AEDs from the CFO Perspective

Posted: July 12, 2015    |   John Ehinger

AEDs from the CFO Perspective

A recent Harris Interactive survey documents that on average 1 out of every 2 people expect to find Automated External Defibrillators (AEDs) in places of business. If the AED topic has not already come across your desk, you can be sure that it will soon.

So, appreciating that more and more companies are implementing AED programs, what does this mean from the perspective of the CFO? Following, we have tried to provide some insight that we hope you will find useful when you implement a new AED program (or optimize an existing one) for your company.

Mechanics and Main Components

There are a number of elements that comprise an AED program. Obviously, there is the AED device itself, but some of the other items to consider include Consumables (e.g. replacement batteries and electrode pads), Training, and Program Management (systems, tools, and services that facilitate proper oversight / upkeep and regulatory compliance of the program).

While your accountants (and the IRS) will have the defining word on the specific treatment of each component, the following illustration may provide some helpful context.

AED prices will generally range from $700 to $1,500, depending on the make / model selected. Manufacturers provide warranties ranging from 5 to 10 years, again dependent upon make and model. Upon purchase, AEDs can be capitalized and depreciated accordingly over their lifespan. Ten years is a reasonable benchmark for useful life, though IRS regulations may dictate a shorter period, e.g. 5 years, for income tax purposes. (The preceding presumes purchase in reasonably large quantities, but you may choose to simply expense the devices upfront if you are merely buying a few.)

AED batteries and pads must also be replaced at regular intervals with useful lives for each again varying from 2 to 5 years based upon the make / model of AED. These consumables carry much smaller price points than the AEDs themselves ($40 to $300 for batteries and $30 to $150 for pads), and you will likely expense them at the time of purchase.

Some form of AED/CPR Training is required in most states, and individual certificate effective periods will vary in duration from 1 to 2 years, contingent upon the provider. Costs for training will range from $20 to $75 per person based upon location, number of people trained, curriculum selected, and the provider (more on this topic below). Training is also generally expensed in the year purchased.

If secured from a third party, Program Management is generally charged on an annual basis, and is therefore expensed in the year in which it is purchased (or evenly across years in the case of multi-year agreements).

The following tables summarize the parameters and expense impact of the above. For ease of example, industry averages were used for AEDs, Consumables, and Program Management pricing and equipment duration. For Training, it was presumed that 5 people would be trained at $50 per person and that a two-certification would be issued upon class completion. All base-line costs were rounded for ease of visualization.

Table 1 – Pricing and Parameters

Purchase PriceExpense or Amortize?Duration/Amortization PeriodPeriod Expense
AED1,100Amortize10110
Battery100Expense4100
PADs50Expense350
Training250Expense2250
Program Management410Expense1410

Table 2 – Annual Income Statement Impact

 YearTotal
12345678910
AED Depreciation1101101101101101101101101101101,100
Battery100100200
Pads505050150
Training2502502502502501,250
Program Management4104104104104104104104104104104,100
Total Expense7705208206207705707706208205206,800
Annual Average680
Per Diem Expense1.86

Leasing

There are leasing options available for AED programs. Leasing can be a useful mechanism for those with cash constraints and can also serve as a tool to help manage around seasonal fluctuations and budget cycles. Depending on the company, leasing can also generate certain tax advantages.

Particular to AED programs, leases most commonly contemplate the AED only, though sometimes program management fees, training, and / or future consumables are also included. Focusing on the AED-only scenario, most lessors active in the sector will provide 2 to 5 year terms with only nominal residual value (e.g. $1) imputed at lease end. Therefore, for financial accounting purposes, the transaction will be deemed a capital / purchase lease resulting in treatment similar to the purchase scenario outlined above (though the financing costs would also need to be expensed).

Understanding the preceding, most companies, absent those with short term cash constraints, elect to purchase their AEDs at the outset of their programs and carry the AEDs on their own balance sheet to avoid the lease finance charges.

 

Potential Hidden Costs and Opportunities for Savings

Soft Costs – While not necessarily reflected as distinct line items on your P&L, there are other costs associated with AED programs. These most commonly include time spent by employees in training as well as time and effort consumed on program administration. These costs can become quite significant relative to other program expenses, particularly for organizations with high levels of employee turnover or for those “self-managing” some or all of their program. In selecting options that fit your organization, it is useful to consider these upfront in order settle on an approach that optimizes use of resources.

Leasing – It is prudent to ensure that you receive full transparency of any items included in a lease. If other items besides the AED itself (e.g. multi-year program management or training) are included in the lease, you will pay financing costs for them. Training can be purchased as needed, and reputable program management companies will allow for annual installment payments for their services when engaged in multi-year agreements. Therefore, absent significant cash constraints, there is usually no need to elevate costs by embedding other items within the amount financed under a lease.

Training – AED/CPR Training can be another source of hidden direct and indirect costs, and attention should be given to the manner in which vendors provide pricing. Some providers will quote attractive per person costs but add minimum class size parameters that effectively increase the per person rate if the class is not fully subscribed. For example, you could see a quote of $35 per person, subject to a minimum class size of 8 attendees, i.e. minimum of $280 per class. So, if only 4 people attend the class, you still pay $280, and the per person cost jumps to $70.

Employee turnover can also add to training costs, as additional trainees will be required prior to the expiration of the original training interval in order to meet life safety standards and legal requirements. Let’s say you need to train 5 people to ensure adequate coverage at the outset of your program at a cost of $250. The trainees receive a 2 year certification, but your annual turnover for this employee cohort is 40%. Therefore, after the first year, you will be down to 3 trained responders and will need to spend another $100 (2 x $50) in year two to train two new people (presuming no minimum class size pricing applies).

Training format will also impact the financial profile of your AED program. While each delivery method (traditional in-person, blended online/in-person, 100% online, and “train the trainer”) has unique direct costs, indirect costs will vary by format as well. One of the most significant drivers of variation of indirect costs is the amount of time that employees need to spend in the training itself. Various clinical and other research demonstrates high efficacy for training that consumes only limited amounts of time. However, time consumed varies based upon training format – generally ranging from less than an hour as much as four hours – obviously, reducing the time that employees must spend away from their other job responsibilities improves the financial complexion of the program.

Another prominent indirect training cost is driven by the administrative requirements surrounding qualifications management. Some providers still use a largely manual format of issuing certificates, which in turn creates a significant administrative burden in managing training expirations and renewals in order to ensure that a sufficient number of responders have current qualifications.

AEDs – AEDs are high quality devices, and in the United States, quality assurance is tightly regulated by the FDA. This should provide you with great comfort on the functionality of all AEDs, but there are differences between makes and models that might make some brands more suitable for your organization than others. While price is certainly one point of distinction, there are a range of other variables, including warranty terms, maintenance requirements, energy approach, dust / water ratings, etc.   A reputable program manager with access to the full spectrum of AEDs can provide you with reasoned perspectives on your options and what will ultimately provide the best value to your organization after considering the full cost picture.

AED Price vs. Consumable Price – Pricing for AED units varies, and both pricing and useful life for the consumables (e.g. batteries and pads) that will be required in the future to maintain the AED vary as well. Therefore, it is important to consider not just the initial acquisition price of the unit itself but also expected future expenditures, reflecting both the cost and longevity of required replacement parts.

Accessories – Some providers try to promote the purchase of additional accessories, ranging from “back-up” batteries and pads to ancillary items to support the program, e.g. hard-wired AED cabinets. Without suggesting any compromise on the safety preparations for your sites, careful consideration should be given to assessing how any suggested “extras” actually fit with the characteristics and needs of your locations and your program.

AED Standardization – Particularly in circumstances where significant numbers of AEDs are purchased, pricing improvements can be realized by standardizing on one particular make / model for all sites. It can also be argued that greater familiarity associated with standardization will improve performance, especially for organizations where employees regularly move from site to site. The most prominent counterargument to standardization is risk concentration. Should a problem develop in the future at your selected manufacturer, it will obviously impact all of your sites. Equally, should your chosen manufacturer escalate consumable pricing in the future, you could be stuck with higher than anticipated maintenance costs.

Manufacturer Extras – Often, AED manufacturers or distributors will offer “Trade-In” pricing that enables you to swap out old AEDs with new ones. Not surprisingly, trade-in terms can vary significantly. If you are not a regular purchaser of AEDs, it can be difficult to assess whether you are receiving appropriate value for an old/new AED exchange. A reputable program manager or a distributor carrying multiple brands will be able to provide constructive advice to help you validate the value of what is proposed.

Another common sales tactic involves the offering of “free” or discounted Trainer AEDs. In considering whether this might be of value to you, thought should first be given to how often and where trainer AEDs might be used. Also, trainer devices are significantly cheaper to manufacture. So, it is important to ensure that you receive a transparent view on stand-alone trainer pricing. Again, a quality program manager or other independent advisor can assist and guide you with all of the above.

Service Delivery – Key representations regarding services (i.e. program management, training, etc.) delivery should be clearly documented to ensure that you receive what you pay for. For example, some program managers will represent or imply that they will be on site at certain frequencies to perform device checks and other services. However, there is often a misalignment of incentives around these activities. Obviously, it costs the vendor money (and time) each time that they visit one of your locations. Particularly for properties with lower AED counts, the expense of visiting may be quite unappealing compared to other activities the vendor could undertake. As a result, some providers frequently fail to maintain initially specified visit frequencies. Strong service level agreements can provide recourse that will help you to reduce the resultant life safety risk associated with gaps in meeting specifications. Again with the objective of understanding and aligning incentives, it can also be valuable to understand who will be performing site activities (vendor employees or contractors) and how these individuals are compensated and incentivized to perform.

Post-Event – Following an event, you will need to replace at least the pads on the AED. Additionally, many jurisdictions require the completion of other administrative tasks, such as providing the data from the AED. If you elect to use a third party to manage some or all of your program, it is useful to understand at the outset of the contract what goods and services will be provided. For example, some vendors will provide complimentary replacement of consumables following an event while others may leave you to fend for yourself.

Synchronization – A cohesive approach to your AED program will help to reduce costs while also improving your safety profile. Using a concise group of vendors (or even a single vendor) will enable you to drive better terms and pricing. Also, when evaluating vendors, it is worth placing attention on the processes and systems that they will employ. Quality vendors will minimize the workload on your central and field staff. Care should be given to ensure that the technology and tools that providers use to support you are both comprehensive and easy to use / access. Clearly, systems and processes that require significant manual efforts or fail to easily provide comprehensive access to your program data will increase effort (and therefore cost) on your end.

 

Quantifying Benefits

The most obvious and significant benefit of an AED program is the ability to save a human life. Clearly, this incomparable benefit makes an AED program invaluable.

Without diminishing this in any way, there are a variety of safety measures that companies can implement. Understandably, the CFO role entails assessing various options to provide the greatest benefits to your company, your employees, and your customers. Fortunately, the human and financial impacts of AEDs are complementary, and in fact, an AED program may be the highest return safety measure an organization can take.

Each year in the United States, approximately 450,000 people die from Cardiac Arrest. Using a conservative set of assumptions for the percentage of these deaths taking place outside of the hospital and outside of the home (15%) and the subset of these occurring at places of business (50%) yields 33,750 annual workplace fatalities. Per the Census Bureau, there are roughly 7,000,000 places of commerce in the U.S., which implies an incident rate per business site of 0.48%. Presuming that only 10% of these incidents involve employees, the expected annual rate of worker incidents per business site is 0.05%. By comparison, while workplace homicide and active shooter events are frequent topics of attention, the corresponding incident rates are only 0.0079%[1] and 0.0001%[2], respectively.

Both the Centers for Disease Control (CDC) and the National Safety Council (NSC) publish estimates of the direct costs associated with a worker fatality with the most recent figures being, $991,027 (CDC) and $1,420,000 (NSC). NSC also benchmarks indirect costs at more than 2 times the direct costs. Taking the average of the CDC and NSC direct costs and using a conservative presumption that indirect costs will only equal 1 times the direct costs, then yields an expected annual site cost of $1,162 based upon the Cardiac Arrest incident rate calculated above. Using the simple example outlined Table 1 above (and adjusting the training expense to reflect a single year of utilization) shows a proxy annual AED program cost of $710. Therefore, the expected ROI of an AED program under these parameters is roughly 64%.

It is important to note that this positive ROI reflects the beneficial worker impact only on an average basis and does not reflect the distribution around that average, i.e. the modeling gives equal value to your best performing sales person and your worst performing clerical worker. If customers and other site visitors are added to the analysis, the ROI increases, particularly for sites with greater likelihood of incidence due to large volumes of third party traffic. The direct costs of losing customers will vary based upon the specifics of your company. Equally, with growing expectations for businesses to have AEDs, there is significant potential for negative brand impact, which again will likely vary based upon the nature of your business.

The preceding makes no attempt to quantify the positive impact associated with concurrent improvement in adherence to social responsibility policies or a more favorable outlook from investors who include human impact as part of their assessment process. Also, the expected future increases in workplace cardiac arrest due to the aging of the workforce and a higher percentage of workers classified as obese are not contemplated.

Again, the human impact is vastly more meaningful than financial impact. Nevertheless, while the preceding is a simplified example that omits several key benefits, it does demonstrate that generating positive social impact and fiscal results are far from mutually exclusive.

Insurance Implications

The outlook of the insurance industry on AED programs has shifted over the past several years. Many, if not most, insurance carriers use AED programs to protect their own sites. Additionally, insurers increasingly advocate that their insureds implement AED programs. This advocacy is generally manifest via educational initiatives as well as providing mechanisms for policyholders to realize discounts on AED programs. While provision of explicit (filed) premium credits tends to be the exception, An AED program reflects well on a company’s overall safety and risk profile, and the insurer has the ability to offer discretionary credits. Therefore, presuming that you do not heavily self-insure, you should request that your carrier incorporate your AED program in their underwriting process and provide a credit for the associated reduction in exposure.

 

Take Aways

Instead of re-visiting the details above, we would like to close with a few summary suggestions.

Ultimately, the details of your AED program matter – not only from a life safety perspective but also from a financial perspective. Properly constructed AED programs can be easy to establish and maintain, but knowledge and preparation are key to doing so. Understanding the landscape (and your options) upfront will save you time, effort, and money – as well as improve the quality of your program.

For most CFOs, the topic of AEDs is a specialized one outside of their regular activities. Appreciating this, securing outside guidance early in the process can be very helpful. While assistance can be obtained from a variety of sources, a respected and knowledgeable AED program management firm may be your best initial source, as they will have the most comprehensive view of all program components and may be less prone to bias in suggesting particular avenues or solutions. Equally, in helping you to establish a road map, an independent outside advisor can also take on a significant portion of the analysis effort as well as the work associated with cohering various constituencies in your organization.

Ultimately, the basic principles used in other business decisions apply to AEDs as well. Think comprehensively. Plan for durability. Ask questions. Demand transparency. Ensure that you partner with knowledgeable providers that you can trust.

[1] 551 annual average over the period 2006 -2010 per Bureau of Labor Statistics

[2] 8.9 annual average over the period 2000 – 2013 per U.S. Department of Justice / Federal Bureau of Investigation




Leave a Reply

Your email address will not be published. Required fields are marked *