Let’s Resurrect Medical Equipment Service Contracts

By Al Hahn

Although I haven’t written about it for quite a while, I have been consulting in the market for services of medical equipment steadily for many years. Some of the things that I have observed concern me greatly. In the U.S., we have seen turmoil and dramatic changes for a few years. The initial cause was a backlash against years of unchecked cost escalation for healthcare. This resulted in t legislation and a fundamental market shift to outcome-based medicine. The search for cost cutting resulted in some good things, but many were shortsighted. I include a widespread bias against service contracts in this category. Service contracts have been targeted by hospital administrators, insurance companies, biomedical technicians, and asset managers as OEM rip-offs that can be eliminated to deliver multimillion-dollar savings. I would like to challenge these assertions and sound a call for an industry counterattack. Let’s start with a review of each challenger and her/his position.

Hospital Administrators

Of all the attackers, administrators are probably the least deserving of my ire. They have been subjected to relentless pressure to control costs. For a while, this caused over-correction. Lawyers and other non-doctors took over some healthcare providers and usurped medical judgment with a fiscal iron fist. Service contracts became taboo at some institutions. More recently, public pressure is restoring a more balanced approach. Overall, administrators have been trying to do their jobs and may be forgiven for falling prey to bad advice along the way, often from the following groups whose motives are more self-serving.

Insurance Companies

While I certainly am not against the concept of insurance, I find their attacks on service contracts disingenuous at best. These companies have excellent sales staff and they typically call high in the hospital with the tempting opportunity to save “millions.” Their proposition is that hospitals cancel all their service contracts and use time and materials services only when needed. In return for a premium that is considerably lower priced than the canceled contracts, the insurance company promises to reimburse the hospital for their T&M costs. Since they often use the OEMs’ service, they claim that the quality of service will not suffer. The assumption at the heart of this approach is that OEMs are overcharging their customers on services and that there is plenty of room for savings—enough room for the insurance company to make some money while sharing the savings with the hospital. Is it any wonder that harried administrators fall for this? I find it particularly hard to believe that an insurance company could add any value to this situation. What do they know about high-tech services? Their proposition is preposterous at heart.

Biomedical Technicians

Many hospitals have their own in-house technicians, commonly referred to as biomeds, short for biomedical engineers. These groups also have been threatened by cost-cutting measures. It is no surprise, then, that they are reaching out for ways to hang on to their jobs. Unfortunately, they sometimes also attack service contracts as a target of opportunity to provide savings that justify their existence. Since they are usually more competent as technicians than as business people, they may fool themselves into believing that their costs are lower than they really are. If they haven’t worked for an OEM service organization, they may not be aware of all the costs required to deliver quality service in multiple locations. Services require tremendous investments in inventory, technical support, training, and other infrastructure elements. Since biomeds usually provide first-call type service and are backed up by the OEMs, they don’t have the same cost burdens. My position is that we are brethren and should partner instead of opposing each other.

Asset Managers

These companies range from industry giant GE Healthcare to smaller consulting firms. Their proposition is that they can manage technology products and services better than hospitals. This is not an entirely bad proposition. The motives of some, such as GE and other OEMs, however, are in question. Certainly they have a vested interest in replacing their competitor’s products and services with their own. Some of the consultants may not really understand the service side of the business very well. In any case, they sometimes join the anti-contract crowd and muddy the water for others.

Why Service Contracts are Good for Customers and Vendors

As part of my consulting work, I often audit the value of service contracts. What I have found is that the typical contract is at least 25 percent less expensive than the same services purchased at time-and-materials rates. When I add the information that contract customers report considerably higher customer satisfaction levels and a corresponding 20 to 25 percent higher vendor loyalty ratings, contracts can be seen to be positive for vendors and customers alike. While it may be true that T&M customers spend less on services, they often postpone services on non-critical problems, allowing users to suffer with less than optimal performance until the product has a serious breakdown. This can cause productivity problems and ruin the return-on-investment that justified the expenditure on products in the first place. My conclusion is that contracts, in fact, provide excellent value to customers, but that we are not very good at articulating the value. I have another concern. Contracts are a commitment from customers that allows vendors to invest in service infrastructure. If contract revenues erode too far, quality of service is sure to deteriorate.

It’s Time to Counterattack

This column is a call to medical service/support providers, particularly their marketers, to launch campaigns to resurrect the much-maligned service contract. I still believe it represents a win-win for the market and should not be abandoned. I am concerned that some vendors have given up the fight. This is a sales and marketing problem generated by market shifts that can be handled. It is a perfect opportunity for talented service marketers to demonstrate their own value to their organizations. I personally have worked with several companies to orchestrate initiatives to reclaim their contract base and can testify that it is very achievable. Give me a call or drop me an email if you want to talk about it.