MR imaging has turned high-definition. CT is up to 64 slices. And PACS can store all these images on whatever new media suits a facility’s needs. But these technological advances aren’t cheap. And some facilities might find that they’re still paying for equipment that’s already become obsolete. Leasing is a potential solution, but is it the right one? Here, leasing experts discuss the factors that should be considered when deciding whether to lease or buy.

Short or Long?

Equipment is the first consideration: How much does it cost? How long will it be used? What will be done with it after its usefulness has expired? What will replace it?

“Tremendous changes are happening in technology today, particularly with medical-imaging tools,” says Kevin Walsh, business development manager for CIT Healthcare Financial Services (Tempe, NJ). “So an outright cash expenditure might not be the best way to proceed when acquiring equipment.”

Equipment that will complete its usefulness before it has been paid off is a prime candidate for leasing. “X-ray equipment that a facility plans to have for 10 to 15 years should probably be purchased. High-tech items, such as CT scanners, are more likely to be used for three to six years, after which point, the hospital might want to upgrade. For this equipment, leasing is a better option,” says Todd Skulte, general manager of healthcare financial services North America at GE Healthcare (Chicago).

Leasing prevents the facility from taking on all the risks of ownership. Leased equipment can simply be turned in at the end of a lease. Owners, on the other hand, must deal with its disposal or resale.

Got Capital?

Another consideration is the facility’s financial strength or weakness. Does the company even have the capital necessary to buy the equipment? “An institution just starting out, or one that lacks outright cash, could benefit from leasing,” Walsh notes. “Leasing provides additional funds. In some instances, a down payment is not even required.”

Skulte concurs, adding, “It all boils down to cash flow.” If a facility has a good idea of how long it will use the equipment, decision-makers can determine the cost of ownership and compare it to the lease rates. What is the useful life of a piece of equipment versus its obsolescence risk? “It doesn’t make sense for a hospital to lay out capital funds to purchase technology that it will have to replace in four years. It can lease the equipment cheaper,” Skulte says.

Leasing also can impact tax and balance-sheet calculations. Lease options can allow payments to be coordinated with cash flow, budget ceilings to be overcome, and cash to be conserved. Leasing even can provide additional financing. “A provider who is diligent about making payments has access to unlimited sources of capital,” Walsh notes.

Which Lease?

QUICK QUESTIONS

Before signing on the dotted line, ask these 10 questions:

  1. How am I planning to use this equipment?
  2. Does the leasing representative understand my business and how this transaction helps me to do business?
  3. What is the total lease payment, and could I incur any other costs before the lease ends?
  4. What happens if I want to change this lease or end the lease early?
  5. How am I responsible if the equipment is damaged or destroyed?
  6. During the lease, what are my obligations for the equipment?such as insurance, taxes, and maintenance?
  7. Can I upgrade the equipment or add equipment under this lease?
  8. What are my options at the end of the lease?
  9. What are the procedures I must follow if I choose to return the equipment?
  10. Are there any extra costs at the end of the lease?

Source:
Equipment Leasing Association. Ten questions to ask. 2005. Available at: www.ChooseLeasing.org/Before/. Accessed February 24, 2005.

Plenty of lease options exist to meet any customer’s needs. “A customized financing solution is available for every type of institution, whether it’s a huge hospital system or a start-up imaging center,” Walsh explains. He recommends speaking to a leasing specialist who can review needs and budget, and then help to identify the pros and cons of each option.

Leases are not loans, but interest rates can affect the monthly payment. Determining factors include the applicant’s present borrowing rate and credit background. But more important than interest rates, Skulte says, is the residual. Leases take into account the value of the equipment at the term’s end, or the residual, which also is built into the monthly payments.

Leases can incorporate many costs, such as servicing and taxes, in this one monthly payment, and are best compared to one another on this basis. The options are plentiful, but two of the most popular are the operating lease and the finance lease.

With an operating lease, the payment is treated as an operating expense. This lease typically provides the lowest cost of use and can be treated as off-balance-sheet accounting. The monthly payment can be deducted, and the equipment is turned in to the lessor at the end of the term, leaving the facility free to purchase or lease new equipment.

Alternatively, a finance lease (aka a capital lease) offers the option of buying the equipment at the end of the term. The facility counts it as debt and is typically responsible for maintenance, taxes, and insurance, although the facility can deduct the depreciation of the equipment.

Coming to Terms

Terms also must be negotiated for the end of the lease. Equipment can be returned or purchased at fair-market value or for a nominal price, or the lease can be renewed. The lease contract will need to be examined for stipulations on upgrades and early termination. “Any facility can get out of a lease early, but it will be responsible for the remaining lease payments,” says Skulte, who notes that the only time the decision to abandon a technology or piece of equipment should be made is when the cost of maintaining it outweighs the cost of ending the lease early.

If a hospital or imaging center thinks it might need to end the lease early, it can negotiate for a shorter lease term instead. “Prepayment penalties can become expensive, so a facility really should negotiate this beforehand,” Walsh explains.

Upgrades are easier to manage, although these should be negotiated beforehand as well. According to Skulte, a complete change of systems could be treated as early termination. But upgrades can be worked into the contract. “Typically,” Walsh adds, “an upgrade is leased through the same company. The facility either turns in the equipment or keeps it and adds additional features. If done before the lease term ends, the remaining balance can be rolled into the upgrade.”

Everyone’s Jumping into the Ring

Leasing can make equipment, such as this GE Healthcare Signa Excite for high-definition MR, more affordable over the long term.
Leasing can make equipment, such as this GE Healthcare Signa Excite for high-definition MR, more affordable over the long term.

Many institutions are deciding that the risks of early cancellation outweigh the risks of ownership, even though buying equipment has traditionally been seen as a more secure path. A survey of medical equipment vendors1 conducted by the Equipment Leasing Association (ELA of Arlington, Va) found that 89% of respondents either agree or strongly agree that leasing is a leading business trend. In addition, 53% reported that their customers are leasing more today than 5 years ago; the same number (53%) expect their customers’ current leasing activity to increase within the next 2 years. Perhaps this figure is no surprise, as these same vendors report that the average life span of the equipment they distribute is 3?6 years.

ELA also conducted a 2003 market research study,2 which reported that the estimated size of the US healthcare equipment-leasing market in 2002 was $5.8 billion in terms of new volume, with an average annual rate of market growth of 9.4% during the past 5 years. This number is projected to reach $7.4 billion in volume by 2005. The study attributes the growing acceptance of leasing to budget constraints, stating that “lease financing has been increasingly accepted by hospital providers as a necessary means of acquiring equipment and controlling expenses.”

GE Healthcare’s Todd Skulte (left) suggests leasing equipment that will be replaced within 3?6 years. Kevin Walsh of CIT Financial Services (right) says that a customized financing solution is available for every type of institution.

Diagnostic imaging equipment accounts for a little more than 50% of all healthcare lease financing, with the principal modalities being MRI, CT, and ultrasound.2 An estimated 30%?50% of diagnostic imaging systems are lease-financed in some fashion through captive finance companies or third parties (such as leasing companies or commercial banks).2 Lease terms are typically 5?7 years, although requests for 3-year terms are not uncommon with the advent of digital enhancements.2

It is these enhancements that have prompted more facilities to turn to leasing options to finance their new purchases. As equipment becomes more rapidly obsolete, leasing becomes a better deal for customers. Still, the decision about when to lease and which option to use are dependent upon an individual facility’s needs, budget, and cash flow. Keeping these factors in mind can prevent a financial blow.

Renee DiIulio is a contributing writer for Medical Imaging.

References

  1. Equipment Leasing Association. Market research: medical equipment sales and financial trends survey. 2005. Available at: www.ChooseLeasing.org/market/MedSur.htm . Accessed February 23, 2005.
  2. Equipment Leasing Association. Healthcare equipment leasing, 2003: US market dynamics and outlook. 2003.