Buyer beware: The time to negotiate a service contract is at the point of sale
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Buyer beware: The time to negotiate a service contract is at the point of sale

August 14, 2019
Parts And Service
From the August 2019 issue of HealthCare Business News magazine

By Rebecca Gayden

Purchasing equipment can take a bite out of a health care organization’s budget, especially if the expense is unplanned.
Skipping the service agreement until the initial warranty expires may seem like a good place to cut costs, but this is no area to skimp on. The savings your organization gains in the short-term can cause budget headaches down the road. Why? Because the time to negotiate the best deal for a service maintenance agreement (SMA) is when purchasing the equipment itself.

Keeping track of these agreements is just as important as when you purchase them. For example, one hospital found during an audit that though its service was fully insourced, it was also using service agreements from several OEMs (original equipment manufacturers). After creating a centralized reporting structure, among other process improvements, the hospital found $1.1 million in savings opportunities its first year after the audit.

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Service agreements are especially important for diagnostic and imaging equipment, which are among the most expensive pieces of equipment a hospital purchases. In addition to the diagnostic services they provide patients, imaging equipment generates revenue, and when not working, needs to be replaced or repaired quickly. Each day that passes without one is another hit to the budget.

This issue is not new. The hidden costs of SMAs misaligned with cost efficiency has always been a problem, but as hospitals face more budgetary constraints, it’s beginning to surface as an area to find savings. Many hospitals don’t realize the untapped budget-savings potential of SMAs because it can be difficult to keep tabs on the multiple and varied contracts that keep equipment running. Hospital acquisitions can compound the problem because the merged entities may not be working with the same tracking systems.

Here are two ways to gain control of these costs:

Purchase SMAs at the point of sale to leverage price negotiation
Why would a hospital choose not to purchase an SMA when investing in capital equipment such as a new magnetic resonance imaging (MR) machine? Unplanned purchases of expensive imaging equipment can cause constraints within the system, and keeping their costs as low as possible by not also purchasing a service agreement helps lessen the budgetary pain — for the year the warranty is in effect. But over the lifetime of the equipment, the short-term savings don’t add up.

Negotiating an SMA at the end of the warranty gives the supplier the advantage because the organization has already committed to the capital purchase. The discount for purchasing an SMA at the POS will always be the highest. After that, suppliers begin reducing their discounts. This rule is also true when a purchase is made utilizing a GPO contract.

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