintain profitability while continuing to expand their competitive position in the market by spending on new clinical programs and digital engagement platforms. With services performed in the operating room (OR) accounting for almost one-third of healthcare spending, improving operating room efficiencies can be a key strategy for increasing both top-line revenue and operating margin.
And one of the largest costs in any OR? Purchasing and maintaining equipment. Due to a lack of data on equipment utilization, hospitals often over-purchase. This results in compounding equipment maintenance costs, which can be as high as 20 percent of the purchase price, as inventory expands and equipment ages.
Basic accounting practices within a health system also have unintended consequences, leading to a bias for hospitals to request more equipment than they need. Individual hospitals within a health system operate on separate profit and loss statements and their performance is rooted in maintaining a positive operating margin. Their profitability is impacted by renting equipment, but not necessarily by making capital equipment purchases. Those dollars are allocated by the health system and can also be used for long-term maintenance contracts with the manufacturer. Therefore, leadership at each facility is incentivized to decrease rental activities, an operational expense, but not their overall inventory of equipment. A common strategy for avoiding rental costs is simply to purchase more equipment, instead of finding ways to use owned equipment more efficiently.
At the same time, it is not uncommon that one facility will request a laser, while the exact same laser sits unused at another sister facility. Capital dollars are allocated separately for each individual facility, and this means that when executives are considering the expansion of a service line or buying equipment for a new surgeon, they tend to think only about what exists in the four walls of their own hospital. While this can result in problematic over-purchasing, there is a greater opportunity cost that comes from restricting surgeons to practice only with the equipment in their facility. Patients are increasingly opting for treatment at hospitals that offer robotic surgery, seeking faster recovery times from minimally invasive procedures. By making this equipment available to any surgeon in the network, hospitals can attract new patients and expand the impact of their investment.
Components of an equipment sharing initiative
An equipment efficiency initiative is a data-driven approach to equipment management that breaks down siloes between facilities and improves access to equipment, while simultaneously decreasing the overall inventory of assets within a health system. An equipment efficiency initiative can help hospitals to meet the following goals:
- Demonstrate how often hospital equipment is being utilized instead of relying on subjective or anecdotal information regarding equipment capacity. According to a study conducted by GE, the average utilization of equipment is pegged at an anemic 42 percent
- Quantify and reduce total rental activities across the network by using network-owned assets that are sitting idle
- Reduce capital expenses by sharing equipment system-wide instead of buying multiple units of the same equipment across facilities
- Decrease the administrative time dedicated to scheduling equipment for cases, while standardizing how equipment is managed across the health system
The initiative is focused around three areas: tracking equipment utilization for smarter resource allocation, deployment of cross-hospital asset sharing, and capital planning that maximizes the usage of existing equipment before purchasing new units. This approach enables hospital systems to buy fewer redundant units, reduce rental expenses, improve access to best in class surgical assets and grow surgical case volume by removing equipment constraints at each facility.
Getting started with an equipment sharing initiative
Many health systems are beginning to develop equipment efficiency programs. One such example is UPMC, which has a centralized depo for shared patient care equipment, having invested in building out a distribution network across their health system. Other hospitals have implemented Real-Time Location System (RTLS) programs that leverage RFID chips to track the location and utilization of equipment. There are platforms that rely on the electronic health record (EHR) to log utilization – manually with nurses entering the beginning and end time for cases or via a completely automated system – and then manage equipment sharing, either with a proprietary distribution system or working with a third party. The last category are health systems working with a third party to do both – handle the automation of equipment tracking with the EHR and the logistics for sharing equipment across the network.
We are approaching an era in healthcare where, for the first time, technology and clinical innovations allow for a reduction in costs, without the resulting reduction in the quality and delivery of care. Equipment sharing is the perfect example of this trend. By taking a more strategic approach to operationalizing equipment, health systems can meet the need of providers and the hospitals within their network, at the most affordable price.