Measuring cost Expert Advice matrix by Pat Lynch


A reliable metric for evaluating the financial performance of an HTM department

Measuring the cost of serviceThere is a universal metric that can be used to evaluate the financial performance of a Healthcare Technology Management (HTM) department. The name HTM is a new for departments formerly referred to as Clinical Engineering, Biomedical Engineering or Medical Maintenance. These departments can be evaluated and compared by determining cost of service ratio , or COSR.

COSR represents the annual cost of maintaining an asset, expressed as a percentage of its purchase price. COSR has been shown to be amazingly consistent among various service options. For example, manufacturers’ full-service contracts are reliably priced at between 12 percent and 20 percent of the price paid for an asset.

Using a shared maintenance approach (sharing workload between an in-house department and the manufacturer) can reduce the COSR to between 8 percent and 12 percent annually. A mature in-house program that takes advantage of hospitalemployed labor and alternate sources for parts can reduce the COSR to 4 percent to 6 percent of the purchase price.

measuringcost2 Expert Advice: Measuring the cost of service is calculated by dividing the annual cost of maintenance by the original purchase cost. This formula can be applied to a single asset, a group of assets or to all the assets in a hospital system.

A major advantage of COSR is that it can be applied in a number of ways. It can be applied to a hospital department, to all the assets in an equipment category, or to all the assets from a certain manufacturer. COSR can also be used to compare the financial costs of two or more competing contracts. This is especially useful for contracts that cover many pieces of equipment. COSR can be used to evaluate the maintenance cost of a single asset, from low-cost to expensive, in comparison to the original cost of the asset. The COSR ratio stays consistent no matter what mix of equipment you are evaluating. COSR can be used to evaluate and benchmark a specific manufacturer, or a specific department, or an entire hospital.

COSR can also be used to compare the total cost of service among HTM departments that do not have identical scopes of service. No two HTM departments provide the same level of service on the same types of equipment. For example, one department may provide only general biomedical equipment repair and PM, while another may have an extensive imaging service division. Yet another may have the responsibility for the maintenance of beds, surgical tables, nurse calls and other devices found in hospitals. Traditionally, it has not been possible to quantitatively compare the cost of service among these diverse departments. Staffing, cost and other dimensions of service were not possible to compare because the cost and labor requirements were so different.

COSR provides a uniform metric for comparison for hospitals, whether they are large or small, urban or rural, teaching or critical access, outsourced or inhouse, established or startup, or narrow or broad in scope of services.

Any hospital can compare its COSR with any other hospital, regardless of demographics, scope or location. Because COSR is a percentage, the scale of large vs. small is eliminated. The percentages hold true for any hospital anywhere in the U.S.

Take for example a particular hospital in Georgia. The HTM department pays for all maintenance costs (including contracts, parts, labor, outside repairs, etc.) on an inventory of $112,000,000 within several hospitals. The HTM departmental budget was $5,000,000 per year. The COSR can easily be calculated (5M/112M) and is shown to be 4.46 percent. This is reflective of a mature HTM department that has very few service contracts on the hospital’s medical equipment.

COSR can be illustrated by Graph 1 at right. It shows how the COSR changes as the mix of service options change (between manufacturer, third-party and in-house). Marking your current service mix on the horizontal axis will yield an accurate estimate of your COSR . You can break COSR down further by marking your major equipment types (CTs, MRSs, patient monitors, infusion pumps, etc.) individually on the norizontal axis. You will notice that the items on the right (the lower service cost) are taken cre of by the in-house staff. As you move toward the left, more and more assets ae on a mnaufacturer contract. So to reduce costs, the goal is to move all assets as far to the right on the horizontal axis as possible. Even if it is necessary to add technical training, test equipment, additional staff or an administrative assistant, the ROI (return on investment) to the facility is always realized in less than one year.

Note in Graph 2 how costs vary as the service mix changes. An increase in in-house service is directly correlated with a decrase in COSR .


The graph is useful in illustrating the relationship between service mix and cost, but to gain the true benefit of the COSR formula, further calculations are needed. Since COSR requires just one calculation consisting of just two numbers, it is fairly straightforward to determine. But there are a few nagging questions to be answered before the calculation can be made.

1. How do I determine the value of my hospital inventory?

Since COSR is a single calculation, it is important that the acquisition costs for all medical equipment be entered into the HTM equipment database. But which cost should you use – the manufacturer’s list price or the actual price paid by the hospital?

Using list price at the time of purchase would be preferable, as it would allow exact comparison between differing hospitals. The COSR for model 789 CT scanner, for example, would be directly comparable between facilities. But list price is not readily available for the thousands of manufacturers and models and model options available.

So for convenience’s sake, the HTM norm is to use price paid by the facility. The exact number may vary depending on the buying power of the facility, but it gets us into a reasonable ballpark. In spite of the allegedly “great deals” that hospitals report, the final prices paid for medical equipment usually do not vary by more than about 10 percent. This is accurate enough for calculation of COSR and comparison between facilities.

Many inventories are the result of many years of data collection and entry. The quality of the data varies greatly, but usually consists of little more than the nameplate information (device name, manufacturer, model, serial number), the owning department (surgery, radiology, ICU, etc.), and some schedule of routine maintenance. Few HTM databases contain individual cost data of the price paid for the items in the inventory. Collecting these prices might seem impossible, even if you have the resources to pore through the thousands of original purchase orders. But there is an easier way.

If you meet a single, simple criterion, you can assign an average value for every item in your inventory. This single criterion is that the inventory in question must be a complete inventory of every piece of equipment in your hospital. This includes all imaging equipment, all radiation oncology equipment, and all patient monitoring and other general biomedical equipment. A comprehensive and complete medical equipment inventory of a general acute care hospital can reliably be estimated at $12,000 per item.

Yes: Every item in your inventory can be assumed to have an initial purchase price of $12,000.

However, if the inventory that you are working with is not a complete hospital, you cannot use this estimation method. If you are trying to determine the purchase price of a limited inventory, such as an imaging department or another subset of an entire hospital’s inventory, you have no choice but to research the individual equipment prices.

I personally determined this several years ago by having access to some of the largest and most complete medical equipment inventories in the U.S. I had experimentally found the $12,000 price to be accurate based upon my own hospital. Being somewhat obsessed with perfection in my hospital database, I had painstakingly researched and entered the actual price paid for each of the 11,462 items in our inventory. The total value of this inventory was around $132,000,000. Doing the math, the average was very close to $12,000. I was confident that this was a relatively accurate number, but I set out to verify it elsewhere.

I had access to the TriMedx national database when I worked there in 2006. We had more than 200 hospitals in a central database, with several technicians responsible for maintaining the accuracy and completeness of the data. Thus, every one of the 227,000 items of equipment had good purchase information. Using the summing function of the database, the 227,000 items had a total value of about $2.5 billion. Again, the average price per item was about $12,000.

To further verify this information, I was able to ask some questions of Catholic Health Initiatives. While not able to examine their database, I was able to determine that their database of medical equipment was valued at about $2.8 billion. Using their tabulated sum of equipment costs and equipment counts, their average price paid was about $12,000.

As I visited hundreds of hospitals around the U.S., I occasionally found one that had been rigorous about entering complete equipment price paid date.

When I quizzed them about the numbers and total costs, the averages always came to between $11,500 and $12,200. The larger the number of items in the inventory, the closer to $12,000 the average.

These multiple data points, as well as anecdotal confirmation from many more hospitals, convinces me that the estimate of $12,000 per item is accurate. If you know the total number of assets in your hospital and their total value, you can calculate the average asset cost for yourself.

2. What costs should I include?

For an accurate COSR, the Annual Cost of Service should include everything related to the maintenance of the equipment in question. It must include internal labor, external labor, parts, service contracts, preventive maintenance costs, on call, training costs, test equipment depreciation and annual calibration, as well as the costs of departmental supervisors, administrative assistants, parts clerks and any other labor resource in the HTM department. It must also include employee benefits. This is the total cost of internal labor.

3. How do I determine all of these costs?

If you are fortunate enough to have an HTM department that pays all of the bills for medical equipment, it is possible to just use the annual departmental budget of actual costs as the annual cost of the program.

But if your hospital has a distributed system where individual cost centers pay for their contracts, parts or external repairs, it is much more difficult to compile the total annual cost of equipment maintenance. Often the sub-accounts in clinical departments that are labeled as “Repair and Maintenance” include costs for instruments, copiers and other nonmedical equipment costs. If this is the case in your facility, you have no choice but to examine every line item in every “Repair and Maintenance” sub-account and exclude non-medical equipment costs.

For this reason, it is preferable that all medical equipment maintenance costs be consolidated into a central HTM departmental budget. Analysis of costs, efficiencies and financial performance is much easier if the costs are managed in this way. It is still possible to allocate the costs back to the clinical departments by using monthly or annual accounting reports and allocating by value of equipment in each department (or by some other means).

4. What if my entire HTM department is outsourced?

In this case, it is possible to just use the cost of the contract, along with any additional billings and direct charges to determine the Annual Cost of Service.

5. Why is the mantra “Less FTEs” the Holy Grail of Healthcare?

There is a movement afoot to reduce costs in healthcare. The preferred way to do this seems to be by reducing employee counts (commonly referred to as FTEs – full time equivalents). The prevailing wisdom is that when evaluating employee staffing, the fewer employees you have, the better and more efficient an organization is. I have even seen hospitals refuse to add an FTE when the ROI (return on investment) is less than a year, and the annual savings thereafter is several times the cost of the employee – all in the name of not adding FTEs. I believe this is an inaccurate way of evaluating the performance of an HTM department. It should be about reducing costs, not reducing head counts.

Since in-house biomeds are earning less than $50 per hour, on average ($62.50 if you include benefits at 25 percent), they are much more financially effective than manufacturers at servicing medical equipment. Medical equipment manufacturers routinely charge more than $200 per hour, and as much as $800 per hour (with a minimum number of hours and travel costs). This provides a compelling financial motive for beefing up the in-house program as much as possible.

a new way to set the htm budget COSR shoud be the only financial and budgeting metric for HTM operations. Using the COSR as the financial measure, an HTM department should be given the financial resources, or budget, based upon the value of the medical equipment inventory times the COSR. This should result in an achievable budget. The desired COSR can even be reduced slightly year after year to encourage improvements in HTM departmental operations.

About the Author

Patrick Lynch is an experienced biomedical manager with formal training as a technician, engineer, and in business management at the graduate level. He has worked exclusively in healthcare since 1975 and has managed clinical engineering and biomedical departments since 1979.

Presently, Lynch works with Global Medical Imaging, an ultrasound sales, training, parts, and service company headquartered in Charlotte, N.C., where his full-time job is to support the development of the biomedical profession throughout the country. This is accomplished through no-charge advice, consulting, mentoring, frequent educational presentations and the active creation and development of local biomedical associations.

Lynch is a two-time winner of the American College of Clinical Engineering (ACCE) Advocacy Award (2004 and 2009) and TechNation’s Professional of the Year Award (2012).

Lynch was the first president of the North Carolina Biomedical Association in 1980/81 and served as the Chairman of the Board of Examiners for Biomedical Equipment Technicians for six years.