Shop talk: In acquiring lab instruments,
  the stakes have gotten higher

July 2007
Feature Story

Anne Ford

Acquiring the right instrumentation for your laboratory can feel much like a game of poker. That is, it depends on two things: the cards you’re dealt—such as budget, time frame, and existing contracts—and how you play them. And like poker, acquiring instruments can be an expensive, risky pursuit.

In this analogy, Mark S. Lifshitz, MD, and Robert P. DeCresce, MD, MBA, aren’t card sharks. Far from it. They’re more like seasoned gamblers willing to share what they’ve learned about beating the odds. And in this article, they and the directors of three laboratories (one small, two larger) offer tips that can help you get that winning hand.

For several years in the late 1980s and early 1990s, Drs. Lifshitz and DeCresce published The Instrument Report, a monthly newsletter that functioned as a sort of Consumer Reports for laboratories; each issue focused on the pros, cons, and other particulars of a given instrument. Though they stopped publishing the Report about a decade ago, both doctors have kept on top of instrumentation trends in their capacities as laboratory directors. Dr. Lifshitz is director of clinical laboratories at New York University Medical Center, and Dr. DeCresce is chair of the Department of Pathology at Rush Medical College and director of laboratories at Rush Presbyterian-St. Luke’s Medical Center, Chicago.

Over the years, they say, the stakes in the acquisition game have gotten much higher, thanks in large part to the standardization push. “Years ago, you went looking around at new systems and someone sold you something,” Dr. Lifshitz says. “It wasn’t such a big deal. If it didn’t work out so well, you got another box down the line. Now the decisions are far bigger. They cost more money, because now when you’re making a change, it’s a change across the entire lab for a consolidated platform, potentially, as opposed to many different boxes. You’re not making a $200,000 decision; you’re making a million-dollar decision now. If you get it wrong, everyone’s going to know about it.”

In the mood to ante up yet?

The good news for laboratories is that standardization means higher stakes for the vendor, too. “Fifteen years ago, you had a stat analyzer from vendor A, and a routine analyzer from vendor B, and another analyzer from vendor C,” Dr. Lifshitz says. “The lab that might have had four different vendors’ worth of equipment now has only one or two vendors’ worth of equipment. It’s an all-or-nothing decision now.” And for laboratories, that increased bargaining power represents an ace up the sleeve.

In the end, though, this game doesn’t—or at least shouldn’t—have any losers. “You have to have a win-win situation,” Dr. Lifshitz says. “Don’t get me wrong, I’m all for getting the best possible price. But in the end, they [the vendors] have to get something out of the relationship, too. No one wants to squeeze a vendor to the point that they’re losing money on your account.” After all, “you do want them to show up for service when you need it.”

Now that the rules of the game have changed, how can laboratories come up with a strategy that lets everybody win?

First, what not to do: skimp on pre-purchase research. Seems obvious, but it’s a common error. “Some people buy a car without driving it,” Dr. DeCresce shrugs. “That’s looking for trouble. People don’t call around enough to check references” for instruments they’re considering. “I think that’s a big mistake. I have found that most of the time when you call people, even the ones the vendors recommend, they’re very honest with you.”

In addition, when researching a potential acquisition, “there’s a lot to be said for going to a hospital and looking at it and talking to the people who operate it. Not the lab director. Me, what do I know about the machine? Why don’t you go ask the lab tech who’s running it? Or the supervisor? That’s who to ask.”

James Nichols, PhD, has plenty of experience asking questions about potential acquisitions. An associate professor of pathology at Tufts University School of Medicine, Boston, he is also director of clinical chemistry for the Baystate Health System, Springfield, Mass. Between 2001 and 2003, his laboratory switched vendors, a process that entailed reevaluating every assay they had. Now Baystate is planning to move the lab within the next year or two, which will entail purchasing new analyzers, “so we’re going to have to go through that whole process again,” Dr. Nichols says wryly.

And in that process, he’ll ask questions like these: “What type of efficiency are we going to get? Because no instrument is capable of staying operational for 24 hours a day. There is some period of time when you have to do maintenance on it. So how long does that maintenance take? How long is it down? How many times does it break unexpectedly? When it does break, is the service rep willing to come in? Have they been coming in on time, and is the analyzer back up in a reasonable period of time? How functional and operational and customizable is the middleware? And how much support are we going to get from the vendor?”

Important questions, yes, but before asking what type of equipment you should get, Dr. Lifshitz suggests, ask if equipment is even what you need. “I don’t install a new analyzer in my lab because it seems like a nice thing to do,” he says. “Technology is a means to achieve an end; it’s not an end in itself.” And sometimes a nontechnological solution, he adds, can be just as effective (and a heck of a lot cheaper).

For example, a lab may experience a large peak of samples in the morning and longer turnaround time. In this situation, some laboratories might try to reduce the workflow backlog by purchasing another analyzer. Then there’s the solution that Dr. Lifshitz and his team used when they encountered this problem at NYU.

“Instead of purchasing more equipment to increase capacity,” Dr. Lifshitz says, “we looked for ways to distribute work more evenly during the shift. We had phlebotomists send samples to the lab after every few patients instead of waiting to collect a large batch from an entire floor,” he says. “So samples arrived in the lab sooner, were processed faster, and we avoided a big peak. Testing demand was reduced so that it more evenly matched instrument capacity. That’s called a nontechnologic solution to a complicated problem.”

What if you’re just not sure whether a new instrument is appropriate or not? That’s where a workflow analysis comes in. Unfortunately, it’s another often-skipped step, Dr. DeCresce says. “Most people want their machine to accommodate their workflow, rather than saying, ‘Gee, maybe with this new instrument I could completely change how I do my work.’”

Some vendors offer complimentary, or at least inexpensive, workflow analysis services. And while it’s true that “they usually propose their product as the solution,” Dr. Lifshitz says, “many of the findings are often useful and don’t necessarily have applicability to a specific analyzer. It could show you how by changing your workflow you could change X, Y, and Z irrespective of any new technology, or if you get rid of your current technology and move to any one of several different options from different vendors, you might achieve some economies and some improvements. It doesn’t have anything to do necessarily with what vendor you decide to use in the future.”

Mark Reyes, MBA, MT(ASCP), service line administrator for laboratory operations at Palomar Pomerado Health, San Diego, has taken advantage of vendors’ workflow analysis services before and says they can be worthwhile. Palomar Pomerado Health, a California District Hospital System with two acute care hospitals and two skilled nursing facilities, is in the process of building an additional hospital that will add 500 to 600 beds to the system’s existing 400 or so, meaning that Reyes has plenty of instrument acquisitions awaiting him.

“It appears that competition among the vendors is so fierce that they are actually willing to present anything and everything to us,” Reyes says. “For example, at least two of our vendors offered to come in and do a workflow analysis for us, bearing in mind that it may be tilted toward their instrument, but at least we get some ideas how to proceed and which direction to go.”

Deciding whether to switch to a new vendor from an existing one is a bit of a catch-22. “Obviously our experience with our current vendor gives them a competitive advantage because we know the positives of this vendor,” Dr. Nichols points out. “But on the other hand, we know all the deficiencies of the current vendor, and no one’s perfect. We may be able to solve some of our problems that we have with the current vendor by switching,” but then again, “we could get into new problems that we didn’t foresee.”

Laboratories must also consider the pros and cons of going with single versus multiple manufacturers, he continues. “Any time you put all of your eggs in one basket, you know, you can have problems. Particularly if the vendor does a recall, or if they no longer support an instrument. You can suddenly be left scrambling.” In a previous position at another hospital, he says, “I can remember a couple of point-of-care tests when a vendor did a large recall back in early 2000. We suddenly were left scrambling trying to find a pregnancy test to run on the point-of-care unit. We were glad we had a few boxes in our stockroom that we could use until we could find an alternative product.”

Let’s say you’ve analyzed your workflow, implemented any necessary nontechnologic solutions, determined that you really do need new instrumentation, and chosen a vendor or vendors. Don’t be surprised if all that turns out to have been the easy part. Getting your institution’s administration to sign off on a potential acquisition—now, that’s tricky.

Dr. DeCresce blames that, in part, on the Sarbanes-Oxley Act of 2002. Designed to prevent companies from fraudulently manipulating their financial statements, it also required that “the manufacturers be much more transparent in their description of what they were doing when you were acquiring equipment.” That is, they had to specify more clearly whether their proposed transactions were leases, sales, reagent-rental agreements (in which the cost of the instrument is incorporated into the cost of the reagents and distributed over costs-per-test), cost-per-reportable arrangements (in which the laboratory pays the vendor on the basis of reportable tests), or some permutation of the above.

“When you go to get an instrument, the manufacturer gives you a contract that says exactly how much goes toward the instrument, exactly how much goes toward supplies and service, and when you present that to your hospital, they usually wind up qualifying it as a capital purchase, even though you might be leasing it,” Dr. DeCresce says. “Now a lot of times you have to plan a lot further in advance what equipment you’re going to get, because a lot of times your hospital’s going to treat it like a purchase, even though it may not be a purchase.” (Dr. Nichols notes, too, that sometimes institutions’ finance departments see a lease as a liability—“in other words, it’s a debt against the hospital.”)

“And at the same time, hospitals became much more cautious in their financial reporting,” Dr. DeCresce adds. “So the combination of the law having changed and hospitals wanting to be a little more transparent made it more difficult for hospitals to acquire equipment.”

Reyes knows those difficulties firsthand. Getting instrument acquisitions approved can be a “long, tedious process,” he says. Any request of more than $100,000 has to be presented to and approved by his hospital’s Physicians Capital Advisory Committee, which then makes a recommendation to the executive management team. “When I’m ready to purchase that instrument, I then have to go to the executive management team and make one more presentation, and say, ‘I need this because of the following reasons,’” Reyes says. His presentation includes “anything and everything that you can put on—cost savings, patient safety, ROI. And then they make the final decision.”

That’s not to say he has no influence in the matter. While his institution generally prefers to purchase equipment, Reyes prefers to see the lease or reagent-rental proposal as well “so that we can decide to keep or get rid of an instrument when the agreement is over, because technology changes so fast or the instrument no longer meets our needs.” So when he puts out an RFP, he usually asks vendors to include the cost of a straight purchase, the cost of leasing an instrument, and the cost of reagent rental, in the hopes of getting information that will help justify one of the latter two choices to the executive management team.

Laboratory directors at some smaller hospitals, too, prefer a lease or reagent-rental scenario, such as Sarah H. Jenkins, PhD, director of laboratory services at the 155-bed Children’s Medical Center, Dayton, Ohio. “We don’t purchase a lot of our analyzers, especially in areas where the technology is changing rapidly,” she says. “We used to purchase instruments using capital dollars years ago, when I first got here, which was about 10 years ago. And then it just became easier to get the reagent-rental agreements.”

Not only do those agreements allow her the flexibility to acquire new technology, they also allow her to avoid having to vie for capital dollars, which are available only once a year. “If you find something midyear that would be a really good thing to have, you don’t have the option of capital dollars,” she points out. “And typically also with reagent rentals you can upgrade your instruments as time goes by, whereas if you’ve purchased them you’re kind of stuck with them.”

Cost-per-reportable arrangements are another way to get an instrument without having to pony up its entire price. There’s another advantage to them as well, Dr. DeCresce says: “Cost-per-reportable arrangements tend to make the whole process more transparent, so people have a much better idea what it’s going to cost them.”

Dr. Nichols is a fan of the cost-per-reportable route, though, he says, “I haven’t been seeing them too much because the vendors don’t like them. Quality control, reagent that’s wasted, maintenance types of things that you don’t get a reportable test out of, you don’t pay for. I kind of like them because I think the vendor has to really step up and support its product.”

But that can backfire, Dr. DeCresce adds: “A lot of times customers don’t like it because the vendor comes in and says, ‘Hey, you’re ordering too much reagent,’ and it turns out that at the end of the day, the tech throws away what’s left in the bottle because they don’t want to run out of it halfway through the next shift.” Or, as Dr. Lifshitz puts it, “If you end up spending 500 tests’ worth of reagent to produce 100 tests, they’re going to start wondering why you’re throwing out 400 tests’ worth of reagent that you’re not paying for.”

Before entering a cost-per-reportable agreement, Dr. Lifshitz says, a laboratory should understand the assumptions the vendor uses to calculate costs. For example, “If the vendor proposes a fixed payment per month based on current reportable volume, how much does your patient volume have to change before they will increase or decrease your monthly payment? Has the vendor assumed you will run the test twice a week when you plan on running it daily?”

Reyes discovered the virtues of cost-per-reportable arrangements through trial and error. When he bought four chemistry analyzers from Beckman Coulter some time ago, “I had an option of either buying the reagents straight out or paying them cost-per-reportable,” he says. “We did the straight purchase of reagents for the first four or six months. And we were finding that we were spending more money buying them directly. I went back to the vendor and said, ‘I want to go to cost-per-reportable.’ And now I know I’m paying what I’m paying based on what my usage is.”

In another attempt to save money, some lab directors take advantage of so-called reconditioned or refurbished instruments. These may be demonstration models or nearly-new instruments that another laboratory has tried on a trial basis and rejected. The general consensus is that while reconditioned systems are usually not appropriate as frontline instruments, they can be useful in a secondary role. Reyes has used them to work around budget constraints, such as needing two instruments but not being able to afford both. In that case he has purchased one new and one reconditioned instrument and used the latter as a secondary analyzer.

At NYU, Dr. Lifshitz says, “We have used in certain circumstances rebuilt or refurbished machines, generally not as a frontline system. It may be that as part of the extension of a contract, we’re getting a refurbished analyzer which is, for practical purposes, a little newer than the current one that we’d be giving up.” Should laboratories worry about getting stuck with a lemon? Not really, he says: “You have a maintenance contract with the vendor, generally speaking, so it’s in their best interest to make sure what they’re giving you works.”

Sometimes, Dr. Nichols says, a laboratory has no choice but to use a reconditioned instrument—as when a vendor stops manufacturing products that the lab really likes or needs. “Sometimes you are forced to use them because the assay’s so robust, so good, that you want to continue to use it rather than switch to another vendor or a newer model instrument,” he says. When his lab sought a nine-minute intraoperative parathyroid hormone assay from Roche, for example, he discovered that “it was only available on one of their models that they no longer produced, so the only way you could get that was to get one of these reconditioned ones. And there was such a demand that they had a long waiting list for them.”

He stipulates that it’s best to buy reconditioned instruments from the manufacturer rather than a third party “that’s just kind of bartering used equipment,” because the manufacturer not only knows its own products best, but also has “a database of complaints and problems [about the instrument] that they fixed.”

Reyes grapples with one vendor issue as he begins planning acquisitions for his institution’s new facility, which is a few years from completion. “One of the things we ask when we meet with the vendors is, ‘What are the new instruments that are coming out down the pike?’” he says. “Some of them are reluctant to give that out. Sometimes they say, ‘Well, that’s confidential.’” Understandably, he wants to avoid making a long-term commitment to an instrument that is about to be replaced by a next-generation system.

Dr. Lifshitz’s take on this kind of situation: “You have to buy based upon what exists today. You don’t want to buy machines because of something that’s supposed to happen. You want to buy an analyzer because it offers you today what you need.” Not to mention that “sometimes the feature or assay that’s supposed to come out next year never comes out.”

Then, too, laboratories should weigh the pros and cons of upgrading their instruments carefully. “You want to get to a good technology that’s going to get you all the features you need for delivering the best to your patients, but on the other hand you don’t want to be switching every day to these new devices, just because of the number of people involved,” Dr. Nichols says. “You can’t train someone overnight on these things. When you’re looking at 2,000 or 2,500 operators, if you have to bring in a new point-of-care testing device, you’re talking about—even at 15 or 30 minutes per operator—a huge number of nonproductive hours and resources that you’re spending in training.”

Dr. Lifshitz reminds laboratory directors that they need to decide whether they feel comfortable acquiring an instrument immediately after its introduction to the market.

“Do you want to be the first one on the block with the new technology where they have just one device in the Northeast with one serviceman running around, or do you want to wait a year and reconsider the technology? That’s a matter of preference.” Personally, he says, “I’m not a big early adopter.” Once, he remembers, his laboratory acquired an analyzer with the serial number two, which proceeded to break down so often that “the vendor gave us a machine for free just to use to cannibalize parts.”

Despite all its potential pitfalls, Drs. Lifshitz and DeCresce argue, the acquisition process has seen many positive changes over the years. For one thing, Dr. DeCresce says, “The equipment is better these days. It lasts longer,” so laboratories don’t have to buy instruments as often as they used to. For another, says Dr. Lifshitz, “I think the vendor cost estimates for operating equipment are more accurate today than they were 10, 15 years ago. So if someone tells you it’s going to cost $500,000 a year for your test volume, they’ll almost guarantee it. There used to be far more guesswork.”

Dr. Lifshitz concludes with one last word of advice: When working with vendors, remember that acquiring an instrument isn’t a used-car transaction, “where someone is just selling you a car and waving goodbye. You have a longstanding relationship with instrument vendors. This isn’t a shady business.”