Reducing the Cost and Inefficiency of Vendor Service Contracts
Many organizations invest a great deal of money into purchasing and upgrading equipment. This is especially true for healthcare systems where technology is constantly changing and advancing. Hospitals and healthcare systems use highly advanced equipment to provide necessary services for their patients, but many healthcare organizations find it challenging to manage the cost of equipment maintenance and to track the many service contracts.
A Unique Challenge
The healthcare system represented in this case study is a general medical and surgical hospital with approximately 100 beds located in a rural area. The hospital owns a single parent captive insurance program domiciled in the Cayman Islands. This client owns approximately 50 pieces of equipment, with purchase of 10 additional pieces of equipment predicted in the near future. These 60 pieces of original equipment have more than 20 different service and preventative maintenance vendors, with an annual cost of equipment maintenance totaling $1 million.
As the hospital faces growing costs, a tighter budget and lower federal reimbursements, the ongoing expense and management of equipment maintenance has presented a complex challenge. The client did not have a way to manage or track the various vendor service contracts throughout the facility. They had difficulty monitoring the various agreements and were inefficient at tracking and adhering to the cancellation provisions. The preventative and corrective maintenance was also difficult to track because each piece of equipment had its own deductible. Additionally, some of the client’s equipment was not covered by a service contract at all.
An Innovative Solution
RCM&D’s Healthcare team implemented Equipment Maintenance Coverage (EMC) for the client. EMC provides comprehensive equipment maintenance solutions that reduce costs. By consolidating the current vendor maintenance contracts into one comprehensive program, EMC helped to eliminate the high costs and inefficiencies of multiple vendor contracts, while leaving the client in control of the service providers. There are no restrictions on the client’s choice for service providers, including Original Equipment Manufacturers (OEM), third-party vendors and in-house service personnel.
If the client engages an OEM or other third-party vendor for repairs, they will submit a claim for the covered equipment to EMC. EMC does not require prior approval, but suggests that the client provides notification if they expect a repair to exceed $10,000. In those instances, EMC will recommend one of their qualified partners that can provide a more cost-effective option. The total cost of the EMC program includes an aggregate deductible that is funded through the client’s captive insurance company plus a premium to cover ordinary repairs and ongoing maintenance.
A Cost-Effective Program
EMC has a network of qualified vendors that provide service and parts at reduced rates compared to original equipment manufacturers, providing immediate hard dollar savings over existing service contracts. EMC determines an aggregate deductible amount annually, calculated based on the equipment covered under the service agreement. The client pays the captive an annual premium for the aggregate deductible, which is actuarially determined and satisfies the risk transfer obligations of the captive. Claims are submitted to the captive on a monthly basis for reimbursement to the hospital. If the full aggregate deductible has not been satisfied in a year, the captive retains the funds as a surplus. This allows the captive to serve as a forum to discuss risk management as it relates to equipment maintenance.