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T E C H N O L O G Y

Budgeting best practices Controlling medical equipment spending for the life of a project BY TERRY ESQUIBELL AND KELLY SPIVEY

Key to the success of a health care construction project is a vetted and approved medical equipm ent budget. This lays the foundation for the application of practices that m ay not only save the facility money on medical equipm ent, but on the entire project cost. This requires careful consideration of

a number of important variables such as the sophistication of the equipment being specified, the accuracy of cost estimates, the needs and desires of the various stakeholders and the frequency of change orders, to name a few.

Successful professionals will take a for­ mal approach to ensuring that these and other concerns are properly addressed.

Budget development Historically, medical equipment budgets for health care construction projects were

determined as a percentage of project­ ed constmction cost. The industry now recognizes that two hospitals with the same square footage can offer completely different services, resulting in significant differences in the cost for owner-furnished medical equipment.

A more accurate method than basing a budget on square footage is basing it on a space program. But, even then, the budget may vary significantly, depending on a variety of factors.

A fundamental concept in developing the medical equipment budget is the

A large teaching facility's vision may include specialized technology such as PET, while a critical access hospital's vision may focus more on procedure volume.

budget-setter's definition of medical equip­ ment — not just categories of devices but whether factors such as relocation costs, equipment upgrades, leases, transition rentals, information technology (IT) inte­ grations and ancillary expenses (Le., elec­ tronic health record interoperability) will be part of the medical equipment budget.

Additionally, the project delivery method (i.e., design-build, integrated project delivery or design-bid-build) may impact the procurement process and the final cost of medical equipment. On a design-build project, for instance, medical equipment that typically is considered owner-furnished may be furnished by the contractor.

The construction schedule also can impact the cost of medical equipment. For example, in renovation or expansion proj­ ects, phasing can impact the warehousing requirements, equipment discounting and the practicality of relocating existing equip­ ment versus purchasing new equipment.

After all these issues are considered, the health care organization will deter­ mine whether the budget should include additional costs such as tax, freight, inflation, group purchasing organization (GPO) discounting, insurance for stored equipment, warehousing costs, instal­ lation, transition planning and various contingencies.

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R e d u c tio n s tra te g ie s to align e q u ip m e n t b u d g e ts a n d c o s ts

Cost estimate r The cost estimate encompasses many of the same or similar parameters as the budget as well as clinical input, design-driven decisions, supply chain considerations and other factors. The best process to assemble this information is to gain input through a series of meetings.

P re -design v is io n in g sessio n s. Before design meetings begin, the organization should document the technology vision for the facility. It is important that all participants in the design process (e.g., administrative personnel, clinical direc­ tors and physicians) understand and support the organization's vision. A large, urban teaching or research facility might include cutting-edge medical equipment or specialized technology such as positron emission tomography (PET), teaching sur­ gical suites, interoperative surgical suites or research laboratories. In other circum­ stances, a critical access hospital's market may not require PET, but the organization may want to consider technologies such as telemedicine.

If an organization is considering imple­ menting a Lean program, medical equip­ ment planning for the new facility can support that effort. Likewise, if an organi­ zation has not already established medical equipment standards, a new project is an ideal opportunity to start. These programs may allow the health care organization to realize better pricing. Additionally, mainte­ nance and staff training may be reduced.

The project team should begin by identifying the budget and cost-estimate decision-makers and ask them to estab­ lish who is carrying what costs in their budgets. For instance, picture archiving and communication system display moni­ tors may be carried in the IT cost estimate or in the medical equipment estimate. The team also should meet with supply chain and purchasing early in the design process to understand GPO contracts, standards, leased and no-charge items and discounting expectations.

The team also should discuss who will be responsible for installing no-charge items like glove boxes and sharps con­ tainers. Vendors can assume this role, but contractors might be the better choice because they are involved in mock-ups and understand the planning of the room and placement. Vendors inadvertently may place items in the wrong position and cause reworking of walls.

A hypothetical design and con­ struction project can provide several good examples of

savings th a t m ig ht be achieved through careful control of the medical equipm ent specification and procurement process.

One example would be a hospital th a t embarked on a replacement fa c ility and expected substantial com pletion in two years. At the start o f the project, the fa c ility was in the fourth year of a five- year bed replacement program.

By the end of design, the in itia l $ 2 0 m illio n medical equipm ent budget (based on 2 0 percent o f construction cost) was $ 1 .5 m illio n lower than the final cost estim ate of $ 2 1 .5 m illio n.

Because additional fu n d in g was not an option, the follow ing reduction strate­ gies were identified:

• Purchasing professionals were asked to furthe r qualify the cost estimate with the assistance o f the organization’s group purchasing organization (GPO). This identified a potential savings of $ 2 2 5 ,0 0 0 if all purchase orders were placed w ith in the next 10 months. W hile lim ita tio n s on cash flow and other fac­ tors made th is approach im practical, the potential savings from the qualification was s till $ 7 6 ,0 0 0 .

• All departm ents were asked to reconsider relocating equipm ent tha t m ight be beyond its normal life expec­ tancy but s till fu n ctio n in g properly. This resulted in a cost-estim ate reduction of $ 1 7 5 ,0 0 0 .

• Booms and lights planned for six operating rooms (ORs) remained in the project, but the im plem entation of OR integration was delayed until after move- in. This saved $ 6 0 0 ,0 0 0 .

• The replacement of patient room beds was delayed by two years for a cost

Capital purchases already approved and capital budgets in the years lead­ ing up to project completion should be considered during project design to help alleviate budget shortfalls. Similarly, it is important to determine whether the proj-

Medical equipment cost estimate over life of the project

$5M $15M $25M

SOURCE: GBA

savings of $ 7 2 5 ,0 0 0 . These reductions (excluding the

potential savings identified by the GPO of $ 7 6 ,0 0 0 ) lowered the cost estimate to $ 2 0 m illio n, keeping it in line w ith the original budget for medical equipm ent.

The owner had to relocate more equipm ent than planned and accept delays in bed replacem ent and im ple­ m entation of OR integration, b u t these delays made it possible for the project to move forward.

Establishing an in itia l m edical equip­ m ent budget is an im portant firs t step. The second step should be developing a detailed cost estim ate fo r medical equipm ent. This step w ill determ ine if the in itia l budget is in line w ith the own­ er’s objectives and id en tify problems or opportunities th a t m ight exist. ■

ect is relocating equipment from another facility. The decision-makers should estab­ lish which categories of equipment should be considered for relocation.

C lin ic a l user m eetings. Medical technol­ ogy user involvement is essential to devel-

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oping a reliable cost estimate. The right clinicians and staff members should be brought to the design and planning meet­ ings. For example, a nurse might know which features of an automated medication dispenser are needed but not know which particular model is appropriate or how it is acquired. Thus, input from finance, IT and pharmacy are critical to selection, procure­ ment and implementation.

Clinical staff can help to identify proj­ ect-specific factors such as marketing, clinical applications, government regula­ tions, test or procedure volumes, patient demographics and staff preferences. Most importantly, the project team will be sure all equipment and systems meet clinical needs and program criteria.

The planning and cost-estimating pro­ cess is a precursor to the procurement process and should result in clinical specifics. The more clinical specifics iden­ tified in the meetings, the more accurate and manageable the cost estimate. For example, a cost estimate for a 3-D ultra­ sound for fetal studies requiring five trans­

ducers that is based on discussions with the clinical staff is more exact than simply estimating a diagnostic ultrasound. Specif­ ics also can help to identify items that are being added to the project that were not part of the original scope. For instance, the reference to fetal studies might be a red flag that the equipment is beyond the project parameters.

Providing specifics also can help to identify wish list items. However, restraint should be exercised because a construc­ tion project sometimes may be viewed by staff as an opportunity to get items they requested in previous capital budgets but were denied. Wish-list items should be considered only after all the medical equipment needed to meet clinical and program goals has been purchased.

Leadership meetings. In addition to clinical input, the team should meet with key leadership to address possibilities of future change in procedures, volume, staff and other variables. Then, medical equip­ ment appropriate to those possibilities can be planned.

Enterprise patient/physiological monitoring

In the case of physiological monitoring, fa c ilitie s professionals must determine whether the equipment budget includes bedside monitors and brackets, central stations, displays, cabling, servers, software licenses and EHR interfaces, or if they are s p lit among equipment, contractor and IT budgets.

SOURCE: SPACELABS HEALTHCARE

Leadership also must understand the impact of timely design decision-making on the overall project budget. Design and construction are based on exact details, and placeholders for fixed equipment don't provide the necessary level of detail. It is better to design around a specific computed tomography (CT) system and, if necessary, modify the design for an alter­ native system later.

Managing change Change orders and specification adjust­ ments are among the key moving parts that health facilities professionals must manage before, during and after a major design and construction project. Medi­ cal equipment is easily among the most expensive variables subject to these types of changes.

Reconcilable differences. At some point, a variance may exist between the initial medical equipment budget and the medical equipment cost estimate developed during planning. If the medical equipment cost estimate is less than the initial budget, the project team should not look for ways to spend what may be perceived as extra money. If the medical equipment cost estimate is more than the initial budget, the team should look for ways to reduce the cost estimate. The approach will depend on the magnitude of the variance. Adjustments could require a simple change in manufacturer or model for a specific item or a significant change in the project scope.

Significant discrepancies between the estimate — based on what the users iden­ tify as requirements for meeting clinical goals — and the budget may signal a prob­ lem. Operational requirements may have changed and the original estimate may have been based on incorrect or incom­ plete information. Or advanced tech­ nology may have resulted in increased equipment costs, which could be offset by operational efficiencies.

Whatever the case, the initial budget and the medical equipment cost estimate must be reconciled before procurement begins. There only should be one set of numbers to track during procurement.

Planning for reuse. The team shouldn't automatically discard replaced medical equipment. They should look into relo­ cating existing medical equipment, with the caveat that current equipment in good condition at present may be obsolete by the move-in date. For example, a patient

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exam table that is no longer manufactured but is in good condition is appropriate for relocation. However, an eight-year- old, 16-slice CT scanner that is in good condition may no longer be appropriate for a hospital with a growing emergency department.

Managing to the budget At the end of the design phase, a pro­ curement schedule should be established based on the construction schedule. Construction delays due to not having the equipment on-site can cost more than the equipment itself. The medical equipment planner and the contractor should coordi­ nate to identify items that are considered critical-path equipment. By definition, this is equipment that can derail a construc­ tion schedule if it is not delivered to the job site when the contractor needs it.

Procurement policies and procedures. A successful procurement process that stays within budget involves a collaborative effort, continuous review and reporting of measurable results throughout the life of the project. The end result could mean having money left over to address the wish list in part or in total.

A team and process should be estab­ lished for clinical review and approval of all items that are scheduled for purchase. This team might include one or two principals, such as the chief operations officer and a department head, who were involved during the design process and are aware of the organization's ongoing objectives. They must be informed, deci­ sive and responsive to support the con­ struction process.

Clinical input. Clinical review, accep­ tance and approval are critical before

proceeding with any purchase. Circum­ stances may have changed since clinical equipment first was specified, and a new solution may be necessary. The project team should establish a procedure for approving changes to the final equip­ ment plan. The team must know the variance between the cost estimate and the purchase price before the purchase order is issued.

Settling accounts. If the team has spent less than expected, they must be careful not to spend the savings before all accounts are settled. For every purchase order that is under budget there probably will be one that is over budget. A budget status report, comparing the impact of pur­ chases to the cost estimate and its relation­ ship to the budget should be issued at least monthly by both department and overall project. This document should be required reading for key project stakeholders.

Installation and closeout Careful planning and management pay off when the project enters the installation and closeout stage, because the project team has created the framework for han­ dling unforeseen situations.

For instance, it is still possible for a piece of medical equipment to arrive on-site and not fit in the area for which it was planned or lack the utilities it requires. If casework must be adjusted, or an outlet must be added for an under­ counter refrigerator, a change order or delay may occur. Both may impact the project budget, if not the equipment budget. Fortunately, many of the causes of change orders in the past now can be identified and avoided by using building information modeling.

Another issue during closeout and installation may be building codes requir­ ing certain equipment to be anchored to withstand an earthquake. The responsibil­ ity for installation of the equipment may have been established as the vendor or contractor, but the cost of the seismic tie­ down kits themselves often come out of the equipment budget.

Ideally, the clinical review, acceptance and approval team, working with the medical equipment planning and procure­ ment consultant and supply chain, will have coordinated to review and approve purchase decisions throughout the procure­ ment process. This coordination will result in no procurement-related design changes and associated change orders.

In addition, a team that has exercised restraint when quotes have come in under budget may enable the organi­ zation to purchase equipment that had been deferred earlier in the process or to replace equipment that had been planned for relocation, but is no longer viable.

Best possible outcome The medical equipment specification, pro­ curement and installation process is fraught with hazards for the project team that does not carefully consider all variables.

Managing change while considering the entire life of a medical equipment project will yield the best possible outcome, h f m

Terry E s q u ib e ll and K e lly Spivey are v ic e presid e nts

a t G BA, a h e a lth care te c h n o lo g y c o n s u ltin g fir m

based in F ra n klin , Tenn.

They can be reached a t

te rry.e sq u ib e ll@ g ba inc.

co m a nd kelly.sp ive y®

g b a in c .c o m .

w w w . H F M m a g a z i n e . c o m JANUARY 2015 II 25

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