Control Service Operating Expenses Using Equipment Maintenance Insurance

The dramatically changing outpatient imaging business environment has made it imperative for all radiology managers to continually reduce operating expenses. Pressure to reduce costs while maintaining high-quality service has never been greater. Reimbursements are being squeezed by the Deficit Reduction Act (DRA) cuts, including the multi-body part discount, while increasingly stringent minimum equipment capability standards required for coverage are being enforced by many private payors. These factors all negatively affect cash flow at many centers. One of the largest fixed and seldom managed operating expenses is equipment service expenses.

There are few alternatives for managing and reducing service costs in the outpatient imaging business. Full-service maintenance agreements are purchased at the time of equipment acquisition, often with the assumption that there are no alternatives. While these full-service agreements have their place, they are not necessarily the best solution to all situations.

As diagnostic imaging systems matured, equipment reliability has dramatically improved, as have the means to remotely service them. Increasingly sophisticated software and modular hardware have changed how service is delivered, often minimizing the need to dispatch an engineer to the equipment location. However, the terms of service contracts and warranties have increased, on average to 6 years and 16 months, respectively, locking buyers into high fixed cost scenarios. These trends make an understanding of alternatives to conventional service contracts all the more important.

Equipment maintenance management programs may well benefit the following groups:

1. Center owners looking to improve the financial health of their business;
2. Center owners looking to identify and cap service costs on their balance sheet;
3. Center owners looking to identify and fix service costs on acquisition targets.

In this article, we examine how insurance-backed Equipment Maintenance Insurance (EMI) can be an important tool for understanding and managing service expenses.

Current Outpatient Imaging Environment

Current factors in the outpatient imaging business make EMI more attractive.

Service contracts were initially developed by original equipment manufacturers (OEM) to simplify the management of their very complex and sensitive imaging systems. Service contracts have since expanded into convoluted and highly profitable programs typically incorporating many features with unmeasurable financial value bundled with the actual repair and maintenance terms.

Alternative service management programs, such as EMI, have historically been used by hospital networks seeking a means to reduce service expenses that complements in-house clinical engineering efforts. These programs allow hospitals to identify and cap service costs.

With the expansion and maturation of the outpatient imaging business, particularly in larger urban centers with a disproportionate Medicare/Medicaid population, and the additional financial pressures applied by the recently implemented DRA cuts, imaging center owners and their managers must seek more programs for cost management to complement revenue cycle management efforts. Increasingly stringent equipment standards being implemented by many payor organizations, such as CareCore, are putting additional cost pressures on already strained organizations. On the bright side, new purchases offer imaging providers an opportunity to consider alternative service programs before entering into costly multiyear OEM service agreements.

Application to Outpatient Imaging Environment

Outpatient imaging operators should assess the benefits of EMI for their organization.

This is a critical time for outpatient imaging center operators, particularly those with a high percentage of Medicare/Medicaid patients. The recently published Moran report, sponsored by the Access to Medical Imaging Coalition (AMIC), found 87% of procedures (126 of the 145) affected by the DRA cuts would be reimbursed less than the estimated cost of the exam. See Figure 1 for a list of the most significantly impacted procedures.

Equipment	DRA Payment Reduction
75635 CTA of the Abdomen	47%
70553 MRI of the Brain	42%
72194 CT of the Pelvis with and without contrast	42%
77080 DEXA bone density, axial view	42%
70549 Neck MRA with and without contrast	41%

Figure 1. The most significantly impacted procedures.

A majority of the more than 5,000 outpatient imaging centers are individually owned and operated by small physician groups. These centers have succeeded by keeping operating costs low and serving the immediate needs of local referring physicians. The inherently low cost structure of outpatient imaging would be upset if centers employed personnel dedicated to the continuous management of service contract purchases, as is the standard practice in the hospital environment. Nor can they afford to employ engineering personnel to lower the cost of servicing equipment. Therefore, the perception persists that long-term contracts are the only available and most cost-effective option for fixing long-term service costs and ensuring equipment is repaired in a timely fashion. Over time, the only means to judge the value of service contracts is the responsiveness of the service provider in keeping the systems “up.” As pointed out in a December 2006 Axis Imaging News article about EMI, actual financial value is masked in these contracts because of the lack of reporting capability and access to actual costs.

Knowledge of current service costs and the ability to use service information to continually reduce service expenses are a prerequisite to active management of operational service costs. Programs such as Equipment Maintenance Insurance are designed to address this need and clarify, rather than mask, actual service costs.

EMI programs can help outpatient imaging centers through:

• cost-effectiveness via pooled risk share-based pricing;
• quality control by using the service organizations of their choice;
• simplified budgeting via a single contract bill;
• access to historical statistical equipment performance data to guide future equipment purchases; and
• access to engineering support services to review service issues, and recommend third-party service providers and alternative parts sources.

EMI programs give outpatient imaging owners/managers the freedom to seek out and utilize the service organization of their choice. Users of EMI are not bound to a specific service provider via a long-term commitment and are free to change service vendor if service quality wanes or needs change. Decision makers in the outpatient radiology setting must be empowered, like their hospital-based counterparts, to seek out the best business solutions and not feel threatened or limited by the equipment manufacturers.

The greatest operational expenses in outpatient imaging are typically:

1. professional and administrative expense;
2. staff salaries and benefits;
3. billing expenses; and
4. equipment service expenses.

Success Criteria

All parties must work together to keep the industry healthy.

Individuals exploring the use of EMI must be fully invested in understanding their current service expenses and work with their current service providers to ensure a smooth transition to the new program. Because strong relationships are the basis for any successful business, managers considering alternative service programs must feel empowered to discuss these needs with their current providers, keeping in mind that health care equipment service providers reap a number of benefits from EMI programs—most notably, rapid payment for services rendered.

Under a successful EMI program, service invoices are typically paid in 30 days versus the 60 to 120 days that is common practice in the imaging business. Prompt payment helps the vendor’s cash flow and often ensures priority treatment over those customers that pay more slowly (or not at all!). Preventive maintenance and unscheduled repairs performed under an EMI contract are all paid at the service provider’s prevailing time and materials rate; therefore. they will be paid well for work performed.

The EMI provider should be a long term partner of the imaging services provider, understanding the current and future needs of their business and meeting with center owners regularly to understand changing needs and review the effectiveness of the program.

The following should be addressed by any successful EMI program implementation:

• The EMI program must be backed by an “A” rated insurance carrier to ensure long-term financial stability.
• Service providers and imaging service providers must work together to ensure that equipment is maintained and kept up and running.
• The EMI program administrator must have a track record in health care.
• Service responsiveness for all customers within a defined geographical area must remain uniform regardless of the service program implemented.
• All parties must acknowledge the existence of available service alternatives.
• Relationships are the ultimate glue that ensures the successful implementation and adoption of new programs.

Conclusions

While full-service agreements have their place in the health care industry, their value does not always meet the demand of the outpatient diagnostic imaging market. Outpatient imaging providers can no longer afford to have their revenue squeezed without reducing annual operating expenses. Equipment maintenance management programs such as EMI should be considered as a means to reduce operating expenses.

Health networks have recognized the importance of leveraging their buying power to ensure the best mix of service programs, thus contributing to the financial health of the institutions involved. While stand-alone imaging centers do not inherently have the same financial leverage as multicenter chains and hospital networks, EMI provides some leverage through its pooled risk sharing capability. It is equivalent to joining a service buying group that includes all other covered equipment, regardless of ownership, and can be an important tool to ensure the continuing health of the outpatient imaging business.

Dean Kaufman is the director of business development at Herman Risk Management, Rockville, Md. For more information, contact .