• Feature

    Life-Cycle Costing: A Valuable Tool for Big-Ticket Purchases

    Life-cycle costing involves identifying all the costs associated with owning an asset. Here's how PTs can apply it to their practices.

    Feature - Life Cycle

    As the manager of inpatient therapy services at a large, freestanding acute care rehab facility in Pennsylvania, Jane Oeffner, PT, DPT, MBA, spends most of her time overseeing patient care. On occasion, however, she turns her attention to other matters, such as crunching the numbers around possible equipment purchases.

    "Especially for high-ticket items, it's important to understand all the costs involved," Oeffner says. "All of these technologies we use can be wonderful for our patients, and the clinicians like them, too. But we need to know what we're getting into upfront and how it's going to fit into the bigger financial picture."

    Toward that end, Oeffner always calculates the return on investment her facility can expect to see if it buys a new asset. And to ensure that her calculations are as accurate as possible, she incorporates "life-cycle costing," which considers the many factors influencing the total cost of ownership (TCO).

    "Sometimes people look at the initial outlay"—the price a vendor advertises for its product— "and they fail to realize that there's usually a lot more to it," she explains. Additional costs can include installation, needed training, maintenance, even the product's eventual disposal. "If you don't do the research and ask the right questions," Oeffner says, "and if those things aren't included in your overall budget, there's a good chance you're going to run into trouble."

    "What Are We Getting Here?"

    Oeffner isn't the only physical therapist (PT) extolling the virtues of a good TCO analysis. "We go through that process for everything we buy," says Jerry Rush, PT, MPT, executive vice president of CPRS Physical Therapy. Rush is a board-certified clinical specialist in orthopaedic physical therapy as well as a certified ergonomic assessment specialist.

    CPRS comprises nearly 30 clinics across central Pennsylvania. The company has an executive team that meets weekly, and while they're "often more inclined to invest in our clinicians with continuing education courses than in new equipment," Rush says, purchasing often is part of the conversation. "The question always is, ‘What exactly are we getting here?' Especially when we're looking at declining reimbursement rates, it's important to make sure that any purchase is a smart business decision."

    Making that decision, Rush adds, is typically straightforward: The executive team determines how the equipment will be used "from a billable standpoint," as well as how it might facilitate improvements in patient care, then weighs that use against the equipment's TCO. Determining TCO usually starts—but doesn't end—with a price quote from vendors. "Usually, anything we buy we're getting from vendors with whom we've had longstanding relationships," Rush says. "They're not trying to hide things when it comes to details about costs."

    Still, he and his colleagues never assume that a vendor can give them everything they need to determine a product's TCO. So they also do their own due diligence to ensure that any new purchase is good for their company. Part of that entails running a "pro forma" costing analysis to project the long-term financial impact their investments will have on the business. Another part involves talking with other PTs. For example, he says, "You see other practices buying the latest equipment, but then they're trying to sell it just a few years later. That's usually a sign that it doesn't make financial sense."

    In fact, even equipment manufacturers tend to recommend the same approach as Rush: If you're interested in life-cycle costing, start by asking vendors for their own data, but follow up with research of your own. "The vendor," notes Joel Behnke, senior director of marketing at Bioness, "can give you an estimate of the total costs, but you have to remember—they want your business." Bioness provides technologies to help people regain mobility and independence, including implantable and external neuromodulation systems, robotic systems, and software based therapy programs.

    For that reason, Behnke says, it's important to get a sense of the supplier's "reputation in the marketplace" and to obtain feedback from peers who are using the product or service. "Talk to other PTs about that equipment or technology and find out what their experience has been like: What are the benefits, but also, what should you watch out for? Are there certain costs to using it that aren't obvious?"

    To get at an item's "true costs," Behnke explains, you'll have to include things like user-license fee(s), warranty coverage, and the potential savings the item might provide if it reduces human capital or leads to fewer PT or patient injuries. "Or maybe it enhances patient outcomes and improves reimbursement. These are all things that you ought to know but can be difficult to pin down."

    Sharif Zeid, business director at MWTherapy, which makes practice-management software for PTs and other therapists, agrees with Behnke that arriving at an accurate estimate of costs sometimes requires a bit of digging. "We try to be transparent with our pricing and upfront about what practices are getting when they buy our system," he says. "But to do a true cost analysis of a product like ours, you have to compare it with an in-house or server-based system and consider the costs you might not have in the future."

    For example, Zeid explains, because MWTherapy's software is cloud-based, the practice pays only for what it needs: "If you grow, the system grows with you, and you pay more depending on how big you get; or if you shrink, it shrinks, too, and you pay less." Contrast that to a conventional system for which a practice might be required to invest heavily in infrastructure only to realize as it expands that the investment wasn't enough. "Or, what if it downsizes?" Zeid asks. "It will have more capacity than it needs, but will still be paying for it."

    On the other hand, if the practice has a fixed cost for software and hardware, it may benefit from economies of scale if its usage increases. Anticipated growth or contraction of a practice also should be considered.

    Practices also should factor into the total-cost equation the efficiency of any system they buy, Zeid says. "If it's saving you time, it's saving you money. A lot of practices forget to consider that when they're trying to decide if a purchase is worth it."

    Ira Gorman, PT, PhD, MSPH, an assistant dean and associate professor in the School of Physical Therapy at Regis University in Denver, says, "You have to be careful about what you buy, because a lot of equipment is changing so rapidly that after a few years it becomes obsolete." Gorman previously owned a private practice for many years and now is responsible for Regis's physical therapy-related purchasing.

    Describing himself as "kind of fiscally conservative in this area," Gorman—who also is president of HPA-The Catalyst (APTA's Health Policy and Administration Section)—says he doesn't like to spend or borrow money for what he sees as "risky" purchases. "I like to know what the return on investment will be. So if I'm going to buy something to use in a clinic, I want to know how it's going to add value to the practice and to the experience of the patient."

    Zeroing in on a device's TCO goes a long way toward answering such questions, Gorman says—and on occasion it results in no purchase at all. "When there's new equipment coming out all the time, and it's actually better than what came before it, sometimes it turns out that your best option is to lease or, if it's for student classroom use, to just see if it can be borrowed," he notes.

    From Every Angle Possible

    One PT who tries to look at every purchase from every angle in his effort to avoid future cost-related surprises is Robert Latz, PT, DPT. The chief information officer at Trinity Rehabilitation Services, a multistate contract therapy provider, Latz likes to use the example of an all-in-1 office printer to illustrate how life-cycle costing can be of use. "We may choose the most cost-effective unit on the market by price, features, and ink costs," he notes, "but what if that machine also comes with a hard drive that keeps a digital copy of each fax or printout, and what if there's a $20-per-month subscription fee for updates and repairs to that hard drive?" With electronic storage, Latz points out, there is no need to print out confirmations of each fax produced, so less paper and ink would be used, and therapists would spend less time waiting for additional copies.

    On the other hand, Latz continues, because the device now is holding protected health information (PHI), additional care and safeguarding steps are required, which might need to be included in the TCO. There are other considerations as well—from the cost to create, complete, and maintain the business associate agreement that is required for this type of machine, to the cost associated with wiping and destroying stored PHI at the end of the product's life. "The additional costs may or may not be worth it, considering the benefits provided," he says. "The key is to be aware of those costs and make the decision with as much information as possible."

    Of course, getting that information often is the main challenge. "For me," notes Oeffner, "it's usually a matter of getting everything in writing. If the sales price is set by the vendor, it should be right there in your quote, and it should also appear in your contract." In addition, she says, she always negotiates. "These companies very much want to sell you their equipment, so they're usually willing to work with you to maximize your capital budget."

    With that in mind, she says she's made it her habit to drill equipment vendors with a list of pointed questions designed to find the bottom line. "Everything's on the table: What is it going to cost us for installation? Will there be upgrades coming, and are there costs associated with them? What does the maintenance contract look like? What about removal at the end of the equipment's life?"

    Oeffner's facility recently replaced a large piece of equipment that it would have had to pay to have removed if disposal hadn't been negotiated upfront. She says, "In that case we planned for a trade-in, so getting rid of it wouldn't cost us anything at all."

    Oeffner also asks about staff training: "Is it provided for free, and, if so, how much training?" The issue can be particularly tricky when it comes to determining costs, she says. "If you're in an inpatient setting, you'll have to bring in per-diem therapists to fill in while your team is receiving training. And if you're in an outpatient setting, then obviously when your therapists are being trained they won't be treating patients and generating revenue."

    In addition, a vendor may offer basic training at no cost, "but sometimes it's only for a certain number of people, and then it's up to you to train everyone else on your own." Along those same lines, Oeffner says it pays to consider how a new technology might reduce costs by preventing injuries. Particularly when it comes to body-weight-support devices, "these pieces of equipment can really save therapists and assistants from getting hurt when they're performing gait training with patients." When PTs are injured, expenses can add up fast, Oeffner notes. "So I look at benefits like that as justification for the purchase and another way to offset the cost of the device."

    Peter Kovacek, PT, DPT, MSA—owner of 1st Choice Physical Therapy and In Home Rehab, both in the Detroit area—lists other TCO considerations. "Over the lifespan of a piece of equipment, frequently there are other costs such as power/electricity usage, consumables (such as paper and ink for a printer), inspections and repairs, and, especially, staff time for cleaning and setup. Sometimes these additional costs are not significant, but other times they can add up over a multiyear lifespan."

    At her facility, TCO calculations mostly are used on bigger purchases, Oeffner says. ("When you're spending several hundred thousand dollars, you'd better have done your homework, because nobody is going to approve that equipment if you haven't.") Still, she's a firm believer that practices of all kinds, with purchases of any size, can benefit from the insight that life-cycle costing provides. "Even if you need to get a new therapy mat, [TCO] should really be a part of any purchasing decision."

    Chris Hayhurst is a freelance writer.

    Total Cost of Ownership Checklist

    The PTs and suppliers interviewed for this article offer myriad examples of expenses to consider when calculating the true total cost of ownership (TCO). They also suggest some potentially offsetting areas of savings or additional profitability. In calculating TCO, these sometimes are broken into 3 broad areas—price, usage, and disposal—with many narrower categories.

    Here's a checklist of items to consider. Of course, not all items will apply to all acquisitions.

    Initial Price

    • Initial or "sticker" price (lease vs purchase)
    • Licensing fees
    • Data conversion costs
    • Installation
    • Business associate agreements development costs
    • Training (initial)
    • Training (upgrades)
    • Loss of revenue or additional expense during training
    • Risk/cost of obsolescence

    Usage

    Costs

    • Warranty coverage
    • Maintenance
    • Utilities (electricity, water)
    • Consumables
    • Staff time for cleaning and setup
    • Costs to upgrade or expand capacity
    • Use of space (rental or purchase) for equipment
    • Additional security for protected health information

    Savings

    • Potential savings from greater efficiency
    • Potential savings from fewer injuries
    • Enhanced patient outcomes
    • Improved reimbursement

    Disposal

    • Decommissioning or destruction
    • Data mitigation
    • Data migration
    • Physical removal of equipment

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