|Nicole Pliner, MHSA|
The Application Service Provider (ASP) model is creating a tremendous amount of excitement in the radiology community. Because it has the promise of making PACS affordable for the small to mid-sized hospital market, it is no surprise that all eyes are focused on this emerging model. How realistic is its promise, and who are the ideal candidates for an ASP? Unfortunately, with no standard yet established upon which all ASPs will compete (and little or no benchmark data available), these are difficult questions to answer. It is possible, however, to provide a theoretical framework that can help organizations decide whether an ASP makes sense.
|Keith J. Dreyer, DO|
The concept of an ASP is not new. It is a common storage platform for industries such as finance and banking. The fundamental differences, though, between ASPs as they exist in these industries and those in the radiology industry lie in the density of the data and the reliance on retrieving those data. Storing copies of checks, as is common in banking, is less intensive in terms of resources than storing a multislice CT scan. Similarly, the need to retrieve a copy of a check is far less urgent than the need to retrieve a CT scan. Vendors are trying to apply the ASP concept to the unique needs of radiology.
|Patricia Whelan, MHA|
Although there are several types of ASP models, all generally provide off-site image storage, management, and distribution using compression and encryption for secure data transfer. There are a variety of pricing options offered currently by ASP vendors. Subscribing to an ASP service could be based on fees per megabyte, per study, per retrieval, or per use (per click). Generally, prices today are range from $5 to $14 per unit for these options.
In theory, the ASP model offers several financial advantages. It:
- Reduces or eliminates the need for a large, upfront capital outlay;
- Shifts the cost of storage from the capital budget to the operating budget, potentially freeing capital for equipment or other ventures;
- Facilitates budgeting over time by enabling an organization to revisit archive expenses on a regular basis;
- Transfers the responsibility for replenishing the equipment to the vendor (depending on the contract’s terms); and
- Decreases the number of staff hours required for internal support.
|Figure 1. Cost comparison of ASP PACS versus outright purchase in multiple environments.|
There are four key criteria to consider in determining whether, financially, an ASP model would be right for an organization. The first is size. Given the current ASP pricing models and structures, costs are directly related to volume. As the number of examinations or megabytes increases, so does the cost. Thus, organizations producing lower volumes of data are the best candidates for ASPs. Figure 1 and Table 1 illustrate this point by comparing the cost of capital purchase to the cost of an ASP for three different types of entities: an imaging center performing 10,000 examinations per year, a medium-sized hospital performing 100,000 examinations per year, and a large hospital performing 250,000 examinations per year.
|Table 1. Cost including depreciation of ASP PACS versus purchase in multiple environments.|
As Table 1 also shows, ASPs are significantly less expensive than PACS purchases for the lower-volume imaging center. At the medium-sized level, the cost difference is far smaller; for the large hospital, a capital purchase is much less expensive.
The second criterion is that of location, as it affects bandwidth. Adequate bandwidth is a required element for a successful image transfer. Unfortunately, many of the small and medium-sized hospitals are located in rural areas and are out of the reach of high-speed networks. Without significant bandwidth, performance is jeopardized. Delays in retrieval and lack of reliability will preclude a filmless environment and negate its associated benefits and cost savings.
|Figure 2. Model for computing analog film costs per examination by modality.|
Work flow and culture constitute the third criterion. Cost savings cannot be realized without turning off film. Essentially, for every day that an organization continues to print film, it is paying double. The organization must be capable of implementing an aggressive plan to limit film. To do this requires the support of both radiologists and referring clinicians. Until there are champions from both constituencies and a commitment to reduce film use, an ASP should not be considered.
The fourth criterion is business strategy. While shifting expenses from the capital budget to the operating budget has its definite advantages, it is difficult to convince CFOs of its wisdom. If capital dollars are difficult to secure, a strong business case must be made that not only demonstrates the clinical, operational, financial, and competitive benefits, but also highlights the opportunity cost of failing to embrace new technologies.
Evaluating ASP Offers
|Table 2. Analog film costs for all modalities combined, based on 100,000 examinations per year with all films stores on-site.|
If an institution meets the four readiness criteria, the next step that should be taken is the exercise of due diligence in evaluating ASP offers. Cost comparisons and cost justification for an ASP cannot be made without first conducting a comprehensive analysis of the organization’s costs as they exist in the current film-based system. Figure 2 and Table 2 illustrate two models for computing a unit cost per examination. Being armed with an understanding of unit costs will position the organization well to evaluate pricing proposals and negotiate with vendors.
There are several contractual terms that should be considered to protect the organization financially. These include single-year versus multiyear contract duration. Market prices for storage media and equipment are declining. To justify the cost of an ASP, the buyer must be able to take advantage of these savings. As Figure 3 illustrates, multiyear contracts with fixed costs work to the advantage of the ASP vendor. Thus, if a buyer opts for a multiyear contract, periodic reviews of pricing should be required in the terms of the contract. The vendor, as well as the organization, must have a vested interest in the performance of the system. By negotiating risk-sharing agreements into the contract, the institution can create this vested interest by putting both parties on the line. This also creates an opportunity for both parties to share in the success of an efficiently managed system.
|Figure 3. Single year versus multiyear contracts.|
Recently, some ASP vendors have begun to think more creatively about pricing for their product lines. Recognizing that most costs are incurred at the beginning of the engagement, some vendors have incorporated sliding fee schedules into their pricing structure. An organization should seriously consider this type of model because it positions the institution to benefit financially from the efficiencies that PACS can bring to an organization over time. Paying a fixed fee over time does not enable it to take advantage of these savings. Contingency planning is a key element in the cost-justification equation. While it is an almost uniform term in ASP models (for the images do, after all, belong to the institution), arrangements for returning the images to the facility or to another vendor are sometimes unclear. If the migration is cost prohibitive, the buyer may be locked into the use of one vendor and, subsequently, positioned in a situation of minimal negotiating power. Buyers need to ensure that there are no costs for data migration at the end of the contract term.
The ASP vendor must be able to ensure speed and reliability. Downtime and slow image retrieval can cripple an operation. They can also be costly by forcing the facility to revert to film and film-based practices. Before selecting a vendor, the institution should check references to evaluate the vendor’s capabilities and track record. Performance is so critically important that it might also want to mandate performance guarantees.
Due diligence is required in understanding one’s own cost structure, but it is also imperative in selecting a vendor. In the next few years, the market will be flooded with ASP vendors. It is vital to assess the financial standing of the company and to understand its strategic goals. By subscribing to an ASP, one is trusting the vendor to store, distribute, and manage highly critical data. If the vendor is not financially viable and does not demonstrate the commitment (or capability) to be a major player in the ASP market, the institution should look elsewhere. Selecting a vendor that cannot survive would be costly to the organization in many ways.
Due to the infancy of ASP models in radiology, the need to establish a partnership with an ASP vendor cannot be overemphasized. Unlike the traditional model in which the vendor and buyer generally part after the sale and installation, the ASP model requires continued interaction between the two parties throughout the life of the contract.
Today, ASPs are most attractive to the small to medium-sized hospital. They provide a much less expensive entry into PACS than the traditional capital-purchase model. It is critical for consumers in this market segment who are considering an ASP to conduct due diligence before signing any contractual agreement. If an organization is pursuing an ASP, it is imperative that it thoroughly analyze the vendors, protect the organization with sound contractual terms, and have a complete understanding of unit costs in the film environment before stepping up to the negotiating table.
Nicole Pliner, MHSA, is managing director of the Radiology Consulting Group (RCG), Massachusetts General Hospital, Boston
Patricia Whelan, MHA, is senior technology consultant, RCG
Keith J. Dreyer, DO, is vice chairman of radiology, computing and information sciences, Massachusetts General Hospital, Boston; a principle in the Radiology Consulting Group (RCG); and a member of the Decisions in Axis Imaging News editorial advisory board.