Understanding Total Cost of Ownership
August 28, 2018
By Rick McDaniel

The cost of medical devices has caused customers to realize the importance of understanding how much these devices truly cost over the life of the equipment.

At the recent AAMI conference, I proposed the definition of cost of ownership, saying that “the cost of ownership needs to be consistent in order to compare,” and that it is “the cost of what the manufacturer recommends; i.e., preventive maintenance, batteries, filters, etc.”

According to the journal Health Management, Policy & Innovation, in 2013, U.S. hospitals, on average, spent $3.8 million on supply expenses; on average, each patient admission required $4,470 of supply expenses. In order to provide patients the best care possible it is important to understand the total cost of ownership. In my presentation (summarized below), the goal was to inform the audience about the importance of “total” cost of ownership, define and present the criteria, and discuss how to reduce the cost of ownership. I also spoke about the importance of return on investment, the importance of a rigorous preventive maintenance schedule, and utilizing certified service technicians and OEM parts.

According to Wikipedia, the total cost of ownership is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system. To understand more about the total cost of ownership (TCO), Getinge engaged Healthcare Research & Analytics (HRA) to conduct primary market research to better understand the concept of TCO among purchasers of capital equipment. To do that, primary market research HRA used its panel of healthcare professionals to complete a quantitative online study. To be qualified for this study respondents had to be working in a U.S.-based practice as either a CFO/Value Access Committee (VAC) member, biomedical engineer or Operating Room (OR) manager. The participants also must be decision-makers (rating of 6 or 7 on a 7-point scale) in the decision to purchase capital equipment. In total, 80 interviews were completed, which consisted of 40 CFO/Value Access Committee (VAC) members, 20 biomedical engineers and 20 Operating Room (OR) managers.

After all the surveys were completed, HRA discovered many things about the total cost of ownership. They discovered that the total cost of ownership is an important aspect of a capital purchase decision. They also discovered that there are many factors to be considered when considering the total cost of ownership. Normally the cost of ownership is primarily defined as the purchase price, maintenance, and repair costs. On top of these factors, of varying importance, HRA reports that the cost of parts, preventive maintenance, service plans, warranty, consumables, service costs on demand, finance charges and technical training of internal engineers are other factors that are important to figuring out the total cost of ownership.

The survey also goes into more detail about additional factors to consider in the preventive maintenance contract and the warranty. For preventive maintenance, the survey talks about how labor, warranty on work done, parts typically used in preventive maintenance service, and the preventive maintenance kit cost are additional factors to consider. For warranty, the customer needs to look into the coverage, all parts, and the length of the warranty. Also in the survey, the biomedical engineers and the OR managers talked about how it is important to have certified technicians and use the original equipment manufacturer (OEM) parts in a service plan. On the other hand, the CFO/VAC members believed that both those items were not as important as the biomedical engineers and OR managers put it. The focus of the biomedical engineers and the OR managers was on equipment uptime, and that the hospital keeps their products in the best condition possible.

Overall, to simplify the concept of the cost of ownership there are four main criteria:
1. Acquisition
2. Operation
3. Maintenance/repair
4. Disposition

The important things to know about acquisition are the equipment purchase price, financing costs, installation costs, qualification costs, and cost per purchase order. The important things to know about operation are the education and training, accessories, consumables, software upgrades, supplies, operator cost, and mean time between failures. For maintenance, it is important to understand the cost of repairs, cost and frequency of preventive maintenance, service contract cost, on-demand costs (pay-per-use) or service, parts costs, in-house engineer labor costs, and same day fix rate with mean time to repair. The last thing to consider is the factor of disposition, such as the cost of disposal, storage costs, revenue from sale and auction, and write-offs.

It is not unusual for customers to focus on purchase price, however, maintenance, repair, and other costs should be considered when evaluating a product. It is important to consider the total cost of ownership because some equipment can have hidden costs in consumables, parts, and maintenance.

About the author: Rick McDaniel is the marketing manager for Getinge.