By Mark Terry
Writer, Washington G-2 Reports
01/08/09

Overview

Industry surveys and publications over the last five years suggest that approximately 75 percent of clinical diagnostic laboratories utilize reagent rental agreements. A reagent rental contract is an agreement between a laboratory and a vendor of laboratory equipment or instruments and reagents (analytes) to finance a piece of laboratory instrumentation over a period of time by committing to the purchase of a set amount of reagents for that equipment. Reagents are the chemical solutions, analytes, probes, antigens, and antibodies that are used in laboratory tests, and are often specifically designed and manufactured for a specific test and to run on a specific piece of instrumentation and/or analyzer.

Typically the reagents acquired via a reagent rental agreement are more expensive than they would be if acquired directly—that’s the point, actually, that you are financing the analyzers and instrumentation by paying more for the reagents that run on the analyzers. Some reagent rental agreements are based on tests performed rather than reagents purchased.

Because clinical laboratory instrumentation can be very expensive, ranging anywhere from $100,000 to $1 million per unit, reagent rental contracts developed to allow laboratories to acquire needed equipment without large capital investments. Also, because large laboratories or laboratories with multiple locations have need of multiple units of equipment, capital expenditures can quickly become astronomical. In addition, in the molecular diagnostics segment in particular, technology changes at such a rapid pace that the purchase of a piece of instrumentation that might be out of date in two to three years is not considered a practical approach.

Reagent rental agreements, however, can be complicated and often put laboratory managers into the position of negotiating contracts while their institution places limitations on what they can and cannot do in terms of money, finances, and test volumes. Also, because large laboratories with large volumes buy more reagents, they tend to get better deals on reagent rental agreements. Washington G-2 Reports interviewed laboratory managers across the country at laboratories affiliated with hospitals, universities, and independent laboratories to determine considerations and strategies useful for negotiating reagent rental contracts.

In this paper, reagent rental agreements are the same as reagent lease contracts. However, when it comes to purchasing equipment, typically there are three options: buying outright, leasing the equipment, and a reagent rental agreement. Equipment and instrumentation are equivalent; reagents and analytes and chemistries are the same thing.

Reagent Vendors and Laboratory Attitudes

In 2007 Washington G-2 Reports conducted a survey of laboratories to determine how they utilize reagents and their overall attitudes and perspectives on reagent vendors. The survey was published in the Quality Counts: Washington G-2 Reports Second National Reagent Vendor Quality Survey Report.

Overall, laboratories spend 30.9 percent of their budgets on reagents. It varies depending on the laboratory type. Independent laboratories spend the least, approximately 25 percent of their budget; pathology groups and hospitals both spend about 31 percent of their budgets on reagents; and physician office labs (POLs) spend the most, approximately 38 percent of their budgets on reagents. (See Table 1.1.)

There is also a difference in what percentage of budgets is spent on reagents based on the laboratory size. Not surprisingly, smaller laboratories spend a larger percentage of their budgets on reagents than large or extra-large laboratories do. This is a function of discounts based on volume.

Extra-large laboratories were defined as performing more than 5 million tests annually; they spent an average 28.6 percent of their budgets on reagents. Large laboratories, defined as those performing 1 million to 4.9 million tests annually spent 29.5 percent. Medium labs were defined as performing 500,000 to 999,999 tests annually, and reported an average 30.3 percent of their budgets were spent on reagents. Small laboratories, performing 0 to 499,999 annual tests, spent an average of 33.5 percent of their budgets on reagents. (See Table 1.2.)

The major reagent vendors analyzed for the Second National Reagent Vendor Quality Survey Report were Beckman Coulter, Dade Behring, Roche, Abbott, Bayer Diagnostics and Ortho-Clinical Diagnostics. Since the survey was conducted, Dade Behring merged with Siemens AG (2007) and Bayer Diagnostics sold off its diagnostic division to Siemens AG. Siemens AG was not a part of the survey, but is clearly a major vendor in the laboratory reagent segment. There are also a number of smaller vendors, especially in the area of molecular diagnostics.

Survey respondents were asked to evaluate which major reagent vendor offered the best value, which was defined as best service plus lowest price. Thirty percent cited Beckman Coulter offered the best value. Dade Behring was second, cited by 18.2 percent. (See Table 1.3.)

Survey participants also evaluated the major reagent vendors on the basis of lower prices. Beckman Coulter was cited by 34.3 percent of survey participants as offering the lowest prices. Roche came in second with 18.3 percent, and Abbott was third with 14.8 percent. (See Table 1.4.)

Survey participants were also asked which reagent vendor has the most technologically advanced instrument systems. Beckman Coulter was cited by 24.7 percent of all survey participants as having the most technology advanced systems with Roche a close second with 24.1 percent. Ortho-Clinical Diagnostics was cited by 14.7 percent. (See Table 1.5.)

Evaluating Your Current Reagent Usage

There are generally broad reasons why a laboratory may be negotiating for reagents. Maura Pieretti, PhD, scientific director of molecular diagnostics for the BayCare Health System ( Clearwater, FL), says, “We look at several different aspects. One, are we changing from one platform to another or one vendor to another? That’s one situation. Another is, are we bringing a test in-house that is currently going to our reference laboratory? That’s situation number two. Situation number three is if we’re bringing a test in-house that is new, a new test on the market that we want to bring in-house.”

Laura Ovittore, BS, MT(ASCP), administrative specialist for Danbury Hospital ( Danbury, CT) breaks it down into three questions.

1. Is it better technology?
2. Is it easier to use? “Is it easier for my staff to use because we all know we have shrinking workforces?”
3. Expense. “At the end of the day, have I decreased my costs by doing this?”

Ovittore says that otherwise, negotiating reagent contracts “is pretty much a normal process. We meet with the company and we haggle over price. It’s not really difficult.”

There are, however, some things to take into consideration.

Institutional Philosophy

Sometimes the decision is totally out of your control. Institutions may decide that an outright purchase is more suitable—typically for economic reasons—than a reagent rental arrangement. Daynna J. Wolff, PhD, director of cytogenetics and molecular genetics at the Medical University of South Carolina (Charleston, SC), says, “We’ve gone from a position where we would like to purchase outright to a position where we would want to lease (the instrumentation), and now to a position where we’re looking for reagent rental. Originally, ten years ago, there was capital, so the idea was you weren’t wasting money when you bought something.”

However, Wolff’s institution’s priorities have changed based on the hospital’s economy and the overall economy. She notes that hospitals often look at budgets differently than laboratories do and that operating budgets are often different than the capital acquisition budget. “We just built a new hospital, so when the economy crashed it had a huge effect on the funds that are out there. Right now we’re doing reagent rentals because our money situation is such that we can get money for the laboratory’s operating budget and other funds, but there’s nothing in the capital budget for leases as well.”

Ovittore agrees, noting that at Danbury Hospital, “The institution kind of varies years to year on what they want to do.”

Lynel Vallier, administrative director of laboratory services at Boulder Community Hospital ( Boulder, CO), which also runs an extensive outreach laboratory program, notes that in general his institution prefers purchasing rather than reagent rental. “Any time we can purchase, we do. However, if I think the technology is going to change, usually within 36 months, then we might go into a reagent rental deal. Most of the time the institution believes that our cash flow or return on investment is better if we just purchase the equipment and get a separate reagent contract.”

It’s also important to note in the context of institutional philosophy that it is rare for a single person such as a laboratory director or manager to be the sole decision-maker in terms of purchasing instrumentation or reagents. Wolff, for instance, says, “I probably don’t even know all the different levels of involvement. If we’re going for reagent rental and it’s in our operating budget and we’re within our budget, we stop there, we’re fine. But if we’re looking for capital, it goes to the committee in the hospital that will review every capital request in every single department. Then, if they make the decision to go forward, it goes to the central budgeting office to see if there’s money. So even if you get approval, there has to be money approved, and eventually you might get to see that money.”

Ovittore agrees, saying, “We have involvement like you can’t imagine. It starts with me, then it goes to my purchasing agent for the laboratory. After her review it goes to the chairman of the laboratory…” From there it works itself all the way up to the CEO of the institution, moving through approximately eight different departments, each requiring a signature before it moves to the next level. And Ovittore’s situation isn’t unusual; it’s the norm.

Reagent Requirements

Typically laboratories want to make sure that the reagents, along with the platform (instrumentation) they are using, are the best technology available. Of course, there can be cost limitations for some laboratories. However, laboratories mostly will focus on the best technology they can afford.

Pieretti says, “We’re looking for the best analytical performance that we can find for sensitivity, specificity, and rate of technical difficulties. A big cost to the lab is when there is a technical error, or when there is an instrument error—when the test is very hard to work with. There are some tests, particularly in the molecular lab—to use a non-technical term—that are very finicky. Everything has to be just perfect and those tests end up being very expensive, which generally means doubling the tests per reportable.”

High on Pieretti’s wish list is for somebody to publish the rate of failure for tests. “It would be very interesting if somebody did. It’s always a big motivation for changing from one platform to another.”

Leonard H. Kellner, president and chief scientific officer of Lenetix ( Mineola, NY), also feels that knowledge is power. “My priority is to get the lowest possible price I can by speaking to colleagues and knowing what’s going on around me—knowing what the materials are worth and what I’m going to get reimbursed for the test.”

Cost Per Reportable

There appear to be discrepancies between the way vendors calculate cost per reportable (CPR) and the way laboratories do it. This probably has to do with the realities of daily laboratory usage versus a vendor calculation based on ideal working conditions. Ovitorre says, “I don’t like the way vendors do cost per reportable because in many cases it’s not an accurate reflection of how we use the system.”

For instance, she says, the vendor will indicate that in a kit of 100, you should run 10 controls every time. “You don’t get 90 tests in that scenario unless you’re running a full plate and none of us runs a full plate of anything. It’s always 50 this time and 50 next time, so I’m only getting 80 reportable.”

There is a difference between calculating cost per reportable versus cost per test. Ovitorre says, “It’s what it’s actually costing me to do the test that drives how I do my billing structure.”

Ovitorre’s response to dealing with a vendor’s initial offer is to write her own contracts calculating the tests three different ways: outright purchase, as a reagent rental, and sometimes as a lease. “Then I take all three and crunch the data myself. I look at the bottom line and the hospital makes the final decision if it is more effective for them based on what they can write off to outright purchases and find the capital dollars, or should I go ahead and do it as a reagent rental.”

Steve Jones, chief financial officer of NeoGenomics ( Fort Myers, FL), indicates that NeoGenomics “generally tries to stay clear of reagent rental contracts because they’re never a great deal. We’ve done one. They’re never a good deal unless you have a large volume of tests. I prefer to purchase all capital equipment using a capital lease structure with a dollar buyout.”

Jones feels NeoGenomics is better off using their cash to grow and operate the business. “We generally use all of our capital equipment, and what we find is we get the best balance between the term of the debt instrument by going with the capital lease, so we typically go with a five-year capital lease on laboratory equipment with a dollar buyout purchase option.”

Length of Contract

If you plan to buy reagents or instrumentation outright, then the length of the contract is not an issue. However, a reagent rental agreement, which Jones describes as a “fancy way of financing equipment purchases,” typically does have a multi-year contract, and in most cases the vendors push for the contract to run five years.

Juanita Clark, supervisor of the Cytogenetics Laboratory at Henry Ford Hospital ( Detroit, MI), says they generally won’t sign a contract longer than a year, primarily as a philosophical issue.

Pieretti notes that she prefers to keep contracts as short as possible. “We end up having a lot of contracts that are reagent rental contracts and it’s hard to get a reagent rental contract that is shorter than two years. I would say three years is probably the average.”

Wolff says that ideally their reagent rental agreements would run for two years. “But we have contracts that are for three years, because that’s the best we could do. With the molecular laboratory, the technology changes so quickly we won’t sign anything over three years.”

Vallier notes that his longest contract is for two years, maximum. “I’ve got one contract that’s for sixty days and I have another one that’s for 180 days. What I really do is look at the technology and try to stay current on where I think the field’s going. If I think there’s going to be a significant technology change in a reasonable contract period I try to knock the contract period down.”

Wolff is puzzled by the thirty to sixty day contracts, though, noting that, “It would take you that long to validate a test.”

Escape Clauses

Everybody interviewed advocated insisting on an escape clause in the reagent rental contract—if you can get one. Although vendors who put an escape clause or “out clause” in the contract typically have standard wording, most people interviewed suggested this needed to be negotiated as well.

Pieretti says, “Our approach is to always try and put an out clause in the agreement in which we specify a certain period, say twelve months or twenty-four months. Once we’ve hit the volume we committed to, with a 90-day notice we can get out of the contract by supplying a reason, for example, new technology has become available.”

The key issue now may be that vendors are less likely to grant escape clauses. Kellner says, “Out clauses are hard things to get these days. These big mega-companies that have been created through mergers and acquisitions are making that more difficult to get. Companies are holding laboratories to the original contracts more and more. In years gone by it was common to have a wink and a handshake between the sales person or the contact at the manufacturer, and if you decided to change or shift gears nobody came looking for you, but I think that is changing. If you do try to break a commitment there will be penalties.”

Multiple Vendors

One of the basics of negotiating a contract—any contract—is your willingness to walk. In other words, if you can’t ultimately say, “I don’t like this deal and I won’t sign it, goodbye,” then you’re in a very weak bargaining position. So one of the best things a laboratory can do, if at all possible, is to have bids from more than one vendor. Jones says, “We have two or three different reagent vendors for each reagent we have unless it’s proprietary tests, in which case there’s usually only one.”

Vallier agrees, saying, “My best advice is to have a second vendor so it gives you leverage. If you don’t have a second vendor, then you need to try and form as good a relationship with the vendor as you can.”

Vendor Relationships

Having a good relationship with a vendor sounds like a great idea, but several people interviewed suggested that this is more difficult now than it used to be. Vallier believes that smaller vendors are sometimes more difficult to stay on good terms with than large vendors. “Sometimes small vendors can be very agreeable, but when they’re smaller they can be more difficult because they need more guarantees because one customer can have more of an impact on them than they would on a larger company.”

Not everyone agrees, however. Both Jones and Kellner noted that mergers and acquisitions in the reagent vendor segment have resulted in some vendors becoming difficult to work with. Kellner says, “Some of the companies that are getting involved with the things we deal with are not really familiar with the space. They’re not as sensitive as years gone by and so they try to hold you to a higher level of responsibility by shortening their pay time and commitment to show their stockholders they’re doing a great job, but in fact they’re creating a tenser situation between the vendor and the purchaser.”

Jones agrees, noting that typically reagent vendors have a very pragmatic approach to partnering with laboratories. “They understand we’re spending a lot of money on sales and marketing to push their products, but there are vendors that are total pigs that want to extract as much pain as they can from each of their clients. We never like to get flatfooted in a position where a vendor can push us around unless there’s no choice.”

Strategies

There are several things you can take into consideration when choosing a type of reagent or equipment contract. Of course, how much cash a laboratory has is a factor. Kellner notes that for very expensive equipment, the reagent rental is a reasonable way to do long-term financing. “For other smaller things, say $30,000 to $50,000 items, we just buy it under a purchase lease or just pay for it outright and get the reagents at a lower price.”

Jones notes that NeoGenomics prefers to keep the decisions to buy reagents and the decisions to buy equipment separate. “We find that we can negotiate volume discounts for most of our vendors that we buy reagents from. We buy a lot of reagents. Next to people it’s probably the biggest cost for the company.”

Pieretti suggests taking a hard look at your various instrument platforms and trying, as much as possible, to maximize whatever platform you’ve already invested in. “Once you have a reagent rental—for example, HIV viral loads—and the reagent rental is a rental of a certain instrument, you may as well add analytes for Hepatitis B or Hepatitis C on the same platform because you’re already paying for the price of the reagent rental anyway.”

Wolff agrees. “We just do the best we can do with our volumes and try to bundle and pick a platform we can put multiple tests on.”

Vallier also says that when negotiating contracts he keeps in mind that if he’s had contracts with a specific vendor for about 36 months, the vendor has already recouped the costs of the equipment. “So if you’re going into the next term for the contract, and if you want to continue with a reagent rental, the price of that contract should decrease. They have recouped most of their money on the equipment for most of those three years. If you’ve done 36 months and they want the same terms, they’re going to make a lot more profit on you.”

Jones says that laboratories and vendors all want to make money. Unfortunately, in his experience, it’s much more difficult to identify the actual costs of running your business when you utilize reagent rental contracts. Reagent and equipment manufacturers, naturally, use that to their advantage. “Unless you really know what you can buy the reagents for on a one-off basis it’s really hard to do an analysis. Every time I’ve tried to do an analysis around it, it generally winds up—unless you have pretty high volumes—being much more expensive to do a reagent rental. Having said that, it may be the most efficient form of financing for other companies, but we’re a cash-flow positive company and we have financing alternatives that are generally far cheaper for us. Everybody’s circumstances are a little different and a company that is losing money may not be able to attract lease financing, so there are different parameters around how everyone is going to make a decision.”

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