The New Math of Value-Based Capital Budgeting: Determining the Right Technology

When it comes to capital planning, many health systems are learning that total cost of ownership and clinical effectiveness are closely linked.


“Value” is the new common denominator in healthcare. Its emergence has been driven by the need to reduce costs and improve quality of care—two major forces shaping the ever-changing healthcare market.

When it comes to capital planning, many health systems are learning that total cost of ownership and clinical effectiveness are closely linked. New technologies and procedures have changed the way we treat patients, allowing for quicker and more accurate diagnoses, as well as more successful therapies.

But progress isn’t free. Increasing upfront technology costs have forced payers to more closely scrutinize reimbursement plans, with the dual goals of decreasing costs and encouraging quality. These policy changes, primarily driven by the Centers for Medicare & Medicaid Services (CMS), have shaved already slim profit margins, forever changing the way capital equipment is evaluated and acquired.

Once you’ve decided to invest in a therapeutic solution, determining the right system or configuration you need is key to calculating ROI and measuring patient outcomes. This means asking the right questions.

Have You Weighed Every Option?

Often, multiple technologies can perform the same procedure. One example is tissue ablation.

Tissue ablation is defined as removing or destroying biological tissue from the body in clinical areas such as cancer/tumor, cardiac, ophthalmology, urology, gynecology, and orthopedics. These combined applications make up one of the industry’s most rapidly growing markets, with therapeutic benefits that include shorter surgical times, shorter recovery times, lower risk of infection, minimal damage to healthy tissue, less blood loss, less pain, and shorter hospital stays.

Tissue ablation consists of evolving technologies such as light (laser), radio-frequency, ultrasound (HIFU), microwave, and cryo-thermal. Determining the right option means matching the right technology to your service line.

TAKEAWAY: Promised therapeutic benefits are realized only when the technology meets your organization’s requirements.

Are You Scrimping On Value-Added Tech?

Although additional features increase the price, more diverse systems offer the promise of generating more revenue. For example, cardiac MRI and CT software options add $100,000 to $150,000 to the cost of a system. Under APC 5573 (Level 3 Imaging with contrast), cardiac MRI is reimbursed at a rate of $656 per scan.

TAKEAWAY: For a hospital with a program that can absorb the provision of additional services, adding a reimbursable procedure creates potential for a very good return.

Or Are Your Eyes Too Big For Your Plate?

Lithotripsy is a frequently performed procedure in the U.S. Multiple technologies are currently in use, but Holmium lasers are the most common. Pricing for these systems ranges from $45,000 (20- to 30-watt systems) to $200,000 (100- to 120-watt systems). Systems in the 20- to 30-watt range have a break-even point of approximately 55 procedures per year. Though higher-wattage systems offer the potential to perform a wider range of procedures, the break-even point for such systems is more than 100 procedures per year.

TAKEAWAY: If your service line is not ready to scale, a smaller initial investment may generate higher returns.

How Gracefully Will This Technology Age?

Technologies such as surgical lights and tables have a life expectancy of 15 to 20 years. These are mature technologies, and typically don’t face challenges with obsolescence. Flexible endoscopy scopes, on the other hand, have a limited life expectancy of 3 years, due to rough treatment, high usage, and multiple cleaning cycles. Health systems should lock in their negotiated discount for several years in anticipation of replacing the scopes. Likewise, constantly advancing systems such as MRI, CT, or ablation may be superseded by new technology in just a few years.

To protect against obsolescence, facilities should negotiate a requirement that the vendor reveal any plans to introduce a new-generation system or a significant upgrade to the current platform over the next 18 to 24 months. As a condition of purchase, the vendor and buyer should agree on a plan to upgrade and/or replace the existing system with the new release if this occurs in the timeframe noted above. One option is a trade-in value equal to the cost of the obsolete system, minus 1 percent of the original purchase price per month in use, toward the purchase of the new system.

TAKEAWAY: Providers should be forward-looking, assessing where a technology—and its market—may settle in the next few years.

The Bottom Line

The concept of value should enter the discussion at the first thought of acquiring a new technology and should remain top of mind throughout that process. Only by considering qualitative costs and quantifiable measurements of care can sourcing be defined as strategic.


Dennis Matricardi, MS, SM(ASCP)DLM

Clinical Analyst

Service Line: Laboratory, Pharmacy

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TractManager’s Purchased Services program helped a health system in the Northeast save $11M on imaging and biomedical service agreements.

The Challenge: The medical equipment market in the U.S. exceeds $8 billion a year. Providing service and maintenance for the complex equipment found in today’s hospitals is an expensive proposition. After spending millions of dollars on sophisticated imaging equipment …

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