From the August 2016 issue of HealthCare Business News magazine
Outside of hospitals’ capital and supply costs, service contracts are the next line item that can have a significant effect on overall life cycle costs.
With equipment maintenance increasing 2 percent to 3 percent annually, service is a substantial expenditure for hospitals. However, negotiating these service contracts can be difficult and confusing. The following are the most common questions MD Buyline routinely receives related to negotiating service contracts and understanding how to find the best and most effective equipment support.
1. Are service contracts negotiable?
Service contracts are always negotiable. When reviewing maintenance agreements, we consistently find additional dollars on the table and often recommend that our members consider other levels of service. This could include recommending a time-and-materials-based contract when it is appropriate, or recommending no service contract in situations where the hospital’s size or type of technology indicates that the biomedical department can sufficiently service the equipment.
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Additionally, when committing to a service contract, especially if it is for more than one year, we recommend including a limit to the maximum increase per year. The current standard is the Consumer Price Index, or market basket increase, less 1 percent, which translates to price increases of 1.5 percent to 2.25 percent per year. However, in some situations, hospitals may find including a fixed cost for the term of the agreement works better for their purchasing scenarios. Another key factor is negotiating annual payments on a multiyear agreement rather than paying in full up front. This allows customers to maintain leverage should service quality or responsiveness be an issue.
2. When should service contracts be negotiated?
Negotiating the service support contract at the point of sale offers the best opportunity to find savings. Service contracts purchased later can be 10 percent to 20 percent higher than at the point of sale. Additionally, negotiating after the purchase of a system can significantly reduce leverage. A multiyear service contract will provide additional value because these contracts are typically priced lower. With a multiyear contract, customers should be sure to negotiate paying on an annual basis and include the option to change contract levels depending on the performance of the system, or renegotiate price depending on the quality of service.