New Buying Tool: Hospitals Can Save Money and the Planet
For health care equipment, the costs associated with utilization, maintenance and disposal is more than just a financial question.
Hospitals spend 17 percent of their budgets on medical supplies. Hospitals also have an enormous energy footprint, are major water users and when it’s time to dispose of used supplies, they generate 5.9 million tons of waste annually. The impact felt through the extensive use of resources is costly, both to hospitals and the planet.
Gaining more insight into supply costs—beyond the price tag—is an important step to saving money. When it comes to total cost of ownership, additional costs occur through the use and upkeep of a product and any additional resources it takes to run or maintain it, including the cost of energy and water use. At some point, the question of disposal also must be answered and there is, again, a cost involved. Solid, hazardous and regulated waste costs can range from 30 cents to more than $2 per pound.1 With budgets tightening across the health care landscape and facilities expected to do more with less, it’s growing increasingly important to understand the financial ramifications of purchases in their totality, not just at the time the original purchase occurs. Buying more sustainable products is often less costly in the long term and less harmful to patients and the planet.
Evaluating Total Cost of Ownership
A new tool—developed over the course of three years by Practice Greenhealth with input from several hospitals, suppliers and group purchasing organizations—can help hospitals get a handle on the entire financial and environmental commitment they will be making when they purchase certain supplies or equipment. The Total Cost of Ownership tool can be used to evaluate and compare products in order to make the best choices for a facility’s supplies. According to Nestor Jarquin, surgical sourcing manager at Kaiser Permanente, “The TCO tool is ideally suited for hospital procurement, finance and sustainability officers and will help them when sourcing a new contract.”
The goals of the tool are to have a standardized framework for calculating TCO, to enable health care providers to consider the total cost in procurement and consequently reduce overall operational costs and minimize environmental impact. Phase I assessed the scope of the project, and Phase II focused on building, testing and promoting the tool. The result is a tool that can help decision-makers identify cost savings and make product choices that have a reduced impact on the planet. “For hospitals that are purchasing equipment that uses resources, the TCO tool will provide them with the true cost of the device over its lifespan,” said Andrew Madden, senior director of supply chain at the Dana Farber Cancer Institute.
The TCO tool is also suitable for suppliers to help identify strengths and weaknesses in their products.
How the Tool Works
The TCO tool is designed for health care purchasing professionals in hospitals and group purchasing organizations. The tool can account for many costs that occur throughout the purchasing process, through acquisition, use and disposal. The tool allows users to identify which product or scenario has the lowest total cost of ownership and the lowest environmental impact.
When it comes to total cost of ownership, additional costs occur through the use and upkeep of a product and any additional resources it takes to run or maintain it, including the cost of energy and water use.
The tool uses a widely available platform that supports a “keep it simple” approach. Users work through a step-by-step process to enter data of up to four product scenarios at a time. The tool automatically calculates the results in a visual way to clearly demonstrate the business case for decision-making.
The costs the tool analyzes are the direct costs to health care organizations that can impact the total costs of an organization. These direct costs include acquisition, operational costs such as energy, water and labor, and disposal costs. The tool provides guidance on where to capture these costs and, if specific information is not available, the tool incorporates the default data of utility costs based on an organization’s location.
TCO Case Study
Several member hospitals tested the beta TCO tool and provided feedback. One project focused on the purchase of laboratory minus-80-degree freezers. The hospital compared two product options, Brand A and Brand B, and gathered use costs for acquisition, heating and air conditioning and electricity to assist in their decision-making. While Brand A cost more to purchase, Brand B consumed less energy and required less HVAC cooling needs. A TCO evaluation showed that Brand A would save the organization about $3,000 per product over the freezer’s useful life and use 40 to 60 percent less energy. Through a TCO evaluation, the organization identified both a financial return on investment and an environmental benefit.
To get the TCO Toolkit, visit Practice Greenhealth’s Greening the Supply Chain Initiative, and download the TCO tool to begin assessing the true cost of your facility’s health care products. Webinars and training will be available to guide users on the full functionality of the tool.
1 Practice Greenhealth 2015 Benchmark Report.