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Service After the Sale

Are maintenance contracts really necessary?

Service After the Sale

Are maintenance contracts really necessary?

After wrestling with the pros and cons of whether to buy the latest technology for your practice, you make the painful decision to cough up the big bucks required. Once the decision is made, you can console yourself with the idea that you can provide better patient care with the new device, even use it to attract new patients—and that you can recoup some of your investment in higher reimbursements. But the headaches—and the costs—aren't over. Typically, that new device only comes with a one-year warranty. What do you do then? Fees for service contracts can eat up a significant chunk of practice revenue—according to one source, a two-office eyecare practice pays $65,000 a year in service contracts for its equipment.

Are service contracts worthwhile? Is it more cost-efficient to just take your chances and call a freelance repair service? Are service contracts really necessary for all your ophthalmic devices? Here, physicians, practice administrators and third-party repair services help determine the level of “insurance” that is prudent for the devices your practice can't live without.

How to Know What You Really Need

Service contracts are not always a smart buy for every device. Gordon Siteman, vice president of sales and marketing for distributor Lombart Instruments, likens them to an insurance policy—they must be a good deal for both seller and buyer. And therein lies the rub. If a contract or extended warranty is sold too inexpensively, the seller is carrying a “big exposure,” Mr. Siteman says, and will be forced to absorb the cost of parts and labor. If, on the other hand it is priced to reduce risk for the seller, buyers often deem it too expensive—a costly policy to insure against something that may never happen, or happen only once. “When it's all said and done, it's probably just as cost effective to pay as you go on an hourly labor rate,” Mr. Siteman says.

Yet sometimes that expensive insurance policy is worth every penny. In making the decision when to purchase a service contract for your own practice, or how comprehensive a policy to choose, here are the factors to consider:

How much revenue does it generate for the practice? Any device that produces money for the practice is worth a good insurance policy, according to Jody Myers, owner of Florida Eye Equipment in Lakeland, Fla. Typically this category includes phaco machines, topographers, lasers, OCT and vitrectomy machines. “The type of instruments that we recommend you continue to carry a service contract on are something like an OCT device, as it's a $60,000 or $80,000 machine that generates revenue for you every day. With something like that, you just don't want to gamble,” Mr. Myers explains.

Mark Packer, MD, in private practice in Eugene, Ore., agrees. His practice's workhorse devices include an optical biometer, an OCT, a corneal topographer and an autorefractor/autokeratometer, as well as an EMR. For these, he purchases the highest level of service contracts. They don't come cheap. “It seems like these contracts generally are about $5,000 a year, whatever the thing is,” Dr. Packer says. However, he accepts the high fees as simply the cost of doing business. His practice's expenses don't change very much and, aside from temporary gestures such as trying to get along with one fewer technician for a time, expenses are essentially fixed. “What really changes the bottom line is the topline: It's totally revenue driven. You've got to be in business every day.”

The immediate replacement and onsite service that comprehensive service contracts bring is essential, and Dr. Packer notes that he has gotten what he's paid for. “Our biometer stopped functioning at one point, and it was kind of funny because part of that service contract is 24-hour replacement service and onsite service, so you don't have to send it anywhere,” he explains. “Somehow at one point we ended up with five devices in the office because they had sent us so many to replace what we had.”

How long can you live without it? Another related, critical factor in weighing whether to invest in a service contract is to consider how long your practice could function if it broke down, notes Beverly King, practice administrator at Fishkind Bakewell and Maltzman Eye Care and Surgery Center. If the answer is ‘not long,’ or ‘not at all,’ your practice should not only purchase a service contract, but be sure that it stipulates that the manufacturer will provide a loaner device in the event of a breakdown. Devices in this category can include both lane equipment that is used on a daily basis and autoclaves in the OR.

Keep a log of repairs. Ms. King also advocates a very simple way to help practices make an objective decision before purchasing a contract: keep a record of repairs for each piece of equipment in the practice.

Mr. Myers also believes this is a good method for coming to a decision. “If you've owned a device for a year and you've had two service calls on it, well, you can probably expect another one.”

How new is the technology? While having the latest and greatest is a wonderful selling point for a medical practice, cutting-edge devices do carry risks. “If you just bought the latest technology on the market, more than likely the manufacturer hasn't got all the bugs worked out, either. If that's the case, then you definitely want a service contract,” Mr. Myers says.

Is it computer-based? EMRs or any device that is driven by a software program need a good service contract, Mr. Siteman maintains. “Computers don't last forever.” Extended warranties are usually available directly from the computer manufacturer. For Mac-based devices, he recommends clients buy AppleCare. “It gives them an additional three-year warranty over and above the original one,” Mr. Siteman explains.

An Ounce of Prevention?

As prudent as the idea of preventive maintenance sounds, Mr. Siteman notes that it is the “hardest thing to sell.” People simply don't want to spend any more on service contracts than they absolutely must.

Mr. Myers points out that in order to get the best performance from one's equipment and to prevent breakdowns, however, it is a wise investment. “Just about every piece of ophthalmology equipment in the office or the surgery center needs some sort of annual maintenance just to keep it functioning the way it should,” he says.

This maintenance includes the cleaning of filters and lenses, recalibration and cleaning drives.

Mitchell Jackson, MD, of Lake Villa, Ill., agrees that it is a worthwhile expenditure, particularly for lasers. These sophisticated devices should be calibrated weekly, particularly excimer lasers, and preventive maintenance performed on them quarterly.

Bear in mind that extended service contracts, Mr. Myers notes, typically include one onsite preventive maintenance visit annually.

When a Contract Isn't Necessary

Yet, again, service contracts are not always the best bet for all devices. In some instances, calling in a third-party repair service when required is a more cost-effective course for the practice. Here are the situations where it's usually safe to skip the contract so you can save some money.

Usually reliable, mechanical devices—chairs, stands, phoropters, slit lamps, A-scans, keratometers—are not prone to malfunction, Mr. Siteman notes, and probably don't require a service contract. Mr. Myers agrees. “Things that generally run pretty reliably that you can't really bill for typically don't require a comprehensive or long-term warranty.” However, he warns, practices should be sure to budget for the repairs that will inevitably be required sooner or later.

Third-party repair services may charge a lower fee for maintenance, so unless the device involved proprietary technology, as is often the case with OCTs or tomographers, they can be a revenue-saving alternative. Keep in mind, though, that such companies cannot always provide the prompt service you may want. Dr. Packer says that in his experience, it may be four or five days before the company can come, and if they don't have the part needed, there is further delay before your device is up and running again. Dr. Jackson, on the other hand, reports that while freelance ophthalmic repair companies can seldom come the day that you call them, they do typically get the device fixed within 48 to 72 hours depending on the urgency of the repair and if any new parts are needed.

Once a manufacturer stops servicing a device, typically seven years after it discontinues the particular equipment, third-party repair services are a practice's only option to keep the device going until they wish to purchase a new model. Since the economic downturn that began in 2008, more practices want to get as much use out of their devices as possible before making a new expenditure.

If You Do Decide to Go That Route …

Say you've decided to invest in a service contract for your more valuable pieces of equipment; besides the preventive maintenance option, what should it include? Veterans of many contract negotiations offer the following tips on getting an agreement that minimizes both inconvenience when the inevitable breakdown occurs, and unpleasant should-have-read-the-fine-print surprises.

► A replacement device delivered within a specified time frame. The more essential, and expensive, the device is to the practice, the more critical this component is. Michael Saidel, MD, of Chicago, however, warns that replacements are not always available, or are not available as promptly as one would like. For all “mission critical” devices, be sure that you have a contingency plan, should that occur. His practice has two offices, so patients can always be sent to the other location if, for example, the topographer at one malfunctions.

► Check how repairs are performed. Some companies are very good at repair over the phone and can walk you through most issues, Ms. King says. If this is the case, the practice can save significantly on contracts by selecting a less expensive “tier” of coverage. Other devices, however, require more technical expertise and so a visit from a repair service is necessary.

► “When it comes to onsite visits, find out where the repair staff is traveling from and if you are responsible for costs, or you could end up spending major dollars on airfare, etc., or negotiate a flat fee or onsite hourly fee,” Ms. King recommends.

► As for surgical laser devices, not only should your service contract include regular preventive maintenance visits, but Ms. King also suggests a favorable trade-in clause so that the practice can keep up with rapidly changing technology.

It's All Negotiable

Even if you have crafted a comprehensive, purchaser-friendly service contract for your most necessary devices, there remains the problem of paying for it. The currently sluggish economy, though, can be your friend in this area. “For a lot of these manufacturers, the service department is a huge source of revenue for them,” Mr. Myers points out.

Dr. Packer concurs, noting that the service contract can continue through the life of the device. “So the contract can bring them $5,000 a year, every year. It probably adds up to more, in most cases, than the price you paid for the equipment.” Keep that in mind, he urges, when negotiating the contract's fee.

One of Dr. Packer's favored methods for maximizing a service contract and minimizing payments is to purchase equipment with a capital lease. Accelerated depreciation, he says, allows the practice to enjoy the tax benefit in the year of purchase. “For the operating microscopes that we purchased, we signed the deal on Dec. 30. You have to put the equipment in use that day, that year, but we were able to depreciate the entire value in 2010. Because we pay a three-year capital lease, that gets absorbed into the operating expenses of the practice,” he explains. With the first few years of service included in the lease, monthly payments are less onerous.

“The thing to keep in mind is that it is all negotiable,” Dr. Packer says. OM