Four Ways to Free Millions of Dollars Trapped in Your Equipment

by Brian Harms, Eric Jordahl, Kenneth Kaufman, and Mark Sedlmeier

July 2016

Four Ways to Free Millions of Dollars Trapped in Your Equipment 2 © Copyright 2016 by General Electric Company and Kaufman, Hall & Associates, LLC

The relentless demands to fund new strategies and drive organizational growth make it imperative for healthcare

leaders to find new ways to generate more capital from operations and access new avenues for raising capital. A large amount of operating expense and capital dollars are trapped in fixed assets, equipment assets in particular, and this promising cost-reduction and capital access opportunity has received far too little attention to date.

The evidence is clear. Although the cost of medical and diagnostic equipment has doubled since the mid-1990s, average utilization of those assets is approximately 40 percent.1 While idle, equipment incurs large and unnecessary costs related to staffing, operating, maintenance, and financing.

In addition, organizations often purchase equipment they might be better off leasing or lease equipment they might be better off purchasing, both of which can add significant hidden long-term costs. Importantly as well, inadequate equipment maintenance or keeping equipment past its useful life, which occur in many organizations, can impair the financial performance of the equipment, hurt quality and diminish competitive positioning.

Solving the fixed-asset problem yields savings and can address capital spending needs into the future, including equipment needs.

Highlighted here are four ways hospitals and health systems can achieve this objective. A case example illustrates the approaches, which resulted in $46 million of identified capital savings for a hospital system over a seven-year time frame. The Sidebar provides overview information on the initiative.

Identifying and Redirecting Trapped Capital Example

The five-hospital $1+ billion health system had three objectives related to imaging equipment: achieve and maintain modernized equipment; improve safety and customer satisfaction through high-quality technology assets; and deliver specific operational savings to fund equipment acquisitions.

The hospital system worked with GE Healthcare consultants, who examined every aspect of the system’s equipment mix, age, site, utilization, and other factors. The assessment included interviews with executives to learn their goals related to equipment, and with physicians, managers, and technologists to learn how they use and want to use technology assets. The assessment also included 200 hours of observation to watch how the hospital system’s nearly 150 pieces of imaging equipment were actually used and scheduled, and their outputs, such as scans delivered to radiologists and primary care physicians.

The hospital system provided the consultants with data related to: labor cost; the age, location, financing, and maintenance cost of current equipment; and equipment utilization.

Based on industry benchmarks, the hospital system’s total radiology expenses were in an acceptable range of 4 to 6 percent of their total costs. Labor, supplies, and maintenance costs were on the high side, however, while IT and equipment investments were low. This information signaled the possibility that the organization had excess equipment capacity, creating extra labor costs, and that it was deferring capital equipment expenditures. With older equipment, utilization declines due to increased equipment down time, and service expenses increase.

1 GE Healthcare proprietary research, 2015.

Four Ways to Free Millions of Dollars Trapped in Your Equipment 3© Copyright 2016 by General Electric Company and Kaufman, Hall & Associates, LLC

The dark blue line represents the system’s overall imaging capacity hour to hour. The distance between this curve and the lower light blue curve, which tracks actual imaging use, is the “efficiency opportunity.” This is the amount of capacity that could be removed from the system without affecting access objectives or quality. The organization’s capacity was twice as large as the “ideal” capacity based on actual use.

In-depth analysis of each piece of imaging equipment showed that the efficiency opportunity could be achieved through “right-sizing” equipment capacity systemwide. Of the current inventory of approximately 150 imaging devices, about 25 specific devices were duplicative or under-utilized to the point where they could be retired without any adverse impact to patient satisfaction, customer flow, or hospital revenues. Their utilization rates were 5 to 25 percent, and each device had a “sister” unit with sufficient available capacity at the same hospital.

1. Optimize Equipment Use The first place to look for trapped capital is the organization’s current equipment use. Review of utilization data indicates that most organizations have significantly more capacity with technology and imaging equipment than warranted by demand.

The vertical bars in Figure 1 illustrate the average daily number of images in emergency, inpatient, and outpatient settings of the example health system. The spread of bars across the X axis, representing time of day, shows that most of the imaging utilization came from outpatient appointments during regular business hours (8 a.m. to 4 p.m.).

400

0

350

300

250

200

150

100

50

EfficiencyOpportunity

0 2 232218 201614128 1064

OutpatientInpatientEmergency

CapacityIdeal Capacity

“Open for outpatient appointments”

Average weekday room activity and capacity hour to hourNumber of images

FIGURE 1. IMAGING UTILIZATION AND CAPACITY ASSESSMENTSource: GE Healthcare

Four Ways to Free Millions of Dollars Trapped in Your Equipment 4 © Copyright 2016 by General Electric Company and Kaufman, Hall & Associates, LLC

Moreover, most of the imaging services were duplicated in all five hospital locations, despite close proximity between some of the hospitals. Figure 2 illustrates system-wide machine utilization by specific type of imaging equipment, including computed tomography (CT), magnetic resonance imaging (MRI), nuclear medicine (NM), positron emission tomography (PET), ultrasound, dual X-ray absorptiometry, interventional radiology (IR), mammography, and X-ray. Capacity was available for all types of equipment with the exception of PET.

Excluding the high and low outliers, current equipment utilization rates (the lighter bars) averaged about 50 percent.

FIGURE 2. SYSTEM-WIDE MACHINE UTILIZATION: CURRENT SITE AND RIGHT-SIZEDSource: GE Healthcare

The darker bars indicate the “right-sized” utilization rates following removal of the 25 assets described earlier. With fewer pieces of equipment, average utilization rates increased to about 60 percent (again, excluding the outliers).

Imaging devices are not small, inexpensive pieces of equipment. With better correlation of patient utilization, available equipment, and equipment utilization, capital trapped in unneeded equipment and related expenses could be eliminated. By retiring the 25 devices, the hospital system could trim nearly $5 million in total maintenance expenses. Additional savings could be achieved through labor efficiencies, as described next.

Four Ways to Free Millions of Dollars Trapped in Your Equipment 5© Copyright 2016 by General Electric Company and Kaufman, Hall & Associates, LLC

peak utilization was selected because it was most likely to yield the majority of capacity and efficiency opportunities.

Figure 3 illustrates the results. During the 200 hours of observed time, a patient was not in the room 47 percent of the time, meaning staff was idle during this time. During the 53 percent of time when a patient was in the room, 5 percent of staff time (10 hours) was used for non-essential activities that could have been accomplished before the patient arrived in the room – for example, entering patient information or describing the procedure.

Only 48 percent or 96 hours of the 200 hours were being used productively. Cross training on equipment, which would increase labor efficiency, would reduce total labor costs by $13 million over seven years.

2. Adjust Labor Allocation The second place to look for trapped capital is labor costs. Hospitals typically assign technologist staff in an imaging department based on the number of equipment units rather than utilization levels. This means that if an imaging device is working at 40 percent of capacity, the technologist assigned to that device also is working only 40 percent of his or her capacity, but with 100 percent of his or her costs allocated to the department.

Looking closely at how technologists work with imaging equipment is helpful. GE Healthcare consultants spent a total of 200 hours observing 360 scans in the rooms where CT, MRI, NM, ultrasound, and X-ray modalities were used during the organization’s primary scanning period between 8 a.m. and 4 p.m. Monday through Friday. This period of

.

100%

47%

53%

41%

360 scans observed 200 hours

5%7%

41%

Distribution of time in CT, MR, NM, US, and X-ray modalities observed

Totalobserved

time

No patientin room

Patientin room

Non-essentialactivities

Necessaryactivities

Scan

FIGURE 3. LABOR PRODUCTIVITY ANALYSISSource: GE Healthcare

Four Ways to Free Millions of Dollars Trapped in Your Equipment 6 © Copyright 2016 by General Electric Company and Kaufman, Hall & Associates, LLC

3. Optimize Service Contracts and Financing To the extent that organizations have under-utilized technology assets, the maintenance service contracts associated with those assets can be retired along with the equipment. It’s common for organizations to have multiple service contracts with numerous manufacturers or third-party service vendors for a given 100 pieces of imaging equipment. Beyond creating management-of-contract challenges, this situation makes it exceedingly difficult to achieve lower prices and standardization of service level.

For the example hospital system, consolidating from multiple service providers to one or two service providers was estimated to yield total savings of $4 million for radiology equipment and $1 million for non-radiology equipment over seven years. Savings would result from improved prices and decreased downtime for better-serviced equipment. Similarly, consolidation of IT providers would reduce interoperability issues and improve standardization and pricing, resulting in an estimated savings of approximately $1 million.

The hospital system historically owned most of its technology assets and held equipment assets past their useful life. This “bias-to-own” approach may be appropriate for some technologies, but for many types of equipment it results in a portfolio of outdated and uncompetitive technology assets with high ongoing costs. To maintain the right assets and an appropriate life cycle for those assets that require more rapid turnover, the organization could transition to a financing or lease-based program during the next seven years.

Hospitals should be using solid criteria for lease-versus-buy decision making. When done well, leasing can produce

attractively priced financing secured in an easy and cost-effective manner. When done ineffectively, the result may be much higher cost of funds versus what was expected during the initial lease-versus-buy finance decision.

Criteria for identifying whether to purchase or lease equipment include such factors as the cost of the equipment, its estimated useful life, and whether the equipment might require some “downside protection” from falling equipment prices and technology or regulatory changes. Equipment with stable or slowly changing technological development (e.g., X-ray systems) would likely best be purchased; equipment with rapidly changing technology forms or regulatory environments (e.g., ultrasounds) could prove to be good candidates for lease financing.2

4. Effectively Manage “System-ness” of Assets A strategic and company-wide approach to technology-intensive assets is now required of hospitals and health systems. Although productivity improvement may take a year or two to achieve, significant savings can be realized through effective management of assets system-wide.

System-ness delivers improvements particularly with labor productivity. For the example hospital system, once unneeded equipment was eliminated, staff could be redirected to other areas, thereby reducing new labor hires and overtime in busy areas, without adversely impacting head count. Cross-training on equipment, as appropriate to the scope of staff licenses, would enable the organization to move staff during their down times, thereby increasing labor efficiency. Over the seven-year period, reduction in overtime costs through staff redeployment would save $4 million, cross-training of technologists would drive another $13 million of savings, and flexible staffing models would bring nearly $5 million of savings.

2 For more information, see Jordahl, E.A., Robbins, M., and Sedlmeier, M.: “A Strategic Roadmap to Meet Evolving Needs and Reduce Capital Costs.” hfm

magazine (forthcoming Sept. 2016).

Four Ways to Free Millions of Dollars Trapped in Your Equipment 7© Copyright 2016 by General Electric Company and Kaufman, Hall & Associates, LLC

Concluding CommentsThe ability to achieve operational and capital savings from under-utilized equipment assets depends entirely on rigorous monitoring of progress toward cost-reduction goals, and remedying of challenges that may be preventing progress. A master document should itemize specifically how, where, and when the savings are to occur. The master document functions as an active tool for day-to-day management. Buy-in to achievability of the targets must be obtained and accountability for goals should be assigned to specific departments and individuals.

Managing the cost and quality of equipment is an excellent place on which to focus cost- and quality-improvement efforts. The four initiatives described here can yield millions of dollars of capital savings, while improving the quality of service in technology-intensive departments. Hospital and health system leadership teams must know the extent of organizational capital trapped in poorly managed equipment assets, and move thoughtfully but aggressively to redirect such capital to strategic and operating benefit.

Brian Harms (brian.harms@ge.com) is a General Manager, Central Zone of GE Capital Healthcare Equipment Finance. He can be reached at 847-946-2601.

Eric Jordahl (ejordahl@kaufmanhall.com) is a Managing Director of Kaufman, Hall & Associates, LLC, and directs the firm’s Financial Advisory practice. He can be reached at 847-441-8780.

Kenneth Kaufman (kkaufman@kaufmanhall.com) is Chair and Managing Director of Kaufman, Hall & Associates, LLC. He can be reached at 847-441-8780.

Mark Sedlmeier (mark.sedlmeier@ge.com) is a Product Leader of GE Capital Healthcare Equipment Finance. He can be reached at 262-717-4845.

Nothing contained in this article constitutes tax, accounting, financial or legal advice, or shall be construed as any guarantee or promise of profitability or generation of revenue.

FIGURE 4. OVERVIEW OF COST-SAVINGS OPPORTUNITYSource: GE Healthcare

Equipment Utilization

MaintenanceOptimization

SystemProductivity Total

Labor $13MM $21MM $34MM

Maintenance $5MM $5MM

IT $1MM $1MM $1MM $3MM

Service $4MM $4MM

Total $19MM $5MM $22MM $46MM

About GEGE Capital Healthcare Equipment Finance is a leading provider of financing solutions to the healthcare industry. For more information, visit www.gehcfinance.com.

GE Healthcare provides transformational medical technologies and services to meet the demand for increased access, enhanced quality, and more affordable healthcare around the world. For more information, visit www.gehealthcare.com.

About Kaufman HallKaufman Hall provides management consulting services, benchmark data and analytics, and enterprise performance management software that help clients to sustain success in a changing environment.

Kaufman Hall’s extensive industry expertise and tailored solutions for healthcare and other key industries enable clients to take advantage of proven best practices and realize faster time to value. For more information, visit www.kaufmanhall.com.