Because PACS is expensive, many smaller hospitals and imaging centers eager to embrace the productivity-enhancing and cost-saving technology often find they cannot manage its purchase via capital budgeting. Instead, they must look to financing to pay for part or all of the envisioned acquisition.
Traditional funding sourcessuch as banks and other institutional money lendershowever, are reluctant to finance PACS since a significant portion of the dollars lent pays for software. Software, in the traditional finance world, is next to worthless as collateral, primarily due to the obsolescence factor.
There are, nonetheless, PACS financing opportunities. Hopeful PACS acquirers must be ready and willing to explore creative lending approaches if bankers seem disinterested.
For example, an inventive financing strategy enabled Palisades Medical Center in North Bergen, NJ, to obtain a full PACS implementation, hospital-wide, on advantageous terms but in a way that actually contributed to a smoother-than-expected implementation at the 202-bed acute care community hospital.
An affiliate of the New York Presbyterian Healthcare System, Palisades Medical Center had long wished to step up to PACS when in 2000 an opportunity to acquire a system fell into the hospital’s lap. A PACS vendor that earlier made its mark with installations at radiology group-owned imaging centers was then attempting to break into the hospital market. One of the radiologists who staffs Palisades was a partner in a private-practice group utilizing the services of this particular PACS vendor. Through that relationship, he became aware of the company’s desire to land its first hospital customer. He knew that Palisades was talking PACS, so he informed the hospital’s administrators of the vendor’s interest and suggested that, if they were to contact the company, an attractive deal might ensue.
David Berkowitz, vice president of administration for Palisades, agreed to look into it. In the course of discussing Palisades’ interest in going electronic, the vendor proposed providing an enterprise-wide PACS solution at a deeply discounted price. The figure was low enough that hospital officials immediately recognized it aspotentially at leastthe offer of a lifetime.
“We really wanted to utilize PACS,” says Berkowitz. “In addition to allowing us to move away from film and all the problems attendant to being an analog environment, we also saw PACS as a way to differentiate our hospital, since we would be the only one in our immediate market area with this capability.
“But without the price break presented to us, there would have been no way we could ever have afforded to get into PACS at the time.”
DEMANDED BUDGET NEUTRALITY
The attractiveness of the purchase price was surpassed only by the generosity of the terms of financing. Palisades negotiated the payment plan in such a way as to avoid having to repay so much as a single penny until the system was fully installed and operating satisfactorily for 120 days. Moreover, if the system failed to live up to the promised level of performance during those 4 postinstallation months, Palisades would be entitled to demand that the vendor remove the system, in which event the hospital would owe nothing and emerge from the experience perhaps a little worse for the wear but in no way any the poorer.
The funding source was a New York leasing outfit with which the hospital had an already established relationship.
“Because of our history with the leasing company, they knew we were a good credit risk to begin with, so we did not have to provide intricately detailed financial statements and disclosure documentation about our business plan as would have likely been required had we been seeking funding from a bank that didn’t really know us,” says Berkowitz.
One of the terms Palisades secured was a pledge from the leasing company to pay the PACS vendor in phases. This was meant as a safeguard. The idea was to give the PACS vendor an incentive to do the best job possible for the hospital.
“No funds were to be released to the vendor without our OK,” Berkowitz explains. “And we didn’t say OK until we were fully satisfied that everything that was supposed to occur during a phase had indeed occurred.”
Before signing on the dotted line with the PACS vendor, Palisades sought assurance that the cost of the investmentequipment, installation, training, service agreement, interest payments, fees, applicable taxeswould be fully offset by PACS-delivered savings. This was key. Without strong indication that attainment of what Berkowitz calls “budget neutrality” was possible beginning in the first year of PACS operation, the deal would never have been consummated.
“In order for us to go forward with this project, the bottom line had to be that I would be spending no greater an amount of cash than before PACS arrived, and my financial performance would not be adversely affected by the acquisition of the PACS,” he says. “In other words, I wanted to be able to substitute operating costs for capital costs based on going filmless.”
To determine if budget neutrality was feasible, Berkowitz asked the radiology department to identify for him every existing operating cost that they believed would be eliminated by PACS, and to very conservatively forecast the growth in imaging volume the hospital could expect over the coming 5 to 7 years. He also requested from the department a detail of all the added costs expected to be incurred during that same time frame as a result of PACS ownership.
“We were able to project an elimination of almost all our film costs, plus the costs of processing, developer maintenance, and related items,” says Berkowitz. “Then, in projecting the added costs, we took into consideration things like depreciation, program modifications related to subsequent upgrades of the system, and replacement and expansion of storage capacity.
“I prepared a pro forma of the expenses both with and without PACS, and it was clear that budget neutrality was very realistic. There were some variables I could have included in the calculation that would have made an even stronger case for going forwardfor example, the expectation of increased cash flow resulting from improved throughput, especially in the emergency department; also PACS-attributable improvements to quality of care.”
OTHER FINANCING POSSIBILITIES
Another option for nonprofit or government-owned hospitals is to finance PACS through an arrangement packaged as a tax-exempt municipal loan. The appeal of this approach would be the delivery of financing at interest rates much nearer to those of municipal bonds than to those found in the traditional venture capital marketplace. This is accomplished by using an agency of state or local government as a conduit; for example, nonprofits in the Empire State are increasingly securing bond financing through the Dormitory Authority of the State of New York (DASNY), which currently gives them 30-year terms at 5% interest. DASNY-procured funds are normally used for hospital expansions, but the agency will assign lease paperwork so that the sum requested can be used instead for the financing of projects not associated with new constructionlike PACS. Doing so effectively passes along to the nonprofit hospital the benefit of that low-rate financing, although DASNY charges a nominal fee for this service.
Looking the Gift Horse in the Mouth
In the situation Palisades found itself in, the financing piece of the PACS acquisition turned out to be value-packed in its own right because the lease company wanted to play a hands-on role with the project.
Says Berkowitz: “The way our lender looked at this, we were not buying a CT scanner. CT scanners they knew; PACS they did not. The company wanted to thoroughly understand what PACS was all about. They also realized they would be seeing more requests for PACS funding from other customers as the years went by. So, for them, the smart thing to do was to be a true partner with us. They could then gain a real appreciation of the technology, the installation processes, the operational parameters from the ground floor up, and then be able to use that knowledge to better serve future customers.”
Thus, Palisades invited the leasing company to be involved from the beginning. It was good for the leasing company but even better for Palisades.
“They took part in the planning discussions,” he says. “This gave them an opportunity to voice concerns and either to obtain answers to put those concerns to rest or, if there were no answers, to affect the shape of the PACS plan.”
The actual PACS implementation proceeded far smoother than Berkowitz expected. So much so that it proved unnecessary to hire additional support staff to operate and maintain
the system. Existing information services staff and radiology management proved sufficient to support the operational aspects of PACS.
“I feel this approach was a big factor in the success of the project,” he says. “It’s not as if we laid out all the plans with the vendor alone, shook on it, and then I said, OK, now I need to go out and fund this. I believe that having the early buy-in of the funding source made for a better outcome than we would have gotten had we waited until the end to bring them on. By having them involved at the beginning, there was no need to take them through a learning curve when the time had come to make our move and implement. If it had gone that way, it would have very likely delayed movement on the program. Instead, this way, by the time we had made the decision to acquire PACS and move forward with implementation, the leasing company was already committed to funding the deal.”
Back when Palisades got started with its PACS project, the economy was still in solid shape. However, in retrospect, Berkowitz intimates the hospital might have gotten an even sweeter deal had the financing terms been forged just a year later as the business climate cooledand interest rates waned. Normally, as the economy slows, prices typically come down on capital equipment as vendors try to jumpstart their sales or else get rid of excess inventory by more attractively pricing their products; the same is true in a sense of lenders, whose product is money.
“To encourage you to take out a loan during a period of sluggish business activity, funding sources usually attempt to make their product more attractive by lowering its direct or indirect cost to you,” says Berkowitz. “Doing a PACS project in a downturn can make it that much easier to obtain the financing terms that would allow you to achieve a goal of budget neutrality.”
The contrarian view is that PACS is today such an indispensable radiology informatics tool that it is always a good time to invest in it, no matter where interest rates stand.
“As far as I’m concerned, our project was a win-win for everyone involvedthe hospital, the PACS vendor and the funding source,” believes Berkowitz.
Rich Smith is a contributing writer for Decisions in Axis Imaging News.