What’s the best way to afford the latest in digital radiography technology? Keep the clinic open 24×7 to increase the amount of revenue? Postpone other equipment purchases?
The basic question comes down to this: Do you pay cash or obtain financing?
The battle of buy vs. finance is seen differently by manufacturers and the medical community. Most large hospitals and conglomerates feel more comfortable waiting a few years to generate enough capital to afford a DR system and then pay cash for it. While this is the cheapest overall option for the facility, current low interest rates have made it much more attractive to finance a large imaging purchase. There are several financing sources, from manufacturers to bank loans and independent leasing companies.
Cash and carry
Many hospitals prefer to save the capital for their DR systems before buying them, even though they may lease other imaging systems. If the technology changes rapidly, then it is more beneficial to the hospital to finance the purchase, says David Sack, AHRA, administrative director of radiology at St. Luke’s Episcopal Hospital in Houston.
St. Luke’s prefers to pay cash for its medical imaging equipment, but leasing is an option, if the modality has technology that changes rapidly, or if the unit is really needed in the middle of a budgetary year. Sack says St. Luke’s owns a Hologic Inc. (Bedford, Mass.) DR chest system, but is about to lease a mobile CT scanner for an off-campus sites and is paying for a mobile PET scanner with a charge-per-procedure contract. Sack believes a hospital wouldn’t need to replace as many X-ray rooms with DR because of DR’s efficiency; a facility may opt to replace two rooms rather than three, and, as a result, it would maintain its current volume with fewer technicians.
If the equipment is leased, Sack says, the facility cannot depreciate the device for tax purposes, explaining that a facility doesn’t want to keep funding a machine that will have outgrown its usefulness by the time the lease is finished; that will only result in the facility losing money. A separate service contract can be purchased through the company or from another service company. Sack believes this option might be useful when the particular modality needs to be regularly upgraded.
Clarian (Indianapolis), a conglomerate of Methodist Hospital, Indiana University Hospital, Riley Hospital for Children, and four full-service outpatient facilities, pays for almost all of its imaging equipment with cash, because it has the reserves to do so, says Stanley Metzger, administrative director of radiology. Clarian has a Kodak DR 5000 in place at both Indiana University Hospital and Methodist Hospital.
“In our case we start to get more of an immediate return on our investment [if we pay with cash]. Yes, you pay the money up front, but I think our internal rate of return is higher than had we gone out and leased equipment,” Metzger says.
Clarian’s internal analysis has shown buying equipment is better than leasing for the company. If Clarian does choose to finance medical equipment, the interest rates that it receives on the market by floating a bond or securing a loan are more competitive than most leases.
“We just can’t afford to lease,” adds Metzger. “It’s just too expensive for us.”
Sign on the dotted line
There are advantages to a lease or loan. Payments often are more manageable, there are tax benefits, and the facility maintains an ongoing relationship with the manufacturer and can arrange to upgrade service within the lease. Manufacturers like to finance their products to customers, because they believe it often leads to repeat business.
“How they’re doing it is not necessarily how they should be,” says Rex Harmon, vice president of global marketing and PR manager, at Swissray International (Elmsford, N.Y.), when asked how his company’s customers are paying for DR. “There’s a sense in the healthcare industry that you pay for things with cash because that is the cheapest financing. That might be true, but it makes more sense, especially with something like ddR, to fund it with a part of your savings or revenue, and to fund it in a flexible way that allows you to keep upgrading and keep the equipment current.”
Swissray has several financing options available to customers, including no payments for 6 or 12 months, fair market value option and a level payment option. The fair market value plan does not include the principle cost of the equipment in the loan, thus allowing for lower monthly payments. There is a balloon payment at the end of the lease and then the equipment is owned by the customer, or there is the option of returning the system to Swissray. The level payment plan is a dollar buyout lease in which all costs are financed for 60 months and the system may be purchased at the end of the lease for one dollar.
Eastman Kodak Co. (Rochester, N.Y.) has two basic methods of financing. The newest finance product, called Flex Lease, aims to give the lowest operating cost to the customer by allowing the facility to claim depreciation for tax purposes and account for the equipment as a rental expense, explains Richard Lee, director of financial services.
Another method is a pay per scan option, where the facility looks at its usage and knows what the cost structure is for the kinds of procedures it does. Kodak agrees to essentially risk-share with the facility and after a certain level of usage, the plan can be tailored so that the cost to the user is reduced or eliminated.
Lee believes financing is not just a cost issue. “There’s really a lot of concern about technological change [from the customer], the price of technology and the need to stay if not on the leading edge in the technology curve, at least to keep pace, to be competitive in the marketplace,” he adds.
Payment plans
Kodak’s customers are actively taking advantage of the financing packages offered. Cash-paying customers will pay more for upgrades or system conversions and take a loss on trade-in value, Lee says. The vendor then can structure a lease that will accommodate near-future upgrades that the customer may not be aware of at the time of the purchase. A lease also allows the customer to reevaluate the needs of the facility and the technology of the system without locking into owning a machine for the next seven years.
GE Medical Systems (GEMS of Waukesha, Wis.) is seeing its DR customers finance their purchases at a slightly higher rate than those buying other modalities, especially with its latest offering of a full-field digital mammography system, the Senograph 2000D. GEMS customers have a choice of several financing options, explains Jim Ambrose, general manager of GE Health Care Financial Services. A term loan or an installment sale is an asset-based loan for a specified period of years, with a customized amortization schedule. A synthetic lease works as an operating lease for accounting purposes (thus off balance sheet) and an owning lease for tax purposes so that depreciation may be claimed.
GE owns the asset and leases it to the customer in a true tax loan, and the customer can purchase it or return it at the end of the lease. This lease is the most flexible for the customer, says Ambrose. It is beneficial for rapid changes in technology because upgrade financing can be built into the lease. Not-for-profit facilities can get a tax-exempt loan with a low interest rate since GEMS receives the interest revenue tax-exempt and then passes that savings along in the loan. In addition, service contracts may be added to any of GEMS’ financing programs.
John Everets, chairman and CEO of medical equipment financing firm HPSC (Boston), says about $5 billion of medical equipment is leased or financed every year. “I think in most situations, people in the medical world don’t want to tie their capital up with equipment, because they have reimbursement to worry about and substantial capital requirements in their practices, clinics, or hospitals, so they want to maintain as much liquidity as they can.”
HPSC’s financing programs include deferred payments and step payments in conjunction with the facility’s reimbursement schedule.
“These loans are so short in duration — the average is five years or less — that you’re amortizing so quickly that the interest portion of it is really minor compared to the use of it and the cashflow that it produces. Especially now with the rates having come down,” says Everets.
With a lease, the customer can choose to have HPSC dispose of the equipment at the end of the agreement and can expense the payment on or off balance sheet. A lease may even have a slightly lower rate than a financing agreement.
Additionally, a lease is equipment-specific, meaning that it is only attached to the system being financed and not to the hospital’s or clinic’s other assets, as a traditional bank loan would require.
There are even financing options for entrepreneurs and facilities that are considered high-risk by traditional lenders. Marcap, a Chicago medical finance company, offers higher-rate leases to high-risk, smaller facilities like imaging centers, surgery centers and group practices. Its customers are less rate-sensitive and more structure-sensitive, according to Terry Gill, vice president of leasing.
Marcap offers traditional leases, fair market value leases and dollar buyout (capital) leases. The more unique plans include a fee per scan program with no minimum requirement of scans; a fee for equity loan where the customer pays for use of the equipment and part of the money goes toward equity to eventually own it; and a less common joint venture lease, in which Marcap partners with the a radiology group.
“I think leasing is increasing for two reasons,” opines Gill. “The ability to borrow money has tightened up over the last two years, which helps force more leasing. Secondly, based on today’s environment, hospitals want to hang on to their cash for whatever tough times are going to come. In the past, that was less of an issue.”
Most of Marcap’s customers opt for fair market value or capital leases. Gill says most healthcare providers ideally prefer to own the medical imaging equipment. While modalities with rapidly changing technology will more likely be leased through a fair market value plan, it is unknown at this point of whether DR will be one of them.
Fleet Health Care Finance Corp. (Parsippany, N.J.) supplies medical equipment leases to a number of clients, from hospitals, clinics and group practices to individual doctors and radiologists. The company offers the traditional capital lease, where the equipment is owned by the client at the end of the lease, and a limited operating lease, where the customer can return the unit when the lease ends. They also offer a finance lease with the tax benefits of claiming both interest paid and depreciation. Like other lenders, Fleet Health Care creates leases depending on the customer’s cash flow, which can be of benefit to a new practice, which might take advantage of a step payment plan.
Anthony May, DR financial specialist at Fleet, has seen an increase in the number of clients leasing DR systems. “Especially with clinics and private practices, the capital is much, much more valuable… Capital is scarce. A lot of people don’t have $500,000 or $600,000 to drop on a system,” he says. To those facilities, the cash can better be used in other areas of the business.
Intermountain OrthopAEdics (Boise, Ida.), leased a DR system from Swissray. It uses the system in both its MR and osteoporosis imaging centers, performing about 45 exams a day combined. Administrator David Kirk, administrator, says that leasing was the only way his small imaging center of 11 doctors could afford such a system.
Intermountain has a five-year operating lease that allows the imaging center to deduct the equipment as an expense and make lower initial payments as its expands the business. Intermountain also has the option to buy the equipment at the end of the lease or refinance the lump payment for another few years. The center also purchased a separate service and upgrade contract with Swissray.
“For us, it’s not even an option to be able to pay with cash. We wouldn’t have that kind of surplus available for making that large of a payment. To me, if you can use somebody else’s money and use that cash either for distribution to owners or for other revenue-enhancing programs, I’d rather spend my money there,” Kirk says.
The return percentage that Intermountain receives on its DR system is higher than the interest rate for borrowing, so the facility makes money while it repays its loan.
Decision time
A DR purchase boils down to a matter of choice when a hospital board or finance committee decides whether to pay cash or arrange for financing. It must evaluate its own cashflow, risk tolerance, tax advantages and need for a DR system.
“The medical equipment marketplace is growing rapidly, [as are] the requirements on the part of hospitals, clinics and practices to acquire that equipment … They have to have imaging equipment that works,” says HPSC’s Everets. “You can’t buy all of your equipment with cash, because there just isn’t enough cash to go around, so somebody has to provide you with the financing for it.”
If there is plenty of the green stuff floating around your facility, that’s great news. Ultimately, it is crucial to do research to find the best financial package for your facility. The best news is that there is a way to afford the use of a DR system for almost everyone.
