Evaluation of new technologies by hospitals and other healthcare providers: issues to consider.

ABSTRACT

The evaluation of new technology in today's health care environment has become a very important issue for hospitals and other health care providers. Much has been written in the areas of financial analysis, price negotiation, and acquisition errors. This article addresses issues that hospitals and other health care providers may not have considered in their evaluation of new technology. These issues include: (1) costs currently not included in the evaluation process, (2) consideration of the threat of litigation, (3) use of technology to attract patients and physicians, (4) adjustment of payment rates from payers, (5) evaluation of the physical layout of the facilities surrounding the new technology, and (6) commitment to the process.

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The evaluation of new technology in today's health care environment has become a significant challenge for hospitals and other health care providers. In an era characterized by slimmer margins for hospitals and declining profitability for physicians' offices, the need for improved methods for technology assessment has become paramount. The decision on when and how to acquire technology, as well as how to justify the expense in a cost benefit analysis format, has perplexed hospitals, physicians, and medical group practice administrators for many years.

In a recent report from the Blue Cross Blue Shield Association (BCBSA) (Lovern, 2001), the rapid growth of new medical technology was cited as a leading cause for double-digit health care cost increases. In fact, the research by BCBSA found that 19 percent of health care cost increases can be directly traced to the use and deployment of medical technology. The BCBSA noted that growing evidence suggested that hospital costs are playing a larger role in the rise of health care expenditures than previously thought (Benko, 2002).

Numerous parties have addressed the issue of technology assessment over the years. Much has been written in the areas of financial analysis, price negotiation, and avoidance of acquisition errors. The purpose of this article is to address issues that hospitals and other health care providers may not have considered in the evaluation of new technology. The evaluation of new technology is a very complex process. The issues discussed in this article may assist in the refinement of the evaluation process for technology assessment currently adopted by hospitals and other health care providers.

PRIOR RESEARCH

A large amount of research has examined the evaluation of new technology for hospitals and other health care providers. Many of these studies have focused on financial analysis, price negotiation, and avoidance of acquisition errors.

In the area of financial analysis, many studies have addressed the use of net present value (NPV) and internal rate of return (IRR) in the evaluation of new technology. Although these practices have become standard in today's health care environment, NPV and IRR were new approaches twenty to thirty years ago. Prior to budgetary pressures placed on hospitals and other health care providers by Diagnostic Related Groups (DRGs), the introduction of managed care, and other factors, physicians were the primary decision makers for the acquisition of new technology. If a physician requested a piece of equipment, most health care organizations were flexible enough to meet their needs.

In one of the earlier articles on financial analysis, Savin and Vas (1985) examined the use of net present value in the evaluation of new technology in the health care environment. The authors suggested that many large purchases of medical technology were executed without a proper understanding of the true cost, life expectancy, or value of the equipment. Savin and Vas (1985) encouraged the inclusion of maintenance costs, interest rate, life expectancy, projected revenues, increases in operating costs, and cost of capital to determine whether an acquisition's expected net cash inflows exceeded its expected net cash outflows.

Over the last twenty years, many different articles have addressed the evaluation of new technology using financial analysis. Instead of focusing solely on NPV or IRR, researchers have examined the use of analytic hierarchy processes to evaluate new technology. Sloane et al. (2003) developed a decision support system for capital equipment decision-making in the health care environment. The authors developed an analytic hierarchy process that evaluated a critical care neonatal ventilator for a new women's health facility. The inputs to the analytic hierarchy process included purchase price, safety, clinical features, technical features, and operating costs. The analytic hierarchy approach also facilitated an understanding of the underlying criteria and priorities of the hospital's physicians, nurses, staff, and administrators as well as supported its purchasing negotiations with different vendors. Sloane et al. (2003) also noted that a unique feature of their analytic hierarchy process was the ability to support and document the evolution of the process of selecting a specific neonatal ventilator for the hospital's new facility.

In addition to financial analysis, researchers have examined the strategies to implement when negotiating the purchase price of new technology. Pols (1999) and Louie (1997) provided examples of issues that hospitals and other health care providers should consider when negotiating the price of technology with vendors. These authors presented the following suggestions:

* Negotiate with more than one vendor even if one product is preferred.

* Determine a separate price for the equipment and options, such as service agreements.

* Lock in a long-term service agreement when the vendor is also the service provider.

* Consider financing options through other sources than the vendor.

* Determine a plan for future upgrade options for the equipment prior to acquisition.

* Consider risk share or pay per use plans when volume is in question.

* Inquire whether the vendor will loan the equipment for a trial period.

* Utilize buying groups when possible.

The final group of research focuses on the avoidance of acquisition errors when purchasing new technology for hospitals and other health care providers. Wagner (1990) provided examples of issues that hospitals should consider to avoid acquisition errors. These suggestions included:

* Vendors should not be used as experts in the field; rather find an independent, knowledgeable source for information.

* Be aware of potential changes in Medicare reimbursement laws and Federal Regulations that may limit usage or reduce the return on investment of new technology.

* Avoid buying the end-of-model equipment to save on initial purchase cost. This equipment can quickly become obsolete when the new model is introduced.

* Consider sharing equipment with other departments that need the same type of equipment.

* Make the final decision at the top administrative level to ensure that the equipment is consistent with the overall strategy of the hospital.

* Investigate the vendor's financial stability.

* Form a multi-disciplinary task force to assess technology.

* Determine what additional resources will be necessary (i.e., personnel, training, building renovations, space, etc.)

A large amount of research has examined many different aspects of the assessment of technology by health care providers. The purpose of this article is to examine other issues that hospitals and other health care providers should consider when evaluating new technology. These issues include: 1) costs currently not included in the evaluation process, 2) consideration of the threat of litigation, 3) use of technology to attract patients and physicians, 4) adjustment of payment rates from payers, 5) evaluation of the physical layout of the facilities surrounding the new technology, and 6) commitment to the process.

ISSUES TO CONSIDER

When assessing new technology, most organizations consider the purchase price, maintenance costs, other operating costs, physician and staff time (see Exhibit 1 for additional considerations in calculating physician and staff time), projected revenues, and life expectancy in their financial analysis. There are other costs that an organization should consider when assessing new technology. These costs include: opportunity costs, relevant and non-relevant costs, and influence costs.

An opportunity cost is a benefit forgone as a result of choosing one course of action rather than another. Opportunity costs are not entered in the accounting records of an organization but should be considered in the financial analysis of new technology. These costs are often not considered because they are forward looking.

Before calculating the opportunity cost for a new piece of technology, the alternative courses of action must be assessed. Once these alternatives are determined, the organization must assign an economic value to each alternative. This value represents the opportunity cost of not choosing that option. For example, if internal funds are being considered for the purchase of new technology, forgone interest that would have been earned on these funds is an opportunity cost of purchasing the new technology. Andersen (1992) found that internal funds are the leading source of financing for most technology purchases.

When assessing new technology it is also important to consider only relevant costs. Non-relevant costs should not be considered in this process. Relevant costs are costs that differ between alternatives. Non-relevant costs are costs that remain the same regardless of the alternative selected. For example, if a hospital is considering replacing its current laser hair removal system with a new system, the purchase price of the current laser hair removal system is a non-relevant cost because it will not change whether you replace or keep the current system. If a loss would be recorded from the disposal of the current system, the loss is also a non-relevant cost because the loss is a non-cash expense that does not impact an organization's cash flows. If the organization does not incur income taxes, the loss on the disposal of the current system should also not be considered because it does not impact the cash flow of the organization.

Influence costs should also be considered in the assessment of new technology. Zimmerman (2000) defined influence costs as the resources consumed by individuals within an organization in trying to influence decisions. When an organization determines who will be involved in the decision making process to acquire new technology, the organization must weigh the need for inclusion in the process and the influence costs of including too many individuals in the process. The propensity is to include too many parties in the decision process because there is no single approach for technology assessment, and the financial ramifications of these decisions are usually significant.

When assessing the cost of new technology the threat of litigation should also be considered. Recent court cases bring to light the increased threat of litigation when implementing a new piece of technology. Wood (1999) noted that medical devices have been targeted with a large number of class action lawsuits. For example, the family of a 30-year-old woman who died after heart surgery has filed suit against the hospital, the catheter manufacturer, and its sales representative who stood in on the surgery (Heiman 1999). The lawsuit charged that the 30-year-old woman was unaware that the surgeon would be using a new kind of catheter he had not used before and that the sales representative would be in the operating room with the surgeon. The family of the deceased woman asserted that the sales representative aided and directed the surgeon to conduct two unnecessary procedures to demonstrate the catheter's performance. The autopsy found one of the women's main arteries was dissected during the procedure, causing her heart to fail. The attorney for the manufacturer argued that the sales representative was simply there to answer questions and did not direct the surgeon to perform any procedure.

In another case, a patient's eyesight was adversely impacted from an excimer laser surgery when a physician removed 40 percent of the patient's cornea after informing the patient that only a minute amount of the cornea would be removed. The attorney for the patient asserted that his client signed the incorrect consent form, the hospital did not have an operator's manual for the use of the laser, the surgeon and operator did not have adequate training in the operation of the laser, and the laser was housed in a part of the hospital undergoing significant construction that negatively impacted the performance of the machine (Karen et al., 1997).

Many of the lawsuits related to new technology involve under-utilized technology. The likelihood that the medical staff would not have adequate training on a heavily utilized piece of technology is unlikely. As the learning curve decreases, the threat of litigation from a new piece of technology also decreases.

Another issue that should be considered in the assessment of new technology is whether the decision to acquire a new piece of technology should be primarily based on the technology's ability to attract patients and physicians. There is some disagreement on this issue. Some believe that hospitals and other health care providers should adopt the most recent technological advances to gain a competitive advantage in the market place. These individuals believe that hospitals do not compete for patients on the basis of price and, thus, must use some other approach, such as technological advances, to gain a market advantage. Hospitals are feeling an increased amount of pressure to purchase new technology as physicians continue to move their surgery business out of hospitals and into their own surgery centers (Haugh, 2002).

Others believe that the use of technology as a marketing tool to attract patients and physicians is an unwise move. The decision to use technology as a marketing tool is often tied to stealing patients from rival hospitals. Competing with other regional hospitals based on technology can be an unwise move because all of the parties normally lose in the end. In fact, many suggest that hospitals in the same region should enter into joint venture agreements with other hospitals in their region and work together to share in future growth areas (McManis, 1990).

The acquisition of new technology should never be based on one measure (Goff, 1999). Instead, the acquisition of new technology should be based on a process that considers many factors besides marketing. Hospitals should create a technology committee that considers patient volume, reimbursement by providers, and other factors when making the decision to acquire a new piece of technology.

When analyzing the financial viability of new technology, there may be an opportunity to request an adjustment of the payment rates from a payer. This process of negotiation is only available with commercial payers because hospitals do not directly negotiate federal and state reimbursement levels. If a preliminary analysis reflects that the reimbursement for a new piece of technology from a third party payer is insufficient, the hospital or other health care provider should demonstrate to the payer the long-term cost effectiveness of the new technology. The long-term cost effectiveness could include a reduction in the length of stay and a reduction in the amount of employee disability pay by decreasing employee downtime. The hospital should obtain assistance from the manufacturer of the equipment in this process. The manufacturer should be willing to assist in this process because it is in the best interest of the manufacturer to provide data that persuades the payer to increase the payment rates for its new device. This process may be time consuming but it can also be successful.

Another issue that should be considered in the acquisition of new technology is the evaluation of the physical layout of the facilities. The placement of technology should not be an afterthought. Instead, the entire layout of the facility should be examined. In the short-term, new technology should be placed in an area that is accessible to the physicians and staff that will use the equipment. The design of this area should include the supplies, charting, medications, and communications necessary to operate the technology in an efficient and effective manner.

In the long-term, the design of a new structure should easily accommodate new technology and should be flexible enough to adapt to different uses over the life of the structure. This flexibility should include a limited number of load-bearing walls and adequate floor-to-ceiling heights that can accommodate larger pieces of technology. Hospitals are often forced to build new structures to accommodate a large piece of technology because their current space is not tall enough or the available space is limited by load-bearing walls. Building codes may need to be challenged in order to provide a more flexible structure. The time and money spent in challenging building codes may be one of the best investments to ensure the long-term usefulness of a new structure.

In recent years, many hospitals and other health care providers have implemented formal technology assessment processes. Before considering how this process should be adapted, it is important to assess whether the current process is being followed. If the current process is not being followed, any changes made to this process will not be taken seriously. It is imperative that all parties, including the governing board, administration, and medical staff, follow the rules and procedures of the technology assessment process to demonstrate the credibility of the process. Once the process is viewed as credible, changes can be made to improve it. If the current process is being followed, there is a greater likelihood that a small influential group within the organization will be unable to lobby for a request that has already been rejected by the technology assessment committee.

CONCLUSION

The evaluation of new technology in today's health care environment has become a significant challenge for hospitals and other healthcare providers. Much has been written in the areas of financial analysis, price negotiation, and avoidance of acquisition errors. This article addresses issues that hospitals and other health care providers may not have considered in the evaluation of new technology. These issues include: 1) costs currently not included in the evaluation process, 2) consideration of the threat of litigation, 3) use of technology to attract patients and physicians, 4) adjustment of payment rates from payers, 5) evaluation of the physical layout of the facilities surrounding the new technology, and 6) commitment to the process.

The evaluation of new technologies is a very complex process. The issues discussed in this article should assist in the refinement of the evaluation process for technology assessment currently adopted by hospitals and other health care providers.

EXHIBIT 1
ADDITIONAL CONSIDERATIONS IN
CALCULATING PHYSICIAN AND STAFF TIME

Are additional personnel necessary to operate the equipment or can
existing staff members be trained to operate it?

Some equipment requires specialized training to operate. Existing
office staff can generally perform this task with manufacturer training
programs. However, occasionally individuals with specialized skills or
credentials must be hired or contracted to operate the equipment.
Imaging equipment is a good example because it normally requires a
radiology technician.

How much staff time will be consumed in setup and operation of the
equipment? How much time will be required for the staff to educate the
patient? Will a manufacturer representative be present in the
procedure?

It is generally easy to estimate the procedure time and calculate the
personnel costs, but occasionally patient education is the most time
consuming part of the treatment. Many cosmetic surgery procedures have
a long education process to explain the risks, benefits, and options
for each patient. Physicians not accustomed to this type of
procedure may need to consider the cost in more detail.

What additional costs will be incurred for training of physicians and
staff? Is the training available through the manufacturer and can it be
negotiated at the time of purchase or is training necessary through an
independent source?

It is usually customary for the vendor to train the user on the
equipment. Although the vendor can instruct the physicians and staff
on the utilization of the equipment, they are not trained to instruct
them on the procedure itself. Medical equipment is no different;
knowledge of how to use a tool does not always translate into how to
use it properly. Many times, physician-to-physician training or a
mini-fellowship is necessary to correctly learn how to utilize the
equipment.

REFERENCES

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Heiman, R. (1999) 30-Year-old's death after heart surgery leads to suit. Evansville Courier and Press, June 15.

Karen J. Gregg and Michael W. Gregg v. Daniel M. Kane, M.D., Stephen L. Trokel, M.D., V1SX, Inc., and Wills Eye Hospital. (1997) United States District Court for the Eastern District of Pennsylvania. Civil Action No. 95-4630.

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Sloane, E., Liberatore, M., Nydick, R., Luo, W., & Chung, Q. (2003). Using the analytic hierarchy process as a clinical engineering tool to facilitate an iterative, multidisciplinary, microeconomic health technology assessment. Computers & Operations Research, 30(10), 1447-65.

Wagner, M. (1990). The many reasons why hospitals buy technology. Modern Healthcare, 20(31), 2126.

Wood, J. (1999). The judicial coordination of drug and device litigation. Food and Drug Law Journal, 54, 325-61.

Zimmerman, J. (2000). Accounting for Decision Making and Control. (3rd ed.). The McGraw-Hill Companies, New York, NY.

Address for correspondence: Thomas E. Vermeer, Merrick School of Business, University of Baltimore, 1420 North Charles Street, Baltimore, MD 21201 USA, [e-mail].