Overall inflation has slowed down, but equipment costs aren’t budging.
Last year, the annual inflation rate in the United States peaked at just over 9%, highest in over 40 years. By July 2023, it had fallen to 3.3%. But continued inflationary pressure on raw materials, transportation, warehousing and wages have kept capital equipment prices about the same. This fall, as customers scrutinize their capital budgets, sales representatives can expect some tough questions. In response, reps should spell out the broad economic factors affecting capital equipment pricing today and then guide their customers toward solutions that can lead to lower life cycle costs, according to those with whom Repertoire spoke.
Price increases
“Inflation is still a factor,” says Cindy Juhas, chief strategy officer, CME Corp., Warwick, Rhode Island. “Price increases have leveled off the last eight months but were hefty prior to this calendar year.” Manufacturers attribute rising prices to increases in raw material costs, such as steel or computer chips. Stainless steel shelving units, power exam tables and refrigerators are just a few types of equipment to be affected. Freight remains a hidden cost, she says. In some cases, CME is charged almost as much for freight as for the cost of the equipment itself. Price increases also reflect an increase in labor costs.
“Between labor costs remaining high, the need to source more materials domestically, and the need to keep higher parts inventories, there appears to be no justification to lower costs” on the part of vendors, says Juhas. “We have had to pass all price increases on to the customer, since our own operational costs have gone up. Customers aren’t happy, but if they need the equipment, they have to purchase it.”
Jack Moran, managing partner of MTMC, an independent sales representation firm, says that equipment vendors have experienced higher costs on their components and shipping, while those that are less dependent on sourcing parts have felt less pain. “The other very big issue we are seeing is that high interest rates have caused many delays and cancellations in new construction projects. This is hurting sales of new equipment more than higher costs.”
Rebecca Gayden, vice president and general manager, capital equipment solutions for Vizient, the Irving, Texas-based GPO, says that overall inflation slowed down during the first half of 2023, but Vizient anticipates another cycle of inflation to begin this fall or in 2024.
There have been significant price increases in many raw materials, contributing to inflation in medical capital equipment, she says. “We are seeing less of an impact on complex medical capital equipment, such as diagnostic imaging, as many suppliers are offering spot-buy opportunities on equipment components to mitigate overall cost.” Other products such as exam room equipment, which are made primarily of steel and don’t break down into separate components, are having a greater impact on provider costs, as rolled steel is up 61% since January 2020, she adds.
Another inflationary factor is the cost of labor, says Gayden. “Over the last two years labor costs have surged in manufacturing and freight as industries struggle to retain and attract workers. Labor costs remain a significant pressure and are often cited by manufacturers as reason for a price increase.”
Leslie Van Alstyne, director, capital guide-supply chain solutions, ECRI, a Plymouth Meeting, Pennsylvania-based healthcare technology and safety company, says ECRI has not noticed a decline in capital purchasing or any consistent messaging that inflation is contributing to a decrease in capital purchase spending. “We believe this is because healthcare facilities, especially smaller ones, had already been limiting capital purchases to essential equipment because of the pandemic. So, we’re seeing essential purchases, such as replacement equipment, continue despite higher costs.”
Creative solutions
If lower purchase prices for capital equipment aren’t on the table, distributors, providers and third parties are pursuing alternative strategies to keep a check on capital equipment spending.
Juhas says that some CME customers are investing in equipment and technology that will make them more efficient and cost-effective, while others are just holding on to their current equipment. “We are seeing more requests for biomedical-certified refurbished equipment,” she says. In addition, customers are much more willing to look at alternates in the current climate, she adds. “If a customer is willing to look at alternatives, we will show them less expensive products. Our goal is to sell value, that is, the best equipment at the best price so that they will save money over time.”
Van Alstyne says that ECRI has been able to identify cost-savings opportunities for its members despite inflationary price increases. “In many cases, savings are based on negotiating larger discounts on options, accessories and service contracts, and requesting warranty extensions.
“We have noticed a slight increase in requests to analyze stand-alone service contract agreements for our members,” she adds. “This could be a reflection of efforts to extend the use of capital medical equipment past its typical expected service life due to budgetary constraints and concerns related to component shortages and longer lead times for equipment delivery.”
Says Gayden, “Vizient has always focused on the total cost of ownership when negotiating national agreements with terms and conditions to protect providers, such as product acceptance, failure to supply, warranty and point of sale service. We also provide consulting services around equipment planning and capital asset management. Through capital asset management, we enable providers with data to evaluate their current fleet, including utilization, to ensure they are only buying what they need when they need it.
“We see suppliers looking for longer term commitments from providers in exchange for value,” she continues. “Additionally, some suppliers with broad portfolios combine multiple categories to drive value, such as coupling medical capital equipment with consumables. These types of arrangements typically come with high commitment levels and longer terms.”
Sidebar:
When reps are bearers of bad news
In the last year, price increases became essential for many medical technology companies to ensure their economic viability, writes Michael Marquardt, associate partner with Prof. Roll & Pastuch, a management consultancy in Germany, in a recent issue of MedTech Intelligence. However, many leaders now realize that their companies were not optimally prepared for the implementation of such price adjustments. That includes salespeople. Marquardt offers some tips.
“When the time has come for a price adjustment, this must be clearly communicated internally,” he writes. “It is also important for management to show that it stands behind the sales department. The sales team should be clearly instructed that the sales focus is on profitability and which segments (unprofitable) sales may be given up if necessary.
“In the event of escalation on the part of the customer, it is important to stand behind the sales department. Signaling the customer that they only need to move higher up in the hierarchy to get a better price will undermine your sales team and implementation of the price increase.
“For many sales employees, price negotiations are unpleasant. This is precisely why they require dedicated preparation,” writes Marquardt. “If the sales department stumbles during customer contact, the implementation of a price adjustment is quickly put in jeopardy. Typical customer queries and useful argumentation chains must therefore be clarified in advance.
“It can be helpful to show the customer what efforts are being made to reduce the increased costs, for example through innovations in production. It should also be communicated how the solution will help them optimize their internal costs, for example through faster ROI.”
Read the article “Implementing MedTech Price Increases in Times of Inflation and EU MDR” in MedTech Intelligence at
www.medtechintelligence.com/feature_article/implementing-medtech-price-increases-in-times-of-inflation-and-eu-mdr.