Maintenance Agreements 101: Key Points for Initial Navigation

Healthcare organizations tend to classify capital equipment service contracts into different categories. Service contracts may be the responsibility of the purchased services team or of the capital procurement team, or have their own division within the Supply Chain. The most mature Supply Chain departments have their own maintenance agreement division responsible for all external service agreements.

Regardless of which division is responsible for these contracts, it is vital that Supply Chain collaborates internally and with appropriate clinical staff prior to signing an agreement. We have compiled a list of key points and strategies to consider when looking at capital maintenance agreements.

Timing

The best time to negotiate service agreements for capital equipment is at the time of purchase. This is when the hospital will have the most leverage because the vendor is trying to make a sale on the equipment. Waiting until warranty expiration will put the hospital at a disadvantage, as it no longer has the equipment purchase leverage with the OEM.

Our advisors at TractManager do not recommend paying in advance. Have the coverage parameters and cost defined so the hospital knows what service costs will be for the next five years prior to signing a purchase order. Service rates can also vary considerably from one vendor to another, which may also result in a higher cost of ownership for one system versus another. This, too, should be considered at the time of purchase.

This rule also applies to rental and lease agreements. Equipment rentals are becoming more popular as equipment is rapidly changing and new technology is being released. Hospitals don’t want to get locked into owning equipment that might be out of date in three years. They would rather return it to the OEM and upgrade to newer technology.

Lease agreements are a solid option for keeping up to date with the most current technology, and they offer a great opportunity to negotiate a bundled service agreement at the same time. Too often, we see a lease agreement signed without the knowledge that the client is responsible for servicing the equipment. Lease agreements should be treated with the same consideration as capital purchases, with a service agreement negotiated upfront and typically bundled within the monthly payment.

Level of Service

A large hurdle when negotiating a service agreement is knowing what level of agreement is needed for different types of equipment. Service contracts can range from on-call with full service/parts/labor included to once-a-year preventative maintenance agreements. Service level requirements can also vary for the same equipment between hospitals due to staff training, protocols, and equipment turnover frequency. For example, endoscopes in the surgical and endoscopy suite tend to have a higher failure rate. Scopes are delicate pieces of equipment that are handled by a large number of staff (physicians, surgical/GI nurses, SPD staff, etc.), so they typically require a full-service contract — including parts, labor, and even replacement.

If a hospital is negotiating a contract renewal on existing equipment, we recommend requesting that the vendor provide the service call and usage report from the previous agreement. Vendors can also provide an estimate as to what the service calls would have cost without a service agreement and what the breakdown in parts and labor is. This can give the hospital an idea of how often and what type of service was needed on that equipment to better negotiate the next agreement.

Length of Agreement

In most situations, a multi-year service contract agreement will yield a lower annual price compared to a single-year agreement. If a hospital intends to keep a piece of large capital equipment for an extended period, then a 5–7-year agreement should be negotiated. A general standard of measure is that a service contract purchased at the point of sale should match the life expectancy of the equipment. For example, surgical drills have a life expectancy of 5 years. With a 12-month warranty included with the initial purchase, an additional 4-year service contract should be evaluated at the time of purchase.

Multi-year agreements should also be negotiated at a flat rate for the term of the agreement. A minimum increase of 3% might be required for 7–10-year agreements after the third or fifth year. However, 95% of agreements can be successfully negotiated without price escalators. Requesting a longer service contract also requires that a fair price be negotiated up front so that a hospital is not locked into paying an unfair price for a longer period. Once a fair price is determined, locking the agreement in will save the hospital in the long term.

Bundling Service Agreements

There is a wide variety of bundling opportunities in service agreements. If a facility is using one vendor across multiple departments, bundling these departments into one service agreement can prove to be more cost-beneficial over time. It is always advantageous to negotiate as many pieces at one time as possible — a larger agreement will typically yield larger savings compared to negotiating each contract individually.

TractManager often sees this in Stryker surgical agreements. Stryker’s multiple divisions will combine service agreements across power instruments, endoscopy, and electrosurgical generators. These service contracts are typically quoted separately even though they are all within the surgical department and with the same vendor. MD Buyline has successfully seen HCOs negotiate a bundled contract across multiple technologies and receive a higher overall discount. This also allows a hospital to negotiate more optimal Service Level Agreements (SLAs) and reduces the administrative requirement that comes with multiple agreements.

Third party

The number one recommendation when analyzing a service contract is to request competitive bids. There are now many third-party maintenance vendors that service capital equipment. Some OEMS have a positive relationship with third-party vendors because they will send equipment to the OEM for servicing. However, we often hear that OEMs will tell hospitals that the guaranteed response time will increase if services are outsourced to a third party. This is not always the case, and some third-party vendors will provide a comparable response time. The hospital needs to ensure that this is stated in the SLAs of the agreement.

Some OEMs will put patents or locks on the software or parts of their equipment that require them to be serviced by the OEM. Intuitive Surgical has this agreement on the Da Vinci robots so that only Intuitive can service them. There is also sometimes a concern with the source of third-party parts when they need to be replaced. Supply Chain needs to work with the clinical engineering department to determine when using a third-party vendor is appropriate and worth the potential savings. Clinical engineering works closely with all types of technology and is a vital resource when evaluating who should service specific equipment.

Replacement value

Keeping in mind the replacement value of a piece of equipment can be helpful when determining the level of service or whether a service agreement is required for a piece of equipment. Including equipment such as thermometers, pulse oximeters, and other inexpensive equipment on a maintenance agreement is typically not worthwhile because it is cheaper to replace the item if needed. Similarly, the replacement value of a larger piece of capital equipment can help determine a fair price on a maintenance agreement.

If the service agreement is going to cost more per year than it would cost to buy a new piece of equipment, then the price on that agreement is too high. If the equipment is failing so often to warrant that high a price, then there needs to be OEM staff training on proper handling and cleaning of the equipment.

Negotiating service agreements can be an overwhelming task; these considerations are meant to be a high-level guide for navigating these complex agreements. TractManager has an extensive service contract database for all types of medical technology, and our advisors have many years of experience analyzing and negotiating these contracts. Please reach out with any further questions or if there are any other techniques that have worked successfully in your facility.

Jessica Everitt, Purchased Services Analyst

Jessica Everitt is a Purchased Services Analyst for MD Buyline. She previously worked with the MD Buyline Capital team as a procurement analyst, using her industry knowledge to help clients make better purchasing decisions regarding endoscopy, surgical power instruments, robotics, and more. Jessica also has five years of hands-on experience working in hospitals and the surgical suite as a veterinary technician.

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