Makers of diagnostic imaging equipment have found a way never to say goodbye. Although sales of big-ticket imaging devices have withered, manufacturers are growing roots at hospitals by expanding maintenance and consulting services.
The latest agreements are so intimate that equipment manufacturers might become part of the family. Or, in some cases, like the in-laws you can't get rid of.
It's a big change. From the mid-1980s to the early 1990s, equipment sales were soaring and companies stopped at locking up lucrative maintenance contracts for their own machines. For service, hospitals turned to a web of manufacturers, independent firms and in-house engineers.
Now imaging equipment manufacturers want to take care of an entire health system's equipment needs.
Their new offerings, known as multivendor service and asset management, have grown to 10% to 15% of manufacturers' service revenues from almost nothing 18 months ago. Manufacturers predict the offerings could exceed 40% of their service revenues in five years with large health systems the primary target.
Generally, multivendor service means manufacturers receive a set fee to maintain all a health system's diagnostic imaging equipment with their own engineers and subcontractors. Laboratory and biomedical technology often are included, too. The contracts typically run three to five years.
The Regional Medical Center at Memphis (known locally as "the Med") handed over maintenance for more than $100 million worth of patient-care equipment to Picker this April. Rick Smith, vice president of support operations at the 365-bed hospital, said unsatisfactory preventive maintenance logs and safety checks persuaded him to hire experts.
"Hospitals need to realize that the `big H' is here. That's called healthcare reform," Smith said. "If they were shocked by economic pressures in the first four years of the Clinton administration, wait till they see the next four."
In the only known capitated agreement, Iselin, N.J.-based Siemens Medical Systems and Allegheny Health, Education and Research Foundation in Pittsburgh are practically blood brothers. Although the companies won't discuss the details of their 10-year contract, Siemens said it won't make any money if Allegheny loses patient volume.
All told, about 750 hospitals and clinics have signed up with manufacturers for multivendor service.
An unknown subset of those actually are classified as asset management contracts, including Allegheny, because various consulting services have been added to maintenance. Does your health system need another computed tomography scanner? Will a used piece of equipment do the job? Which medical facility should house it? Fledgling asset managers Siemens, Picker International and GE Medical Systems are gathering data to help you decide.
Manufacturers would like to go further. GE is looking for a customer to outsource service for just about all equipment but elevator shafts. Siemens executive Thomas Miller believes manufacturers won't make the most of their ability to help health systems control costs until they also act as overseers of medical-technology use and assessors of future community needs.
Despite the lofty ambitions, most contracts still are set up so manufacturers make more money if they sell more equipment.
To consultant Philip Ronning, this is like handing your daughter's boyfriend the keys to her chastity belt. "Despite his best intentions, he's not to be trusted," said Ronning, a former hospital executive who now heads Technology Risk Management Group, Mammoth Lakes, Calif.
To acquisitions expert William Wooldridge, teaming up with manufacturers is smart business. Manufacturers know about new technology before the rest of the market. And as global companies, they have more resources than independent service firms to pull off multivendor service and asset management, said Wooldridge, chairman of MedEcon Services, a Louisville, Ky.-based buying group that represents 1,000 hospitals.
MedEcon and Picker recently signed what is believed to be the first buying-group contract for asset management. As MedEcon's exclusive asset manager, Picker will help new regional systems write five-year plans for consolidating and upgrading medical equipment. It also will be an equipment supplier-although not exclusive-to MedEcon. "Obviously, there is a conflict because we're going to be pushing Picker (to our members) for capital equipment," Wooldridge said. "But we think it is in the best interest of our facilities. We have a landmark deal."
The first national asset management contract was signed in 1995 by for-profit chain Columbia/HCA Healthcare Corp. and GE. It forced Picker and Siemens to launch their own programs quickly. The MedEcon contract could give Picker an opportunity to strike back, Wooldridge said.
Cleveland-based Picker provides multivendor service at 22 sites; Waukesha, Wis.-based GE claims 700 sites, including Columbia hospitals and clinics.
Manufacturers already dominate the estimated $2 billion business of servicing imaging equipment with a 65% market share, industry sources estimate. Independent service firms and hospital departments make up the remainder.
Full technical service is a much bigger pie. It amounts to as much as $50 billion in U.S. healthcare spending annually, according to one industry estimate.
Independents are miffed by the developments. They spent years pitching the value of asset management against hospitals' belief that only manufacturers could maintain their delicate equipment. Manufacturers are glomming onto asset management now because independents were gaining ground, said Bruce Cree, operations vice president at independent service company InnoServ Technologies, Arlington, Texas.
InnoServ has doubled its asset management accounts every year since its first contract in 1991 to a current total of 70. It provides multivendor service at an estimated 320 sites.
Today almost every major healthcare system is considering a single contract for at least multivendor service and often broader asset management, Cree said.
Despite the rush toward this version of one-stop shopping, a segment of the market is avoiding manufacturers because of the potential conflicts, said Paul Chopra, president of COHR. The Los Angeles-based outsourcing firm reports providing asset management at about 125 healthcare sites and multivendor service alone at about 400 sites.
Chopra thinks asset management is a good idea for any hospital, although larger facilities will see the most value. He expects up to 90% of healthcare providers to sign such contracts in the next five years.
One manufacturer, Philips Medical Systems, agrees with independent firms' objections to manufacturer-sponsored asset management. Asset management should be vendor-neutral, but maintenance management is another story, said John Bills, director of strategic customer support for the Shelton, Conn.-based company.
"Most hospitals don't have very sophisticated mechanisms for tracking assets or dispatching service; that's where we can help them," Bills said. "Is consulting the product of the future? If we take a lesson from the computer industry, this business will go the same way. They once sold boxes (hardware) and today a box is something that hangs onto the end of the network."
Philips declined to identify the number of hospitals at which it coordinates maintenance.
Multivendor service can spare hospitals significant expenses.
The Med pays Picker a set fee of $1.9 million annually to service its patient-care equipment, less than half its previous $4 million budget.
Lovelace Health System in Albuquerque, N.M., saved $220,000 this year by replacing its patchwork of service contracts with a sole-source Picker agreement, according to Lovelace radiology administrator John Ervin. It pays Picker a flat monthly fee to work with diagnostic imaging equipment itself or hire subcontractors. Including incidentals outside the contract, Lovelace's maintenance tab for imaging will total $680,000 this year, 24% below its previous budget, Ervin said. As part of the three-year agreement, Picker placed a site manager at Lovelace to oversee maintenance.
Acquisitions consulting under the contract is offered through a third party, Jannx Medical Systems of St. Louis, in deference to concerns about bias. Even so, Ervin said he would do his part of the analysis as always.
He credits Picker know-how with cutting downtime for normal repairs in half, but he added the asset management piece still must prove itself.
"I just feel comfortable having someone in-house who understands the world of maintenance negotiating contracts for me," Ervin said. "I'm a radiology administrator, not an engineer."
GE is supposed to save Columbia a small fortune by taking over service for diagnostic imaging and other clinical equipment at the chain's nearly 350 hospitals. The five-year contract also made GE the capital-acquisitions consultant, productivity guru and sole vendor of CT scanners and magnetic resonance imaging machines for Columbia (April 24, 1995, p. 21).
GE referred questions to Columbia headquarters in Nashville, Tenn., where officials didn't respond to requests for information on the contract's progress. Neither company has publicized the contract's value or the estimated savings under it.
Manufacturers' guarantees of huge savings in multivendor service-15% to 20% is routine-only demonstrate how grossly they inflated previous charges, charged Ira Tackel, an engineer at Thomas Jefferson University Hospital in Philadelphia. "What we're seeing is the result of 10 years or more of manufacturers enjoying limited competition and charging whatever they want," an outraged Tackel said. He runs the biomedical instrumentation department of Thomas Jefferson and a shared-services company with maintenance contracts at 12 hospitals.
"There's a perception that outsourcing is less expensive, but I don't think that's necessarily true," Tackel said. "We've been extremely successful at insourcing because we have had the critical mass."
Mark Streety, who heads a maintenance subsidiary of the Denver-based Catholic Health Initiatives system, encourages hospitals to first evaluate the cost of adding in-house capabilities.
His company, Novare Services, started selling multivendor service and asset management in 1991. It now has 106 contracts, of which 80 are asset management. Two-thirds of its customers aren't members of CHI.
Manufacturers are novices in the field, Streety said. If GE hadn't bought National Medical Diagnostics of Warrensville, Ohio, it wouldn't be able to pull off its Columbia contract, he said. Picker built its service arm by acquiring Linc Equipment Services of Lincolnshire, Ill.
It's a classic case of "keeping up with the Joneses," Streety said. "All of the rest of the original equipment manufacturers reacted to GE."
Many independent firms also are newcomers to asset management. Serviscope Corp. of Wallingford, Conn., for example, began as an alternative to Philips' repair staff. Now it's writing a five-year technology plan for U.S. Health Corp., Columbus, Ohio. InnoServ decided to position itself as an asset manager after it acquired MEDIQ Equipment and Maintenance Services in 1994. It recently recorded a $2.2 million charge to its balance sheet to carry out the transition.
"The field is so volatile, I would ask, `To what extent are you the vendor financially stable enough to manage our business?"' warned Chopra of COHR, which has bought 15 service firms in the past three years. The company is planning a secondary public offering of 1.9 million shares after netting $16.2 million in a February initial public offering of 2 million shares.
Consultant Anthony Montagnolo advises thinking twice before signing a five-year contract unless its "out clause" can be exercised easily. The big problem is hospitals don't know the true cost of service, said Montagnolo, a vice president at ECRI, a technology assessment firm in Plymouth Meeting, Pa. "If you don't know accurately what your current cost burden is and what correct utilization is, you don't really know if you're overpaying," he said.
Ill-conceived deals can leave hospitals helpless.
"Many organizations coming off contract management discover they don't own their own equipment data," said Tom Lindl, vice president at U.S. Counseling Services, Brookfield, Wis., a maintenance consultant and contract manager. "Usually information systems used to manage operations aren't even theirs. Not only can't they do long-term planning, they don't have a functioning system either."
Companies are in a race to establish themselves as asset managers. The next two years of contracts will set the stage for the next decade of competition, observers said. Market growth, however, could last six years.
Siemens appears to be molding the most cutting-edge agreements.
At Allegheny, Siemens is paid a per-discharge fee to make certain the six-hospital system has the radiology equipment necessary for good patient care. The capitated rate is expected to cover equipment investments as well as maintenance and labor. As part of the deal, Siemens has employed Allegheny engineers. The companies declined to discuss their agreement further.
In addition, Siemens said it has negotiated about 20 three- to five-year contracts for multivendor service with a more traditional payment scheme.
Rearranging profit motives is vital to repairing the troubled U.S. healthcare system. "Equipment manufacturers would like to make more money when machines never break, never need options, when a test can be simple and easily performed," said Thomas Miller, group vice president for imaging systems at Siemens. "Under the traditional paradigm, companies make more money when equipment breaks, when multiple exams are done and diseases are complicated."
A comparable movement hit other suppliers two years ago. For example, Abbott Laboratories is helping health systems standardize procedures for intravenous therapy in return for long-term supply contracts. And Allegiance Corp. is sharing the savings from teaching Duke University Medical Center doctors to use supplies more efficiently.
Healthcare can do without companies that just make sales, said Smith, who was recruited to the Med after eight years as a hotel executive. "I hate the word `vendor,"' he said. "I don't use it, and I won't let my staff use it. We have developed partnerships."
An opponent of outsourcing, Smith said he won't use Picker as an asset manager after five years, but their business relationship will continue. "The education is what we need, and they understand that-they're in it for the long haul. The service they give us now will always make us a Picker house," he said.
"Hospitals don't know a damn thing about customer service. They have to realize the support elements are what's going to make a difference in competition," he said
-Scott Hensley contributed to this story.