Over the past 40 years, primary chemistry analyzers have undergone changes in technology, ownership, maintenance and how they are financed. In many ways, its development closely parallels that of the computers they rely on for operation today.
The 1960s
In the 60s, the IBM mainframe was the only computer, and you couldn’t even buy one. It was only leased. If you didn’t have an IBM, your options were a Digital Equipment Corp. mini computer or a slide rule.
Chemistry analyzers also came in three equivalent technology levels. For large clinical laboratories, there was the often-leased SMAC automated clinical chemistry analyzer. Medium-sized labs employed individual benchtop analyzers for each test. Other analyzers, which were much less expensive, were always purchased. Laboratorians could shop around for the best price on reagents from a number of liquid reagent vendors.
1970 and up to 1983
In the 70s, the IBM mainframe was still king, but the slide rule was defunct by 1975, replaced by calculators. In 1978, personal computers (PCs) from Apple and Commodore sounded the death knell for mini computers. By 1983, even IBM was selling the personal computer, and industry soothsayers (incorrectly) forecast the end of the mainframe.
From the 70s to ’83, healthcare experienced its golden years of “cost plus” reimbursement. A technology boom launched new analyzers that rendered old batch processors obsolete. The new technologies, designed to take advantage of proprietary reagent systems, were much easier to use. But laboratories that chose a proprietary-reagent chemistry system had little chance to negotiate for better pricing on reagents and supplies. Among these proprietary systems were the Dade Paramax analyzer, the Kodak Ecktachem and the Dupont ACA analyzer, which replaced all the tubing of traditional analyzers with a bicycle chain.
1983 to 1997
In 1983, Compaq introduced the first successful portable computer. At the same time, modems began to link PCs to mainframes, assuring their salvation.
In 1983 the federal government introduced DRG’s or Diagnosis Related Groups for Medicare and Medicaid payment. DRGs turned the old system on its head. Instead of an assured payment or the amount billed for each lab test, a fixed fee would be paid. Although DRGs called for no direct technology changes, DRGs created the need to do more with less.
Two new industries grew out of this era. The reference lab and the group purchasing organization. Reference labs introduced a new generation of high-volume, low-cost-per-test profiles by big batch analyzers that had not been practical for individual medical labs. By combining the requests from multiple sites onto one analyzer, the cost per test was kept to a minimum.
Group purchasing organizations were around before DRG’s, but it wasn’t until after their introduction that cost became a driving force. VHA, AmeriNet, Premier and HSCA rapidly developed supply and reagent contracts to support their capital equipment agreements.
1997 to Present
In 1997, a critical mass of PC users began to connect to the Internet for everything. Computer industry wisdom has it that the amount of storage space on a microchip doubles every 18 months, meaning it’s difficult to name anything that improves and depreciates quite as fast as computer technology. Thus, the cost of disk drives went down and the connection speed to the Internet got faster.
Chemistry analyzers have experienced a similar cost and value revolution. Traditionally, owning the analyzers and buying the supplies has been the most cost effective approach. High-volume users received deep equipment discounts from manufacturers. In the last three years, that sales and supply marketing convention has been reversed.
Chemistry in the New Economy
My first experience with this new economy happened while developing a three-year capital budget for the Louisiana Region of the Sisters of Charity Healthcare (SCH). This Premier-affiliated hospital group wanted to evaluate new chemistry analyzers and reagent costs because the analyzers in its 10-hospital system were near the end of their useful life. Standardization was a possibility, and there was strong support to stay with one of Premier’s preferred lab vendors.
After a three-month evaluation, one vendor put a winning proposal on the table. If all 10 facilities would standardize on its analyzers and commit to a five-year agreement, the analyzers, reagents, supplies and service would be combined into a single reagent-rental agreement at the most favorable terms. The most favorable terms were quite favorable — less than any of the hospitals previously had been paying for reagents on their owned equipment.
Russell Dietz, laboratory director at St. Francis Cabrini Hospital in Alexandria, La., in 1997 considered the contract a great business move. His cost of reagents and supplies went down. No new capital equipment requests were necessary, and service considerations vanished. Allen Wells, the current laboratory director, is still happy with the agreement. The reagent costs are still very competitive, he receives free upgrades, service is included, and he isn’t worrying about justifying a new chemistry analyzer in next year’s capital budget.
In 1999, the Sisters of Charity of Leavenworth, Kan., undertook a similar evaluation with their national purchasing group, Health Services Corp. of America (HSCA). The nine facilities and numerous clinics and affiliates that make up SCL/HSC evaluated chemistry analyzer acquisitions through their traditional direct-purchase, a fee-per-reportable test, and a reagent-rental agreement.
Pam Bacon, the SCL/HSC corporate director of materials management believed that bundled evaluations and negotiations were the best method to identify true costs. She brought the laboratory directors together for the first time to propose standardization for whole-blood glucometers, primary chemistry analyzers and hematology analyzers.
The chemistry analyzer evaluation began with RFPs from five vendors, and was quickly reduced to two with very different technologies. The nine hospitals ranged in bedsize from 36 to 290, with three under 100 beds and three over 250 beds. Initial operating expenses for the primary chemistry analyzers ranged from only $13,000 per year up to $189,000 per year. The total annual lab cost for the nine-hospital group was one million dollars. The cost per test in each facility varied greatly.
Cost per test was not the only consideration for standardization. Service, ease of use, test menu and company stability were also important to each laboratory director.
A comparison of the two finalists revealed that both vendors agreed to much better discounts for a 100 percent commitment by all nine facilities than they would for an 85 percent commitment from eight of nine. Both vendors offered their best discounts through reagent-rental agreements. This resulted in a total cost for equipment, service and supplies that was as least as good for reagent-rental contracts and in many cases better.
The above table compares the baseline expense costs by facility as a percent of the group expenses. Each facility lists its individual percentage savings with reagent rental and equipment purchase proposals from the two preferred vendors. Note that savings are not dependent on facility size. Those with the highest baseline costs per test benefited the most. Facilities with an initial low cost per test would have seen cost increases with some options from Vendor 2.
Every facility would benefit from going with Vendor 1. Vendor 2 would benefit the overall group by 9 to 10 percent, but four of the nine facilities would see higher costs to subsidize the other five. The mid-size facilities would save the most from bundling all purchases throughout the group with 100 percent compliance. Needless to say, the clear choice was Vendor 1.
From the manufacturer’s perspective, that 100 percent commitment, five-year deal is mighty tempting. Judy Sinclair, laboratory analyst for MDB Information Network in Dallas, explained. “The five-year cost of sales for both the analyzer and supplies is significant. Staff with the vendor and the facility will both change during that period. Maintaining contacts, sales staff training, local facility evaluations and facility assessment costs vendors significant money. By securing a five-year agreement for nine facilities, a vendor can reduce its sales support costs for all those facilities. There is also a strong drive among manufacturers to eliminate competition today to strengthen the volume of future sales of disposables.”
From the lab’s perspective, this was a “Win/Really Win” scenario. St. John’s, an area reference lab, performed more than one-third of all the tests in the SCL/HSC group. It was already at the best reagent cost level available for a single facility. In the group agreement, St. John’s received new two analyzers at no cost with full service agreements and a 12 percent further cost reduction in reagents.
Equipment purchases are restricted until the construction is complete. When the new lab opens in 2002, it will receive new two analyzers with full service agreements and a 12 percent cost reduction. St. John’s, an area reference lab, performed more than one-third of all the tests in the group. It was already at the best reagent cost level available for a single facility.
In another part of the county, Russ Morrison, director of laboratory at St. Vincent Hospital and Medical Center in Billings, Montana had a very different set of requirements from his counterpart in Santa Monica, but he found a similar solution. Russ’ three labs are 250 miles apart and two of them are less than 100-bed facilities. The smallest hospital received not only new analyzers standardized to the other facilities, they can now standardize on normal values and reagent lot numbers for emergency back up. Work flow has improved, and the test menu has increased. Expenses have been reduced as much as 66 percent.
After significant financial and operational evaluation, the SCL/HSC group was able to standardize on one vendor with multiple models of instruments all using the same reagents. The financial results were most impressive. With an annual volume of almost 4 million tests, 100 percent standardization in only nine facilities resulted in an overall saving of 40.5 percent. SCL/HSC took the time and effort to understand the new economy, apply it to their individual facilities and obtained a cost reduction of $400,000 per year for five years. That $2 million savings over five years, should be enough to buy many new computers at today’s prices.
