This story first appeared in the August 2012 issue of DOTmed Business News

Mergers and acquisitions have always been routine in the medical equipment parts sector, but experts note a major surge in recent years. It has become increasingly evident that unless a company has a niche model that is not easily duplicated, it has difficulty competing against those with greater resources.

“When you think about it, parts are a critical component of daily operations for a service provider,” says Mark Suffridge, vice president and general manager of ReMedPar Inc., a centralized source for quality assured diagnostic imaging parts and technical support. ReMedPar acquires systems from around the world and utilizes rigorous ISO-90001:2008 certified processes to test and qualify parts before placing them in finished goods.

“It is only natural that service organizations would look to acquire or merge with parts organizations as a way to enhance their own supply chain,” he adds.

Recent mergers and acquisitions include the ARAMARK Healthcare/MasterPlan Inc./ReMedPar merger and the Philips Healthcare/AllParts Medical acquisition. Additionally, this year alone, BC Technical Inc., a large third-party dealer and servicer of molecular imaging equipment and parts, acquired three companies: Consus Medical Imaging, Xpert, Inc. and RA services, Inc.

“I am seeing service organizations buying parts companies to bring as much in-house as they can,” says Ken Smith, executive VP of sales and service for BC Technical. His company stocks around 40,000 parts in inventory.

He says the increase in acquisitions has occurred largely during the last two to four years. “When you look at who is doing the buying – for example, Philips and ARAMARK – it is about controlling the parts. Parts are a high margin business, and so if they can control those parts, they can control the cost of services.”

ARAMARK is shifting its focus from being an asset manager to diagnostic imaging and providing the services directly, so the company wants to have field engineers and parts, and Philips is doing the same thing, according to Smith.

“All of the original equipment manufacturers (OEMs) are looking for additional channels for service revenue,” adds Smith. “They are seeing the service revenue go down because of competition and pricing pressures from the economy, so they are looking outside of their core businesses. For instance, GE Healthcare is looking to service Siemens Healthcare and Philips’ equipment.”

Most often, this consolidation centers on OEMs acquiring after-market parts providers as a way to launch or expand a multi-vendor service model. Lately, independent service organizations are strategically aligning with parts organizations as an expanded offering or differentiator – creating a win-win for the service provider and the parts business, Suffridge notes.

“For example, take ARAMARK’s acquisition of ReMedPar,” he says. “Through the acquisition and subsequent integration activities, ARAMARK was able to enhance its parts supply chain, while, at the same time, creating a market opportunity by investments in ReMedPar operations, inventory, and sales to the commercial market. It is partnerships like this that will propel the industry forward.”

At the end of the day, overarching rationale behind these mergers is not exactly rocket science, according to Josh Glas, president of Adam Imaging Parts, Inc.

“Although not privy to the inside information, I think it’s fair to assume that the acquiring companies are looking at their market strategy, identifying weaknesses, and finding a suitable partner that can compensate for these weaknesses,” he says.

Looking ahead, consolidation will slow down considerably, according to Steve Cannon, president of AllParts, a company that provides replacement parts to the imaging equipment service community and stocks over 30,000 parts. Following the acquisition of MasterPlan, ReMedPar and Mesa by ARAMARK in March 2011, and the ensuing acquisition of AllParts Medical by Philips in June 2011, merger/acquisition activity in the replacement parts sector of health care has been essentially non-existent, he notes.

“We believe there will be continued merger and acquisition activity in the medical equipment service and alternate service management sectors, such as medical equipment maintenance insurance,” says Cannon.

The problems with parts

As health care technology constantly changes and evolves, medical equipment parts providers always need to be one step ahead of the game. Although a challenge, Suffridge notes that this aspect of the industry alone keeps providers engaged and excited.

“The volume of manufacturers, makes and models expands every day, and, each new system introduced creates a new parts
opportunity,” says Suffridge. “It is thrilling to keep pace with
the technical skills, equipment and processes needed to meet our
customers’ parts needs in this dynamic environment.”

But with every technological upgrade comes a new challenge For example, the availability of quality imaging systems at an economical price can be a tricky proposition for replacement parts suppliers.

“Given the acquisition of pre-owned imaging equipment is the primary source for supplementing and expanding current inventory levels, we see the possibility of increased system acquisition costs [due to] the growing demand in the market for replacement parts,” says Cannon. “In addition, having the ability to extend and expand the repair of replacement parts will be crucial to the success of replacement parts suppliers going forward.”

End users today are no longer simply looking for a solution; they are looking for a cost-effective solution that will fit within their budget. And it is for this reason that companies like DirectMed Parts LLC will always have the upper hand, according to Tanner LoRusso, the company’s sales manager. DirectMed Parts is a manufacturer and stocking dealer of replacement MRI and CT parts for GE, Siemens, Philips and Toshiba equipment.

“It is about the customers’ needs; as long as we keep providing great products at great prices, we will continue to be supported by today’s biggest service providers,” LoRusso says.

The fact that it is now easier than ever for end users to find the parts they need simply by using the Internet and vetting the applicable vendors, means that competition within the industry is rife. But Adam Imaging Parts’ Glas says customers shouldn’t be so quick to judge.

“I think one of the biggest challenges, for me personally, is communicating a clear message to customers in general that it is not wholly necessary to go to the OEMs in order to find quality parts,” he says.


Playing hard-to-get
In a bad economy, it makes sense that demand for refurbished equipment and parts rockets. Every dollar counts and facilities begin looking to alternative service providers to lower their overall cost of equipment ownership. As a result, providers have to increase their resources on the parts side. But certain parts can be harder to come by.

“The cost and availability of first generation equipment has been, and will continue to be, a challenge for health care providers and
parts suppliers,” says AllParts’ Cannon. “Given the high
cost of these systems, the corresponding proprietary parts
and very limited availability of trained engineers, health care providers will continue to rely on OEMs for the service and support of this equipment.”

Equally, sourcing parts for newer systems, particularly outside of the OEM arena, opens up another can of worms for customers looking to save money via alternative providers.

“A lot of customers buy the systems, and OEMs will sell them four to five year service contracts,” explains BC Technical’s Smith. “But the systems are so new, there are very few used systems on the market to pull parts from. And if there are used systems that are five-years-old, they are typically re-sold and not stripped for parts.”

Some industry professionals believe OEMs horde parts, making it difficult for anyone but their own contractors to service. But not all OEMs handle the refurbishment process in the same way, according to Sabine Duffy-Sandstrom, the U.S. vice president of refurbished systems at Siemens Healthcare.

“Some OEMs outsource all of their refurbishing work to a third-party vendor and some OEMS only refurbish certain imaging modalities,” she says. “Other OEMs – like Siemens -- have their own refurbished systems factory.”

Harvesting systems for parts is a key parts procurement strategy in this industry, according to ReMedPar’s Suffridge.

“I can certainly see why an OEM would find value in being able to dissemble trade-in systems for parts inventory,” he says. “The action would serve as an affirmation of the after-market parts model and go far in dispelling the common misconception that all OEM parts are ‘new’ parts.”

Along with the age of the equipment having an effect on parts’ procurement, certain components may prove a Herculean task to source due to sparse supply. Glas says that, at the moment, supplies of certain X-ray tube models are particularly running short.

“I think a lot of this is a function of the increased difficulty of acquiring quality used systems at the right price point to justify the system purchase,” he notes. “The same can also be said for flat panel detectors. I’ve noticed an increase in pricing on some of these systems, likely due to shorter supply and increased demand, basic economics.”

The Texas-sized migraines really begin when, like in the situation Glas noted, the parts in low supply are also the ones in high demand. And primarily, these in-demand parts tend to be from equipment that the OEMs are announcing as end-of-life.

“Any parts associated with endof- life statements from OEMs tend to be in low supply,” says Milind Gupte, vice president of Better Imaging Solutions, founded in 2007 as an OEM transducer wholesaler.

In 2009, the business adapted to incorporate service for diagnostic imaging solutions.

Typically, when the OEM announces something is at the end-of- life, they do a one-time order of enough parts to support it for a predetermined period of time. After that supply sells out, the inventory is no longer replenished.

“In the nuclear medicine world, people are keeping our cameras for 10 to 15 years or more,” says Smith. “They don’t have the budgets to replace the systems like you get for CT or MR upgrades, so they need to find the source to keep those systems running. So you see that end-of-life products are in higher demand.”

There is really no sure-fire way to predict what medical equipment part will suddenly be touted as the “it” component. But LoRusso advises looking out for trends.

“Any parts vendor will tell you the same thing; our equipment seems to be sold in cycles, we will go one quarter selling primarily MRI, and the next quarter CT,” LoRusso says. “It’s strange how it works out this way.”

Currently, Better Imaging Solutions is receiving more requests for back end processors for ultrasound products than any other part. According to Gupte, these components have a measurable failure rate after extended shelf life. Likewise, as full digital is becoming more of the norm, Adam Imaging Parts is seeing an uptick in requests for flat-panel digital detectors.

Some parts, however, are always in-demand, such as glassware. This is predominantly because it is a consumable. After some time has passed, tubes and other equipment accessories do fail.

“I understand the end users are regularly looking for quality alternatives to purchasing new as the cost on replacement glassware tends to be very high,” says Glas. “It’s important to be able to offer a good, tested alternative to the end users at a cost point that is extremely competitive to what the OEMs are offering.”


The impact of CMS’ preventive maintenance guidelines
Regardless of what’s hot and what’s not, medical equipment parts providers may be in for a sales boost. Last December, a directive clarified the Centers for Medicare and Medicaid Services’ (CMS) preventive maintenance (PM) guidelines, requiring hospitals to strictly adhere to manufacturers’ recommendations.

“Hospitals are being told they need to make sure their PM procedures are documented in accordance with a certain process,” explains Smith. “They need to make sure their PMs are performed by a qualified engineer and that it’s all documented. So we are not seeing a rise in parts sales or service because of it necessarily; we are seeing a rise in requests for field engineer documentation certification, or quality certification from the parts side.”

Further to this, providers are being asked for more information to help health care facilities document what is required from CMS to ensure that diagnostic imaging equipment, for example, meets the quality standards CMS is expecting.

“New CMS preventive maintenance guidelines will definitely impact the labor component of imaging service organizations, based on recommendations on PM frequency and standards,” says Cannon.

Prior to the guidelines’ update, companies like BC Technical were ISO-1345 certified, which meant they already had a process in place to document field engineers’ training quality. The only difference, Smith says, is that companies are now seeing requests for this kind of service escalate due to the update.

“I am sure a lot of the OEMs and larger companies were prepared,” he says. “When you get down into the smaller, regional service providers, they will be struggling because they don’t have the manpower or financial resources to put the infrastructure in place to provide the level of training, documentation or quality control that’s being required. Infrastructure and resources are huge when trying to provide this level of reporting and services.”

As the amount of labor expended on PM performance increases, the thought is that more stringent PM requirements will lower the overall frequency and severity of equipment failures, according to Cannon.

“If this philosophy proves true, then there could be a shift of parts being replaced proactively rather than reactively,” he says.

DOTmed Registered DMBN August 2012 - Parts Companies

Names in boldface are Premium Listings.
Domestic
Doug Anderson, DGA Medical,LLC, AZ
John Marquez, Therapy Remarketing Group Oncology Equipment, CA
DOTmed Certified
David Trogden, Ultra Solutions, CA
DOTmed 100
Bruce Smith, Medical Systems Technologies, CO
DOTmed Certified
Juan de la Cruz Martinez, HIQ Solutions Group, FL
Ed Ruth, Managed Medical Imaging, FL
DOTmed Certified
Tony Zas, Millennium Medical Systems, FL
Michaelle Serrano, Oxford Instruments Service, LLC, FL
Larry Sprague, Imaging Resources, GA
randy cox, MRI Technical Services, Inc., GA
Tim Hansen, Medeco, ID
DOTmed 100
NORMAN RANKIN, GENESIS MEDICAL IMAGING, IL
Volodymyr Markevych, Vomark Technologies Inc., IL
Joe Zaremba, Advanco Medical Systems, MO
Eric Smith, SOS Medical Imaging, NC
DOTmed Certified
Joe Brock, Troff Medical, NC
STANLEY GOLD, AAAMEDICALDEAL, NJ
Melissa Geske, Axiom Imaging Solutions, TX
CARLOS sanchez, ion,llc, TX
Norine Carlson-Weber, Alpha Source Inc., WI
DOTmed Certified
DOTmed 100
Paul Zahn, Shared Medical Services, Inc., WI
DOTmed Certified
DOTmed 100

International
arleen nombrado, iview medical supplies, Philippines
Dan Kongsted, Cervius Medical, Denmark
Tajinder Singh Bhatia, MRI Services, India
ali yousefi, tajhizgistar, Iran