Managed Equipment Services (MES) and Managed Service Contract (MSC) are different. Very different. Both provide a form of ‘service’, as opposed to “doing it in-house”. This might be why the two are often confused and conflated. But, outside of this loose definition, the similarity ends. The contract specification (what will be delivered by supplier) of a managed equipment service (MES) is linked to specific kit, central to the service; a managed service contract (MSC) puts the wider service as ‘primary’, rather than any assets that support the service delivery. This will also lead to differences in the accounting and tax treatments of these contracts.
A new, technologically up-to-date asset base often affords greater quality of service and improved productivity. Old equipment can be expensive to maintain, increasing costs, and unreliable, disrupting service delivery. Essential assets will reach the end of their useful economic life, either through suppliers no longer supporting maintenance, or being in a terminal state. Replacement may be service critical and buyers, particularly in the NHS, don’t always have the capacity for outright purchase. Of course, rental and leasing may be options to consider, but more sophisticated solutions exist that secure benefits and transfer ownership and service risks.
Potential recipients of an MES or MSC contract are often looking for an appropriate alternative to outright purchase and in-house service delivery. The choice, put simply: if a potential buyer is looking to seek the benefits of a specific, identifiable asset without taking on the risks of ownership, they should consider an MES. If the potential buyer is looking to seek even greater benefits linked to a whole service and transfer the risks of service(s) delivery (delivery of which also requires assets and equipment), the buyer should consider a MSC. There are of course other products e.g. leasing that might be considered. But the two should not be confused, buyers should be wary of a simple lease plus maintenance contract purporting to be an MES when there is no risk transfer.
Interestingly, patient-facing, clinical services often remain outside of both MES and MSC specifications, but it will be interesting to see how suppliers might develop services given the strategic challenges of workforce shortfalls and elective waiting list clearance in the coming years.
Managed Equipment Service (MES)
A MES contract outsources all aspects of equipment management to a third party. The service provider will purchase, install, and maintain the customer’s equipment. This management service could range from specific items of equipment, grouped equipment or all equipment) on a long-term basis (typically five to fifteen years). The equipment is not owned by the customer.
There is no single MES model and they, typically, cover the entire equipment lifecycle (often it will include at least one equipment refresh), from procurement and purchase, financing, installation, commissioning, user training, calibration, maintenance, asset management, and then repeated in a refresh programme with disposal of old equipment. The contract will contain performance standards, maintenance cycles and replacement timetable to ensure risk transfer is secured. Charges are arranged flexibly to suit the customer – monthly, quarterly, or annually and, usually, cover a fixed, unitary charge encompassing all elements of the agreed service, with penalties for failures to perform.
The benefits are access to modern equipment and financing, to take advantage of expertise and economies of scale not normally available to a single department or NHS organisation. This should translate into better pricing, more stable clinical services, and efficiencies.
Managed Service Contract (MSC)
A MSC is established primarily around service provision (rather than equipment). This service will cover wider aspects of service than elements relating to the equipment itself. Typically, this will include the supply of a service team, procure to pay facilities of the whole service (not just the equipment and maintenance) including facility management (cleaning and maintenance, even build), taking title and provision of service materials and consumables including stock management. The MSC will be charged as a unitary payment based on, for example, cost per case or cost per test, blending the supply of capital and revenue, including Capex financing and opex for salaries, services, and supplies. The contract will include provision for increases and decreases in activity levels and is a highly flexible contractual arrangement.
As distinguished from a MES, the MSC equipment provision forms a smaller part of the contract value and, mostly, is not identifiable in the MSC i.e. equipment is pooled and will be substituted or permanently removed if causing poor performance. Buildings and large assets will be an exception but even these will be directed by the MSC supplier to achieve the contract for supply. The MSC provider is responsible for delivery of the whole service, measured by service performance standards and/or activity levels, with penalties for failure to deliver.
The benefits are access to a modern, packaged service, expertise, and economies of scale not available to a single department or NHS organisation. An ability to reallocate the risk of service delivery. This should translate into baseline cost reduction, more stable clinical services, and productivity improvement contributing to better quality services for patients and their carers. The MSC has the potential to be off-balance sheet under IFRS 16 [link to IFRS 16], saving capital charges and achieve VAT recovery as a contracted-out service.
Hopefully, the reader has a clearer view of the distinctions between the MES and the MSC. One is not better than the other, they are just different. The choice of one over the other depends upon the requirements, what needs to be optimised, the benefits and even the risk transfer required by the NHS or healthcare organisation.
Genmed Group Limited provides vendor-agnostic managed service contracts, managed equipment services, structured finance and equipment leasing. If you wish to learn more about how your organisation could benefit from managed services or the use of external financing, we would be delighted to be contacted through info@genmed.eu
This article is for general information only, it does not constitute the giving of professional advice, and no advisory relationship is formed. The use of information contained in this article or linked materials is at the user’s own risk. Users should not disregard, or delay in obtaining, appropriate professional advice for their specific circumstances and/or case.