Cover Story: The Third-Party Phoenix – Choosing the right third party

The Third-Party Phoenix: A multitude of reputable third parties have sprung from the ashes the recession left behind.

How can you ensure you’re choosing the right one?

Medical Dealer Magazine | December 2012 | Third Party Phoenix

When a hospital refocuses its internal processes away from an OEM-based service model, two things can happen: a redoubling of efforts to develop its internal biomed department, or searching out independent service organizations (ISOs) to fill in the gaps.

But with a variety of such options available, the vetting process can become lengthy and sometimes unrewarding.

As sales of new equipment declined post-recession, the market for medical equipment service “witnessed a sudden spurt in demand,” and refurbished equipment sales “registered encouraging gains in several regions, including the U.S. and Europe,” according to an April 2012 report from the market research firm Global Industry Analysts.

Procurement of refurbished systems became a common — and even preferred — practice in those regions, driving growth in the service market.

To say that health care purchasers have embraced the third party – equipment, service and parts included – is an understatement. The paradigm has shifted wholly. Even manufacturers are following along. Many are now refurbishing their own equipment or offering their own iteration of third-party, multi-vendor service contracts.

From the ashes of a postrecession economy plagued with uncertainty over health care’s future, a phoenix has emerged: Purchasers have embraced the third party, and more options are available than ever before. No longer does the dominant opinion of ‘refurb’ conjure images of “Velcro, duct tape and Krazy Glue,” as it once did for a surgeon Medical Dealer interviewed for a 2010 Success Story.

But when a hospital chooses to go third party, the decision is not as simple as merely flipping their chosen provider the keys to the met-aphorical car. A variety of unique challenges can dictate the level of success a hospital or health group will have in third-party service contract relationships. Recognizing what they are and how to address them often ensures a greater chance of success, and longer-lasting, mutually beneficial relationships.

1. Flexibility

As the senior vice president of sales for the Michigan-based Block Imaging, Dave McAndrews is tasked with building such relationships, often from the ground up. The first thing to focus on, he says, is flexibility. If you don’t pick a service organization that can grow in the ways that your organization is growing, he says, that’s the first sign that you might not be properly matched.

“There’s no one-size-fits-all,” McAndrews says. “We [work] with the facility based on their need; based on what they have decided to invest internally in. One of the hallmarks to how do you choose the right third-party service organization is ‘What’s my end goal?’ And is my end goal today going to be my end goal in five years?”

Karen Waninger, Director of Clinical Engineering at a large heath network in Indiana, concurs. She says it’s imperative to work with an ISO willing to create a flexible contract that will accommodate changes in regulatory, financial, and patient care demands. “That means the provider may need to be able to offer additional services for a fair price increase, or less service and a corresponding price drop.”

Technology is one of the major factors that dictates the success of an institution, says retired biomed Frank Magnarelli. If hospitals don’t realize its central role, they run the risk of operating against their own interests.
“Hospitals have not realized how insidious technology has become,” Magnarelli says. “You cannot do a single thing in a hospital today if you lose your technology. I’m not talking just IT. Nurses used to do blood pressure and temperature on a patient; very fundamental stuff. Now it’s all automated.

“Lose those machines and your hospital comes apart,” he says. “Lose your CT, you’ve got to stop scheduling surgeries. It all backtracks. And I think hospitals don’t realize that they’ve got to think beyond the machine.”

2. Matching equipment needs and expertise

Whether out of necessity or ircumstance, McAndrews says, there are some hospitals that haven’t had to make major capital buying decisions in as long as the last three or four years. Some may opt to take all their service in-house, including their parts procurement and their aftermarket maintenance.

Yet most hospitals continue to outsource what McAndrews calls “the heavy modalities”: PET-CT, MRI, high-end CT, and digital cath labs.

“With those four, there is a serious reticence to go into just having the biomeds take care of those because of the relative cost of service and the relative cost of parts,” he says. “Modalities like X-ray, RF, even much of the nuclear – people are much more comfortable with moving that [to] in-house biomed.”

That’s where the third-party service vetting comes in. Waninger says she expects third-party service providers to show “appropriate minimum education and training for anyone working in our facility,” and for more complex devices, “evidence of training in those specific areas.”

The “heavy modalities” only remain heavy generally for about the first five years of their product lifecycle, McAndrews says, before those systems come onto the secondary market. Servicing them then becomes easier because, after a while, parts availability increases as well—and a provider has to have access to replacement parts for the system that needs service.

“Really, at the end of five years, the likelihood of being able to get a good third-party or secondary market service contract is very high,” McAndrews says. “Then it’s just a matter of selecting someone to service it for you wholly or to help partner with your biomeds...and that’s where a lot of the savings can be gained, is on equipment that’s on that part of [its] lifecycle.”

What hospitals need to ask, he says, is how long their equipment has been on the market, whether there are third-party companies with the ability to service it, and what the benefits are to keeping that service contract in-house versus taking it outside.

“That question gets answered by a sub-question: How many of these do I have?” McAndrews says. “If someone has five Toshiba CTs in their network in one county, then absolutely, getting a biomed who can work on those five can save you $500,000 a year.”

3. Managing risk

Just like a professional sports team that must consider the long-term impact of players’ health, production, and the cost of comparable alternatives when inking contracts, the details of a long-term service and support contract “can either eat you and maim you from a financial standpoint or they can go on working merrily for years and years,” McAndrews says.

A good service partner will do what can be done to keep things running smoothly.

“We know that we have to bring something to the table that gives you the best return on investment that you can have,” he says; “or it has to take a complex piece of the pie away so you don’t have to deal with it.

“There are people who just want it to work and are not interested in taking any of the risk and want to make sure that if it goes down, they have someone to yell at until it gets back up,” McAndrews says.

“The third-party service comes in at just a tier below that: You understand that the manufacturer is not the only one who can do this.”

Magnarelli once took his hospital off contracts entirely, and found that he had “a lot of trouble with a number of the manufacturers...who didn’t want to lose their fat service contract money.”

“I sat with them, and I said, ‘Here’s the deal. You can either go on time and materials with us, and if you do that I will guarantee that I will only use you as a service provider. If you choose not to go on time and materials, I will go on time and materials with your competitor. They didn’t want to risk a third party working on their equipment.”

4. Lowering cost, maintaining level of service

“A hospital is a giant assembly line,” says Magnarelli; “it’s just not linear.”

That’s why he believes the most important thing someone can sell a hospital is reliability.

“Not ‘we fix it cheap,’ but put in the systems and the procedures to minimize breakdowns,” Magnarelli says. “I think too many people are focused on fixing it cheap. After you’ve done the setup costs and everything, if you have to cancel a case that you’ve started, you probably lose $7,000. All the labor that went into setting it up, [and] nobody’s looking into this piece. Everybody’s focused on making it cheaper.”

There’s no question that a hospital will save money by going with a third-party service provider over an OEM; the trouble comes in making sure that that non-OEM provider can provide a comparable level of service at that lower cost.
“People have come to us from both sides of the equation,” McAndrews says, “from manufacturer contracts, and people who have come to us from other service organizations.”

The former often believe they are being taken advantage of by contracts he describes as “long-term,” “ironclad,” and “almost punitive in nature.”

“They don’t feel that they’re getting the level of service that they’re supposed to get,” McAndrews says. “They’re being charged a premium and they got locked in for a fiveor six-year service contract.”

The latter, he says, are customers from other third-party companies who have been displeased with their prior experiences for any number of reasons—engineers being engineers and not salespeople; wildly fluctuating prices that vary based upon the needs of a smaller business; salvag-ing parts from one system to keep another running.

“Especially in those types of situations, people can feel like they’re being taken advantage of,” McAndrews says, “because if that mom-and-pop-shop service company is hard up for cash, all of a sudden the price of what they paid X for is up exponentially because the service company is trying to survive.

“In situations like that, people are capable of some interesting things,” he says.

“They certainly want to keep their costs down by avoiding the field servicemen having to go out,” Magnarelli says.

5. Making the pieces fit

In many ways, hospitals today are patchwork operations: imaging departments, purchasing departments, a slew of outside clinics that may or may not fall outside the umbrella of the “mother ship hospital,” McAndrews says.

There are also service-side patchwork operations, he says, where providers of varying skill sets, responsibilities, and objectives create pockets of strength and weakness—and all must work together for the benefit of the same hospital client. McAndrews says there are “a ton of difficulties” associated with managing these variables, “and they all come back to the basics of human nature.

“I know from a providing service standpoint there is no company in the country, GE and Philips and Siemens included, that can provide completely saturated service for every single medical imaging user in the country,” he says.

“It just can’t happen, which means that you have to have support and working relationships with a multitude of good-quality groups, and know who those good-quality groups are and who they are not.”

Waninger says evaluating all aspects of a third party company’s reputation – from both customers’ and employees’ perspectives – can go a long way. “Note the need to go well beyond the sales representatives, and even cut through the service management level. The real answers will come from conversations with the front line employees, those who have to try to deliver what was promised. Feedback from other customers is good, as long as you have the choice to talk to any customer and not just a few selected ones,” she says.

McAndrews recommends that purchasers find partners who will accept responsibility for the risk associated with managing their own contracts, engineers, and replacement parts—and who will be able to put aside other differences for the goal of making things work with other third-party providers whenever necessary.

As hospitals have “gobbled up” and assimilated imaging centers, provider groups, and even other hospitals in order to create new revenue streams and get hospital-priced service out to imaging centers, McAndrews says, they have created “a big dispersion of what mix of equipment is on a hospital system’s books.”

“If a hospital is GE and they have all GE equipment and they hire GE biomeds, that’s all well and good, but if you have equipment at freestanding centers that you’ve just acquired that is Philips or Toshiba or Siemens, that’s a different deal,” he says.

Most OEMs offer multi-vendor service contracts, McAndrews says, and will accept their competitors’ equipment under their multivendor service contract—but are they good at working with each other? And the more they aren’t, what does that mean for your institution?

“That line to the manufacturer I would believe is very important,” Magnarelli says. “On the ultimate end, patients are tied somehow to this; diagnoses are tied to it. To cut that corner is not a good idea.

“If I were a third-party person trying to get to relate to a company— and I realize that I’m oversimplifying it—one of the things I would point out is that their name is on the machine,” he says. “If it keeps breaking down, that chief of radiology is going to say, I’m going to go with another manufacturer next time around. When it fails, your name is on the product.”

That name-brand recognition cuts both ways, however, McAndrews says—especially among third-party providers looking to make a name for themselves in the service business.

“Our goals are the same as yours,” McAndrews says. “The better job we do, the less we have to come out. There’s a direct correlation between our goals and your goals.”