Back office relief:
 Automating the arcane world of device warranties

The constant, complicated stream of administrative documents flooding hospital back offices involved in tracking warranty credits, fulfilling purchase orders and replacing equipment can pose significant financial risks, but new software aims to streamline traditionally outdated processes.

The tracking of warranty credits can get lost amid hospital and health system's back office workflow, which some have described as a “black hole”—archaic, overly manual and tedious.

Disorganization and administrative burden can compromise care quality and cost health systems precious time and resources as well as hefty penalties amounting to millions of dollars a year.

As many organizations work to coordinate care, reduce overhead and cut costs during the gradual shift to value-based payment models, they are looking to automate and integrate supply-chain processes across the continuum, including the little-known world of device warranty credits.

“The issue of tracking warranties of medical devices can be complex, difficult to manage and a liability 
for hospitals,” said Jesse Schafer, explant control manager for Mayo Clinic, which is one of the few systems in the country that has a full-time employee dedicated to tracking replacement medical devices and passing the credits on to Medicare, he added.

Errors in Medicare billing have left systems liable for millions of dollars. HHS' Office of Inspector General recently audited Mount Sinai Hospital in New York, New York-Presbyterian Hospital and Abbott Northwestern Hospital in Minneapolis, citing $41.9 million, $14.2 million and $8 million, respectively, for alleged overpayments stemming from Medicare billing errors.

Part of the issue relates to tracking warranty credits for replaced medical devices. The hospital is financially accountable for available warranty credits—even if it did not pursue them. Investigators said that many hospitals regularly did not report manufacturer credits to the CMS and often neglected to request those credits from the manufacturers in first place. The legal repercussions can be significant, healthcare experts said.

Certain companies have written off tracking warranty credits altogether. In medical-device developer Abbott Laboratories' 2016 annual report, the company said that “product warranties are not significant.”

Reserves that medical-device manufacturers keep on hand to pay warranty claims have been falling in recent years, making them more financially vulnerable, Warranty Week's recent analysis of 152 medical and scientific equipment companies found.

Collectively, reserves fell by $91 million in 2016 to 
$625 million, their lowest level over the past 14 years, the study concluded.

It's a complicated, fluid process that requires multiple levels of coordination, experts said.

“It comes down to a visibility issue and connecting the dots between departments,” said Peter Casady, co-founder and CEO of Champion Healthcare Technologies, which co-developed the automated software platform Warranty Tracker with Mayo Clinic to help providers track warranty claims and credits. “Providers are siloed within their departments and that is something that has to be overcome."

When devices such as pacemakers and defibrillators malfunction or are recalled, manufacturers may refund part or all of the cost of the replacement based on how old it is. The CMS requires hospitals to pass the credits on to Medicare, which pays for the surgeries of replaced devices. Yet, providers can keep the credits if they are less than 50% of what the hospital paid for the replacement device, which can complicate things.

In addition: only certain devices are eligible for credits; electronic health records are not equipped to track warranties; vendor requirements for claims vary by device; and vendor turnaround can take months, requiring coordination across a number of departments within a hospital.

“This impacts all health systems,” Schafer said. “It's a very resource-intensive process and requires a proactive approach to tackle it head on.”

Cardiac rhythm implants such as pacemakers and defibrillators account for more than half of all Medicare overpayments, but warranty credits could also involve cochlear implants, neurostimulators and orthopedic implants, Schafer added.

The Warranty Tracker, which is in the pilot stage, is a centralized platform that aggregates the logistics workflow—estimating the eligibility of the return, tracking when the manufacturer receives the device and notifying on the credit outcome. The reason for the explant is logged in the EHR, the EHR sends an on-screen notification to return the device to the vendor, it sends automated alerts when the 50% threshold is reached and reconciles vendor credit reports with hospital records. This minimizes risk, reduces liability and creates a more efficient process, Casady said.

Providers are also using new tools to keep them informed of safety warnings and recalls when they are purchasing equipment and devices. Tracking such warnings can help health systems improve safety measures and save time and money by avoiding potentially dangerous devices, especially as organizations look to merge and scale up, said Michael DeLuca, executive vice president of technology and client services for supply chain technology company Prodigo Solutions.

Updating back-office tasks such as warranty tracking poses cultural hurdles, because transitioning from long-standing processes that require new infrastructure, training and IT support can be difficult, said Eric Wilson, a vice president at purchasing tech company Basware. “Many just stick with manual processes because it's what they know,” he said.

Coordinating back-office work can also prove challenging as systems consolidate. Jeff Friant, vice president of finance at Edward-Elmhurst Health in Illinois, said that before Edward Hospital and Elmhurst Memorial Healthcare merged in 2013, their capital acquisition processes varied—some were on paper and some were digitized. It partnered with OpenMarkets, whose software helps hospitals and suppliers create a better equipment procurement process, to standardize equipment across the organization and align its data, which allowed the organization to be more proactive, Friant said.

“Oftentimes with the old materials management system, we wouldn't know what was being purchased until it got on our desks for approval, and at that point it hampers the negotiation process,” he said. “It raises visibility not just with our materials management but within our leadership as well—it's not as much of a black hole. Having similar equipment also allows us to reduce variation and perform better.”

But all this transformation is more than rolling out new technology. It requires a cultural shift across the organization, Friant said. “I would describe it as a multiyear journey to get where we are today,” he said. “You need everyone to buy in to a collective culture.”