Financing Equipment Purchases: The Changing Landscape

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Mark HoffmanAs health care continues to struggle with a hobbled economic outlook, few aspects of operations have remained unscathed—and those include the financial processes related to the acquisition of new imaging equipment, according to Mark Hoffman, senior vice president of the health-care group at Key Equipment Finance (Superior, Colorado). “In the past few years, funding equipment purchases has been tougher,” Hoffman notes. “In our space, the value of the offer is always going to depend on the hospital’s financial condition.”

He continues, “We’ve seen a pickup in financing, the past four or five years, because other sources of funding are struggling. Even the tax-exempt bond market was slow for a while.”

In this changing landscape, Hoffman says, it’s important for administrators to understand their funding options and how bank financing can work for acquisitions of imaging equipment. “There are a number of sources hospitals would traditionally pull from to fund an acquisition, and if they can’t use those, they turn to financing—either a bank loan or a lease,” Hoffman says. “CFOs need to look closely at bank financing to understand which of these options is best for their organizations.”

Nonfinancing Options

Traditionally, Hoffman explains, hospitals might fund the purchase of a capital-intensive imaging system in one of several ways—or, more commonly, with funds drawn from a combination of these sources. “CFOs want to have multiple sources of funding,” he notes. “Sometimes, they want off–balance-sheet financing; sometimes, it’s a cash-flow thing; sometimes, it’s because their philanthropy budgets are reduced.”

These sources might include cash from operations, where facilities use their profits to fund purchases; tax-exempt bonds, which are generally issued as part of a larger package (for instance, for the construction of a new wing) and have imaging equipment bundled into them; philanthropy; and investment income. All of these sources, though, have taken a hit, in recent years, owing to the economic downturn, Hoffman says. “Larger entities with investment portfolios earmark some of those earnings for capital acquisitions,” he says, “but in the past few years, that’s been more difficult. Philanthropy is down, as is revenue.”

As a result, hospitals are increasingly turning to banks to help finance their new equipment, with two options: financing and leases. Determining which of these is the better choice depends on a multitude of factors, ranging from how the equipment will be used to how rapidly the technology is evolving.

In general, Hoffman says, the decision to finance or lease a piece of imaging equipment begins with an examination of the amount of capital available (or likely to become available). “Today, some hospitals might look at a lease as off–balance-sheet financing, paid out of the operating budget, if they don’t have funds in the capital budget,” he explains. “They lease the equipment now, so they can wait until they have the capital—that’s the flexibility of the lease. If they know they have the money, on the other hand, they’ll finance the equipment.”

Additional Considerations

The decision can be complicated by additional factors. When an imaging system is leased, only a portion of the system is financed, and the finance company takes a residual, Hoffman explains. “At the end of the lease, the customer doesn’t own the equipment—it either has to buy it at fair market value, return it, or re-lease it,” he says. Thus, the key benefit of leasing is its flexibility; even a hospital with access to enough capital to finance an acquisition might choose to lease if, for instance, it expects to keep upgrading the imaging technology in question.

“What you find is that MRI, CT, and PET systems are more likely to be leased than, say, traditional radiography equipment—although, with the move toward digital platforms, we have seen more leasing on the radiography side because there’s now more of an upgrade path,” Hoffman says. “If you’re a hospital administrator wondering how you’re going to pay for a $1.5 million MRI system, if you think you’re going to keep it, you get a loan; if you think you’re going to want to upgrade, you lease it.”

Another factor to take into consideration is whether the equipment can be sold on the used-equipment market when the hospital wants to upgrade. “Imaging technology can have a strong aftermarket value, especially for more portable equipment, so one decision to make is whether