In-house service can save money, but it takes a huge commitment. What are some other service options?

Without question, original equipment manufacturers (OEMs) retain the bulk of service contracts on the ultrasound machines that they sell. OEM ultrasound service contracts are estimated to account for 60% to 85% of such agreements industry-wide. Increasingly, however, third-party independent service organizations (ISOs) are convincing hospitals and other end users to trust them to provide ultrasound service, at what the ISOs claim are savings of at least 15% of what the OEMs charge.

Large hospitals and medical systems are also increasingly turning to in-house information technology or biomedical engineering departments to service ultrasound units, at what they report are far greater savings than rates charged by either ISOs or OEMs, albeit while shouldering higher levels of risk. It is not unheard of for all three of these options to be used by one institution for ultrasound servicing. All of this makes for an ultrasound servicing landscape that often is complicated as well as intensely competitive.

The OEMs
“Nobody ever lost their job for signing a service contract with an OEM,” says medical business consultant Ira S. Tackel, MEng, BME. “The OEM is a very safe route to go, but it’s also the most expensive.”

The OEMs, of course, emphasize this safety. The argument they make is that, since they built the machine, they are best prepared to service and repair it. It is a hard argument to dismiss, especially for private clinics and other small physicians’ groups and small hospitals.

The OEMs also offer free software upgrades, and they operate remote repair centers that can fix many ultrasound problems by analyzing the device over the Internet using software.

“Our online service is included with the service contract, and it doesn’t depend on the level of service purchased,” says Steve Kohler, director of segment management for ultrasound and small markets for Siemens Medical Systems services division. “The engineer can go online and implement a fix that way. Our online fix rate is very high. Repair time is much faster. It might even be a situation where they can continue to use the machine but not at an optimal level.”

General Electric also has remote service capability for ultrasound systems. “We offer remote diagnostic tools that are available on all our products,” says Hooman Hakami, vice president and general manager of global service for ultrasound for GE Healthcare. “On our newer products, these tools also can allow us to proactively to get diagnostic information about the equipment to help prevent future failures.”

GE also offers software upgrades and, through its annual product breakthrough strategy, “provides new features and functionality across our entire ultrasound product family,” Hakami adds. GE can also help with other value-added services such as training, asset utilization, and department productivity analysis, he says.

The service market for ultrasound is not huge by industry standards, but neither is it negligible. Hakami says GE’s global ultrasound service is a $200 million business segment with 560 employees deployed. “Just in the [United States] we have an installed base of [more than] 30,000 GE ultrasound devices, and we also provide service on non-GE products.” That last is a point to remember.

Hakami estimates the global ultrasound market at about $3 billion, and he pegs annual growth in “the 3% to 5% range.” For GE, the global hospital segment is growing in range with the market, he says, adding that clinics and private practices for doctors such as cardiologists and obstetricians/gynecologists are experiencing double-digit growth. This is a lucrative market for OEMs, since the small offices have no in-house service capability and perhaps greater reluctance to trust ISOs.

Hakami says ultrasound machines, which can cost anywhere from $30,000 to $250,000, are relatively inexpensive compared to other imaging systems, such as MRI, that generally cost millions.

The OEMs do not want to divulge how much they charge for ultrasound service contracts. The figures would be hard to pin down given that the OEMs have a number of service options. For hospitals that have in-house service departments, the OEMs will write contracts where the first line or “first call” service is done by the hospital technician before the OEM comes into the picture.

“The flexibility in our service contracts allows our customers to really tailor their needs,” says Siemens’ Kohler. “We are very flexible in trying to help them.”

Competitors say the OEMs charge on average about 10% per year of the cost of a machine for the service on it. GE’s marketing manager for ultrasound in the United States, Michael Rasmussen, does say that a transducer replacement contract on ultrasound equipment “is very low cost, less than one tenth the cost of the equipment per year.”

It is something of an anomaly that, while OEMs are constantly unveiling new ultrasound features, the machines themselves are reliable and long-lived, transducer damage excepted. “Seven to 10 years is the typical lifespan of medical equipment, and that’s what we look at with ultrasound,” says Kohler, “although a lot of them last 15 or 20 years.”

The ISOs
Only in the past few years have independent or third-party service providers come forth to challenge the OEMs for ultrasound service contracts. Typically, an ISO entrepreneur will hire away service engineers from the ultrasound OEMs by promising them commissions on new accounts and other incentives that the big companies find hard to match. The former OEM technicians find ways to repair the equipment they are familiar with, working around any software impediments as best they can.

Christopher Cone, MBA, is vice president of sales and marketing for Sonora Medical Systems, an ISO based in Longmont, Colo. He says the pressure on OEMs to make profits and on hospitals to save money creates opportunities for ISOs.

“You’ve got these huge multinational OEMs that are investing resources, and their shareholders are wanting dividends. On the other hand, hospitals are seeing about a 2% profit margin,” Cone says. “You’ve got the supplier needing to make as much as it can, and you’ve got the hospitals strapped for money.”

Cone says his ISO, on average, can offer a service and repair contract on an ultrasound machine about 15% below what OEMs charge. He also says ISOs sometimes have an advantage over OEMs in that they can service many different brands of ultrasound machines, making a single service contract on all ultrasound equipment possible for some hospitals. Still, Cone advises that end users keep some ties to the OEMs even if they use ISOs for most service. “Some parts you can only get from the OEM, and [for] any new system that just came out, those parts won’t be available in the aftermarket.”

Bob Broschart is executive vice president for sales and marketing for Sound Imaging Corp, another ISO, headquartered in Engelwood, NJ. Broschart says his company specializes in ultrasound service and that its clients usually save about 20% of what they had previously been paying. Broschart estimates the ultrasound service and repair market in the United States to be between $500 million and $800 million per year. He says Sound Imaging has about 2,600 ultrasound servicing contracts, about 60% of those with clinics and physicians groups and the remainder with hospitals.

Broschart says the OEMs have restricted access to proprietary diagnostic software as one way to combat ISO intrusion into the service market. Devices like side-panel locks and dongles that must be attached for software to work have also been used as restrictions, he says, but often ineffectively so.

“The OEMs sell the fact that no one can repair the unit without the system diagnostics,” he says, “and they’ve been very successful with that scare tactic, but the truth is, most service engineers don’t use the diagnostics in the first place. We have often gone in to clean up a mess after the diagnostics pointed in the wrong direction.”

Another area where the ISOs are battling the ultrasound OEMs is in the parts arena. Broschart says his company uses only manufacturers’ parts, but it buys them used in the aftermarket and reconditions them.

At Conquest Imaging in Stockton, Calif, replacement parts for ultrasound are also refurbished and rebuilt. Conquest started as an ultrasound parts company and then expanded into offering service contracts. “Our field-service organization is servicing 500 ultrasound systems,” says Conquest’s president and founder Mark Conrad.

Conrad says his company does encounter resistance from hospitals and other end users that fear reconditioned parts may not perform, even though they are warranteed. “We spend an inordinate amount on packaging and the correct padding,” says Conrad, “so that their first impression is that it looks good and not ‘I wonder if it’s going to work?’ ”

Conrad says he can offer savings of 40%–60% on replacement parts with exactly the same warranty provided by the manufacturer. This is particularly important, he adds, with regard to transducers.

Transducers are wand-like probes on the end of a cable that are moved over the patient’s body during the imaging process to send and receive the sound signals from which the images are composed. There are many kinds of transducers, including abdominal, cardiac, and obstetric, and they are extremely reliable but vulnerable. They contain crystals, and they break easily if dropped. They are easily dropped because they are coated with gel to make them move smoothly over the patient’s body.

The least expensive transducers cost less than $1,000 but the more expensive ones can cost more than a new car. The cost of replacing damaged transducers is probably the biggest expense an ultrasound user faces. Because no one insures an unlimited number of replacement transducers, they are an important aftermarket item.

“Ninety-five percent of the [transducers] we take in are damaged; they haven’t failed,” says Conquest’s Conrad. The company rebuilds transducers and guarantees them. “We try to mirror the OEM warranties; we are that confident in the product that we deliver at 40% to 60% less. We buy parts from the manufacturer and vice versa, although they don’t want to admit that. You have to have those relationships.”

Because transducers are so expensive, technicians who damage them often don’t tell their bosses. At Siemens, says Kohler, returned transducers are examined minutely to see if they have been damaged. “It’s a challenge for everybody when the customer says ‘I didn’t do anything, it just stopped working.’ We try to err on the side of the customer, but we also don’t want to eat a whole bunch of transducers. We do a microscopic review, and we show them the obvious misuse.”

In-House Repair
One factor making it easier for ISOs and hospital in-house biomedical departments to service ultrasound units has been the development of independent schools that train service engineers.

Joseph Weidner is vice president of DITEC, a Cleveland-based school that trains engineers on imaging equipment, including ultrasound machines.

Weidner says OEMs are more cooperative with in-house biomed engineers who service ultrasound machines than they are with technicians from ISOs. Weidner says OEMs will often help train in-house people to perform a first level of service, but he adds that hospital administrators and purchasing agents do not spend enough time negotiating software rights with the OEMs to make in-house service easier. “I would make sure I got access to the diagnostic error codes. That would be critical to me. You can get the software locks turned off as part of the purchasing agreement.”

Weidner says one reason hospitals and clinics do not pay more attention to service agreements in the prepurchase stage is that the purchasing decisions are often made for clinical reasons. “Usually someone with power buys the machine, and it shows up on the dock unannounced. Biomed would plate out some of these things, but a lot of times they’re not even brought into the circle. It’s all part of keeping the doctors happy.”

Kenneth Wedlake is a champion of hospitals performing in-house services, not just on ultrasound but most other medical equipment. Wedlake is director of biomedical engineering at ViaHealth Rochester General Hospital, a 527-bed facility in Rochester, NY. He says the hardest part of his job has been convincing clinicians to sign on to and have faith in the in-house servicing concept.

“We think we can achieve a 50% saving on all ultrasound service by taking the first call,” he says. “The ultrasound costs aren’t as high, so the saving is not as dramatic as on other equipment—but the 50% is still there.”

He also emphasizes what he calls “the quality piece.” He says service engineers who are hospital employees have a stronger commitment to a hospital’s quality standards because they are at the hospital day after day and also live in the town. “I don’t think you ever build that real trust without a good, solid in-house program.”

Wedlake is so convinced that in-house service is the way to go that Rochester General has no service contracts with either OEMs or ISOs for ultrasound equipment. “We are at risk for all our equipment; we pay secondary service as we need it,” he says.

He says key to being able to do in-house service are the training programs available through the OEMs and independent schools like DITEC. “We have been able to do first call with what they have taught us.”

On the subject of transducers, Wedlake says it is critical that hospitals like his are willing to use third-party aftermarket providers of reconditioned equipment. “I spend more on probes than even x-ray tubes,” he says. “In order not to lose on those probes, you have to be able to use a third party.”

Wedlake is skeptical about the value of system upgrades written into OEM service contracts. “A true upgrade is never covered. If it really provides a new function,” he says, “then you’re going to pay for it. Anything that is considered a true upgrade is a capital cost, and I treat it that way.”

Conclusion
DITEC’s Weidner contends that OEMs make most of their ultrasound profits from equipment service.

The OEMs also build service divisions that compete to service their competitors’ products. Because of this they are themselves like ISOs in some cases and they may be forced to join hands with true ISOs to get competitors’ replacement parts.

All of this makes for a complicated and possibly confusing ultrasound service market, but it’s one where the knowledgeable negotiator can save money.

“I’ve used them all—in-house, ISO, OEM—and no one approach is correct,” says consultant Tackel. “They all have value.”

George Wiley is a contributing writer for 24x7.