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In search of an analyzer: sifting through the offers.

The fortunes of instrument manufacturers rise and fall with those of the laboratory community, so it's not surprising that prospective payment is coloring their current marketing efforts.

There is greater pressure on hospital laboratories to provide quality service in the quickest, most cost-effective way possible. As we provide clinicians with data to aid in diagnosis and treatment, the focus must be on reducing the patient's length of stay.

Manufacturers are fashioning responses to these demands. Their advertising has changed significantly in the last year. Phrases like "most cost-effective operation," "total walkaway operation," "increased efficiency and productivity," and "decreased turnaround time" appear in many ads.

Vendors are also putting more emphasis on protecting labs against such risks as instrument downtime and absolescence. In the former category are training programs for instrument operators and troubleshooters, better service, and better service contracts; in the latter, increased adaptability among newer instruments to future technological developments, better trade-in terms, and alternatives to outright purchase of an instrument.

The financing options available today are, in fact, a leading element of instrument marketing. We hear of flexible reagent rental and purchase plans, tailored to the laboratory's budget constraints; economical reagent rental plans; and no-capital-investment plans, which is another way of saying rentals and leases.

Our 658-bed hospital laboratory evaluated financing options recently before selecting a replacement for our 17-year-old multi-channel chemistry analyzer. We weighed not only the general advantages and disadvantages of renting, leasing, and purchasing, but also the disparate specifics of different offers. These ranged from discounts on reagents and supplies to a broad spectrum of trade-in allowances and one or another type of purchasing bonus.

Several factors gave us an edge in trying to land the most cost-effective acquisition. First, the kind of instrument we needed, an analyzer for inpatient profiles, was sold by a number of manufacturers. Second, the chemistry profiling area of the lab was one of the last phases of a renovation project that will finally end this fall. We had 18 months to carry out instrument evaluation and selection.

And third, our choice of instrument was not restricted by any physical limitations in the laboratory. The area reserved for the new analyzer was designed to meet the requirements of most instruments on the market, including water, air, and gas outlets; floor drains; dedicated circuits; and special ventilation equipment.

We didn't seek finacing proposals right away. The evaluation process began with visits to manufacturers' plants and user laboratories in order to see the instruments in operation. We also telephoned some labs. Most manufacturers supply a list of current users, but we wanted to include dissatisfied customers in the survey. So we asked the customers on the manufacturer's list whether they knew of others who weren't so happy with their instruments. With some analyzers, it seemed as if every satisfied user had a counterpart who was negative.

Our survey delved into seven key characteristics: instrument performance, service response time, expected downtime, time-saving operational features, startup time, costs of consumables, and ease of operation.

Consideration of these factors narrowed down the field to four instruments. We now asked the manufacturers for financing proposals, and each came back with an assortment of options. Let's look at them within the broad categories of acquisition methods:

* Instrument rental. Lasting for a year or less, these plans should be considered when a special project imposes a short-term need. They require minimal initial cash outlays, making them an excellent way to evaluate technologies in the lab without great expense.

We treat rentals as operating expenses since they accumulate no equity for the lab. They also increase cost per test significantly. On the other hand, service is included because the instrument remains the vendor's property.

All of the rental proposals submitted to us were similar in content. Vendors offered a discount on necessary reagents and supplies, to offset some of the cost of renting. Most notably, one vendor enticed us with 50 per cent off list prices for reagents and supplies.

* Reagent rental. The lab purchases reagents for the instrument from the vendor at list or near-list prices in this alternative. In general, reagent rental plans are similar to outright rentals, except that here the lab gets the instrument at no separate charge--use of the instrument is incorporated into reagent prices. Each proposal we received stated a base charge keyed to a minimum monthly standing order for reagents.

As with straight instrument rentals, we treat reagent rentals as operating expenses. Rarely do laboratories pay list price for reagents on the open market, of course. So the reagent rental program also is likely to increase cost per test significantly.

A variation on the reagent rental plan was the "click and meter" system. We would be assessed a fixed charge each time the instrument ran a test. To enhance its offer, one vendor listed a discount on all metered tests over a minimum montly number.

* Leasing. Like the rental proposals, the lease agreements submitted to us required a minimal initial cash outlay. Proposed leases ran from three to 10 years, enabling the hospital to maximize its reimbursement by claiming the lease payments as expenses over a shorter period than the five to 15 years in outright purchases. This is an advantage for as long as most third-party reimbursement remains cost-based. There are shorter-term leases available, running from three to five years.

A true lease (one without an option to buy) is treated by us as an operating expense; the hospital doesn't capitalize the instrument because it gains no equity in it. For more specific guidelines, the Federal Government's Financial Accounting Standards Board's Statement No. 13 lists criteria that distinguish a true lease from a capital lease.

Although the total outlay for a lease can exceed the original purchase price of the instrument by a great deal--as much as 60 per cent in the proposals we reviewed--the lease protects the laboratory from instrument obsolescence. Lease and rental rates were based on the prime lending rate and were subject to change without notice.

Unlike rental options, leasing puts responsibility for instrument service on the lessee.

* Lease-purchase. The laboratory has the option to purchase the instrument for a relatively small amount of money after leasing it for three to 10 years. The cost is capitalized as an asset, and the instrument is depreciated over its life span because the hospital builds equity in it.

When capital resources are limited but obsolescence is not a worry, the lease-purchase agreement is an inviting option. In our proposals, the end-of-lease purchase price appeared to be the book value of the instrument after five years of use.

In one of the proposals, the purchase price was $210,000, less a $30,000 trade-in allowance. After 60 months of leasing, we would have been able to purchase the instrument for $36,000.

*Purchase. Immediate outlay of capital marks outright purchase plans. The acquisition adds to the hospital's financial worth. Allowable depreciation extends over the useful life of the instrument, which is usually five to 15 years. Again, the cost of purchasing an instrument is always less than leasing it.

Purchase recommends itself for long-term needs, five years or more, where obsolescence isn't a factor. For maximum benefit, the lab should use the instrument until it is completely depreciated.

We found the purchase proposals sprinkled with a variety of extras: extended warranty (18 months to two years), reagent and supply price protection for one or two years, free service contracts, biomedical engineer training, and air fare for technologist training. The trade-ins offered for our old analyzer ranged from $5,000 to $30,000.

One proposal offered to carry the balance of the cost after trade-in as an addition to the cost of reagents. Still another--and the most remarkable in our view--was the offer of two instruments for the price of one. We could buy one chemistry analyzer and get a smaller one at no extra charge.

As we evaluated our proposals, it surprised me that manufacturers always offered the reagent rental option first, even though it spells higher testing costs per DRG. The explanation is that a reagent rental does not require the laboratory to have money budgeted up-front for the instrument acquisition. The rental can start at midyear and come out of the reagent supply account. Thus, the manufacturer gets a foot in the door, and when the new fiscal year begins, the laboratory may switch to another financing arrangement. As the prospective payment system widens, it will be interesting to see if reagent rentals continue on the front line of sales appeals.

We summarized our site visits, user surveys, and evaluations of financing proposals, including the effects of each financing option on our third-party payments. Then we settled on one instrument that seemed to meet our needs best. It happened to be the one that was offered with a second, smaller analyzer at no extra charge above the $190,000 purchase price. The trade-in allowance was $25,000. Our alternative selection, outlined in a submission to the hospital's finance committee, was a lease of the same instrument, even though the second analyzer would not be thrown in under that arrangement. The finance committee supported a purchase.

Apart from the manufacturer's offer, two major factors weighed in favor of buying the instrument: capital funds were available and capital expenses continue to be reimbursed as pass-through costs under prospective payment until Congress determines how to incorporate them in DRG rates. Congress has set an October 1986 deadline for itself.

When the pass-through ends, there will be an increased risk to capital investment decisions. Hospitals and their laboratories will need financing options more than ever to keep abreast of changing technologies and provide quality services. Our search showed that several workable alternatives are in place right now.
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Title Annotation:chemical analyzer
Author:West, Yolanda
Publication:Medical Laboratory Observer
Date:Aug 1, 1984
Previous Article:Buy, lease, or rent: which way to go under DRGs? Prospective payment is changing the relative advantages and disadvantages of instrument acquistion...
Next Article:How to improve your lab's productivity.

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