An industry expert discusses a variety of lease products well suited to community hospitals, depending on their needs and financial concerns.

Our country’s economic woes are taking a toll on the financial health of medical facilities across the land. Community hospitals, in particular, are feeling stress.

Declines in admissions, elective procedures, health care coverage, and investment income are significantly cutting into revenues. Bank lenders, consequently, are instituting tougher lending requirements than ever before.

Access to tax-exempt financing—a mainstay for community hospitals—also is rapidly deteriorating. Hospital bonds are now considered riskier, so investors are requiring greater returns. This has made such financing cost-prohibitive for many community-based institutions.

The economic storm engulfing hospitals is expected to result in a decline of capital expenditures by as much as 25% in 2009, according to industry analysts.

Yet the competition for patients—and need for the latest imaging and other medical technology—is stronger than ever. In this environment of shrinking capital budgets, what options do community hospitals have to enhance patient care?

A Welcome Remedy

A growing number of administrators are discovering lease financing as a viable remedy for acquiring critical medical equipment, ranging from imaging technology to surgical equipment to monitoring tools, as well as patient record systems.

The financing arms of equipment vendors and a number of independent commercial finance companies, including Tygris Vendor Finance, specialize in health care financing. They understand the marketplace and the equipment better than any bank.

More importantly, in today’s market they are flush with capital to help vendors solve the many financing challenges faced by community hospitals.

A growing number of hospital administrators are finding it is easier to budget for a monthly technology charge rather than maneuver through the capital expenditure approval process. What’s more, lease financing enables hospitals to preserve their capital budgets for larger endeavors, such as construction projects. This equipment acquisition strategy also preserves bank lines of credit for other operating needs.

Lease financing also enables hospitals to stay ahead of the technology curve. With medical equipment advancing annually, upgrade and technology refresh provisions built into many lease agreements enable hospitals to minimize the risk of equipment becoming obsolete.

Creativity is a hallmark of lease financing. Finance companies have begun offering innovative cost-per-procedure structures that better align lease payments with incoming revenue from patient procedures. To this end, lease financing coupled with effective patient record systems enables a hospital to better track usage of a piece of equipment over its useful life.

Options Fit Hospital Needs

There are a variety of lease products available to hospitals, depending on their ultimate needs and financial goals.

Operating leases may provide off-balance sheet financing and enable a hospital to use a piece of equipment without actually owning it.

Such was the case recently with a community hospital in an urban setting. It was desperately in need of updated surgical technology, but constrained by capital expenditure budget requirements. An operating lease was arranged that was aligned with the surgery department’s operating budget, enabling the hospital to access this technology.

We own the assets—the hospital is simply using them to better serve patients and to make money. Lease payments are treated as an expense. At the end of the lease, the hospital has the option to return the leased assets and obtain new equipment under a new lease or, if it chooses, purchase the equipment outright.

Hospitals interested in the lowest monthly payment often enter into fair market value (FMV) leases that account for the residual value of the equipment at lease-end. Lessors that have effective remarketing channels for the used equipment typically offer hospitals the best FMV lease rates. These leases often come with refresh options, shifting the risk of technology obsolescence to the finance company.

In instances where a hospital wants to eventually own the medical equipment, capital leases are the option of choice. The leases are usually longer in length than an operating lease, with ownership shared between the hospital and finance company for tax purposes. At lease-end, a hospital pays a nominal fee and takes title of the asset.

It should be noted that equipment vendors appreciate the fact that lease finance companies are much more flexible in working with their customers than bank lenders. This enables them to close deals that may otherwise evaporate—even if the customer has good credit.

Last year, for example, a midsized, growing hospital wanted to acquire new equipment, but did not have access to funds until the new fiscal year budget was available in 6 months. We structured a lease with deferred payments until the beginning of this year, so the vendor could complete the deal and deliver the equipment immediately. This is but one example of a unique lease structure designed to accommodate a hospital’s internal budgeting needs.

The Real Facts About Lease Financing

There are a handful of misconceptions associated with lease financing.

Some hospitals believe, for example, that leasing is the financing option of last resort. The fact is that more than 80% of Fortune 500 companies use lease financing to manage their capital expenditures. Thousands of very successful hospitals across the country use this tool to acquire needed equipment each year.

There also are unsubstantiated concerns that equipment leases include onerous interest rates and penalties. In truth, lease agreements today are often very competitive with financing arrangements offered by banks.

Michael J. Sweeney

Concerns with inflexibility also are common. As illustrated earlier, lease finance companies often work closely with a vendor’s customer to provide them with lease terms and conditions that best suit their needs. Flexible payment structures are the norm. Equipment upgrade and technology refresh provisions are very common during the life of a lease to provide the end user with the very latest equipment available.

A Smart Prescription to Stay Competitive

Virtually all prognosticators think the current economic recession will continue to grip the nation well into next year. This does not bode well for community hospitals coping with falling revenues and other financial challenges largely out of their control.

In times like these, however, lease financing may be just what the doctor ordered. Flexible lease structures will help hospitals acquire the needed equipment to remain competitive and provide quality patient care, no matter what actions banks or investors take to weather the current market environment.

In fact, one could argue that hospitals should embrace the financing remedy in both good times and bad. For a growing number of community hospitals, there is no better prescription to preserve capital expenditure budgets and manage medical technology assets effectively.

Michael J. Sweeney is general manager, healthcare, of Tygris Vendor Finance, formerly US Express Leasing. Tygris Vendor Finance is a division of Tygris Commercial Finance. For more information, visit www.tygriscf.com.