Replacing high value equipment can be expensive - but thinking of the future now shows that worthwhile savings are possible, once total cost of ownership has been assessed, writes Jeremy Knight.
Set against the ever-increasing pressure to improve the quality of care while making efficiency savings, the need to replace expensive equipment such as MRI and CT scanners has the potential to cause some big headaches in trusts.
On top of the purchase costs, these items are expensive to maintain – up to 10 per cent of the purchase costs per year –and because of continuous enhancements in technology can quickly become less efficient and effective than newer models.
The National Audit Office has warned that the cost of replacing “high value” NHS equipment in the next three years will be £460m, but it is not beyond imagining that there could be some potential savings to make on this figure.
Our analysis shows there are indeed significant savings to be made by taking into account the entire costs involved with owning the most expensive and crucial pieces of equipment and comparing a range of financing options. For example, leasing three CT scanners consecutively over 15 years can cost £57,000 less than buying one CT scanner outright. Multiplied across just half of the 426 CT scanners currently used in the NHS in England the potential saving is more than £12m. The total could be even greater, as this calculation does not include the additional savings to be made in better throughput and productivity, or the lower maintenance costs.
However, this is only achievable through developing a long term technology plan, which takes into account the full range of financial tools available.
The big picture
At the core of better management of equipment costs is the concept of total cost of ownership, which should form a bigger part of most major procurement decisions. It is an approach that has the potential for immediate savings on new equipment, making budgets go further, and ultimately benefiting patients and taxpayers.
The savings of £57,000 per CT scanner mentioned above is calculated based on the difference between buying one CT scanner outright for cash at a cost of £500,000 and keeping it for 15 years, and financing three CT scanners (a new replacement every five years) via a fair market value (FMV) lease over the same period.
An FMV lease is simply a lease with an assumed residual value where you can buy, return or extend at the end of term. It can provide improved cash flow and means that the risk of the technology becoming outdated is transferred to the lessor.
The savings are derived from warranty savings incurred every fifth year – typically 10-15 per cent – lower periodic cash outflows due to the FMV lease structure, and potential replacement equipment cost deflation, assuming a modest cost of capital for the 15 year ownership.
Leasing is by no means the solution for all types of equipment in the NHS – beds, for example – but high-tech items like CT and MRI scanners should be the first to review against total cost of ownership principles. Although small in number they have some of the highest costs per item and therefore the greatest potential for easy savings.
Total cost of ownership is not a new idea, but has been underused in the NHS, perhaps because of the constraints of public sector tendering processes, the division between capital and revenue budgets, and difficulties planning in uncertain times. There is also an array of financial tools available to procurers, including cash, hire purchase, leases, services contracts, bank lines and outsourcing, not forgetting charitable donations.
Practices are showing some signs of change. We are seeing more and more attention being given to evaluating the provision of core and non-core services with the aim of creating greater efficiencies, particularly within innovative foundation trusts.
For those aiming for efficiency savings, perhaps in the region of 5-10 per cent, there has been a realisation that although capital expenditure may be less than a tenth of total spending, if managed better it can have a huge impact on overall efficiencies and productivity.
On a basic level, we have found there are things which can be done to maximise the technology cost-to-benefit ratio. Some parameters must be set to ensure buy-in and acceptance around contracts from management and clinicians at all levels.
Data and awareness is the most important step towards developing a technology strategy that builds in both desired clinical outcomes and total cost of ownership. Yet service contracts within individual trusts are often not stored centrally or with summaries, so data awareness, unsurprisingly, is low. There may be multiple contracts with multiple vendors and varied terms and conditions attached that are difficult to track effectively.
Centralising this process is crucial to avoid expensive decisions being taken without the bigger picture in mind and to Monitor end-of-term options on financing and contract arrangements. If proper notice is not given (typically 180 days) there may be penalties to pay or lock-ins for perhaps another year of payments.
During analysis and planning, it is also important to remember that someone needs to manage contracts over the entire life of the asset, and therefore a process needs to be put in place to pass on responsibilities should staffing change.
This longer term approach also allows a range of financing options to be built in to help integrate with pathways and changes to processes.