Contracting Strategies for Medical Equipment Procurement

There are three common contracting strategies for procuring medical equipment: purchase; lease; and managed equipment services (MES).[1]

PURCHASE

Purchasing involves the healthcare organisation obtaining ownership and title of the equipment outright. In this case, the buyer is responsible for how the equipment is used and ensuring that it is properly maintained. The equipment will usually have a warranty period during which time the supplier is responsible for fixing any defects. However, on-going support and maintenance of the equipment is normally contracted separately with either the manufacturer or specialist maintenance suppliers.

Purchasing equipment can be beneficial where: the equipment has a long lifespan; the buyer does not have capacity and/or systems to track assets and manage leases with each supplier; and on-going funding is limited or uncertain.

The risks associated with purchasing include: increased maintenance costs as the asset ages; new technology making the asset obsolete before it is fully depreciated; an initial high capital outlay, which may not be financially feasible; and uncertainty over total cost of ownership (TCO).

LEASE

Leasing involves a financial arrangement between a leasing company (lessor) and the buyer (lessee). It is often used where a buyer does not have much in the way of capital funds but does have revenue funds. Leasing involves less initial expense, has the potential to be tax deductible (as an operational expense), and makes it easier to upgrade equipment. Leases can be tailored to a customer's needs and can be short or long term.

Leases provide flexibility for payments to be structured to meet cash-flow considerations. Leasing can also be favoured because it passes the risk of ownership of the asset to the lessor. As healthcare facilities grow and needs change, the lessee may be able to add or upgrade technology during the lease term. At the end of the lease, if the buyer elects to return the equipment, the lessor is responsible for the disposal of the asset.

Technology solutions that could depreciate quickly should be leased to limit the buyer’s risk of being caught with obsolete equipment. Leases make it easier to upgrade or add technology solutions to meet ever-changing needs. Leasing allows buyers the ability to accurately forecast the cash requirements for equipment since they know the amount and number of lease payments required.

MANAGED EQUIPMENT SERVICES

Managed equipment services (MES) contracts outsource the provision and operation of equipment to a third-party specialist provider. The MES provider owns the equipment and provides all the necessary services to support its effective use by the buyer. MES providers have the specialist knowledge and expertise to manage the procurement, commissioning, training of users, servicing, maintenance and planned replacement of the equipment throughout the life of the contract.

The component features of a typical MES model are shown below.

MES contracts typically last 10–25 years. Instead of incurring significant capital outlays, buyers spread the costs through regular payments over the years. Payments can be tied to the supplier meeting agreed performance measures. The MES arrangement allows buyers to spread costs over the life of the contract, and facilitates long-term, sustainable financial management and planning.

MES contracts allow a buyer’s medical facilities to focus on taking care of their patients, whilst the MES supplier takes care of the technology. MES arrangements represent innovation in financial and business planning. It is sometimes expressed as a partnership with a private-sector service provider and occasionally structured as Public-Private Partnerships (PPPs). They are designed to allow governments to provide access to care, without the burden of detrimental levels of debt. They are therefore often seen to be beneficial to developing countries.

The scope of an MES usually defines requirements as a performance-based specification. This approach provides the flexibility for MES providers to use their expertise to determine the optimum operational solution in delivering the quality of service required at the most economical cost.

In a MES solution, the risk is shared between both parties. The MES provider takes responsibility for the availability, quality, maintenance and upgrades over the lifetime of the technology. This enables buyers to benefit from future enhancements and innovations and any other modifications needed to align their equipment infrastructure with changes to the healthcare environment. This approach can optimise the use of technology and can improve operational performance. MES can make healthcare more sustainable and allow for smarter capital expenditure and ongoing value for money.

MES solutions are having a growing impact on the equipment market, with contracts being awarded in a variety of jurisdictions. Although such contracts have the potential to transform healthcare equipment supply, each jurisdiction will need to adapt them to suit their own healthcare structures. As well as the UK, where the concept is most developed, MES contracts are also established in Spain and the Netherlands. Kenya has entered into one of the largest MES healthcare arrangements, involving the provision, management and servicing of medical equipment in almost 100 hospitals throughout the country, at an estimated cost of US$9m.

The Kenyan government contracted with GE Healthcare (radiology), Philips (ICU), Mindray (theatre equipment), Esteem (surgical theatre central services), and Bellco (dialysis) to modernise hospital equipment, including in intensive care, renal, and radiology units. To eliminate the costs of middlemen sales agents, the government contracted directly with the original manufacturers of the equipment both to supply the equipment and for servicing and training requirements.[2]

SELECTING AN APPROPRIATE CONTRACTING STRATEGY

The following points should be considered in deciding on an appropriate contracting strategy for procuring medical equipment:

• Duration of need;
• Frequency of equipment use;
• Evidence to support the use of technology in the country/healthcare facility setting;
• Consistency of use and required up-time;
• Condition of existing equipment and facilities;
• Total cost of ownership (TCO);
• Funding availability (revenue and capital);
• Consumables;
• Training needs (one-off or ongoing);
• Equipment support and maintenance;
• Speed of technological change, innovation and obsolescence;
• Upgrades roadmap;
• Accountability for delivery of outcomes and/or requirements;
• Availability in the market-place of different commercial models;
• Service standards and response times;
• Spare-part availability;
• Warranty cover and duration;
• Scope of need e.g. technicians to operate the equipment;
• In-house capability to maintain and service equipment;
• End of life disposal.

Many medical equipment manufacturers offer all three contracting approaches.

[1] Adapted from: http://pubdocs.worldbank.org/en/258511553620191211/Procurement-Guidance-MDI-Equipment-Buyers.pdf

[2] https://healthmanagement.org/c/hospital/news/managed-equipment-services-boon-for-emerging-market-health