Leasing used to be a way to try out new medical equipment and see how the radiology staff liked it before spending a large amount of cash to purchase it.

It was short-term, and if the equipment’s performance pleased everyone, a decision was made about purchasing it, either with cash or a bank loan. Leasing once was considered a “last resort” method of financing when a hospital had nowhere else to turn for financing a piece of medical equipment that it needed to purchase. Not so anymore, however.

Today, medical equipment, particularly medical imaging equipment, has become so high-tech with rapid advances in design, software and speed, that as soon as one unit is purchased, it soon may become eclipsed by a newer, better model rolling on the market. Leasing is truly another means of managing finances as well as risk.

Leasing for some healthcare institutions has become a hedge against obsolescence, according to Ralph Petta, vice president of industry services for the Equipment Leasing Association (ELA of Arlington, Va.).

In 1999, the medical equipment leasing industry experienced a 10.3 percent growth, to $5.58 billion. According to a recent ELA survey conducted by Marketdata, medical equipment leasing revenues reached $5.06 billion in 1998, an increase of 11 percent from 1997. A steady annual growth of 9.8 percent is predicted for the U.S. medical equipment leasing and rental industry through 2003.

Why lease?
“Probably 80 percent or more of all high-end capital equipment in radiology today is leased rather than bought,” estimates Richard Broker, vice president of clinical operations at U.S. Radiology Partners, a radiology practice management and acquisition firm based in Dallas.

Broker explains that a 1.5 Tesla MRI system may cost $1.8 to $2.2 million, which is a significant cash outlay, even for a large hospital or medical center.

“Medical imaging is changing so quickly that major manufacturers are coming out with new software upgrades or new coil upgrades for MRI and CT every six months to a year. A leasing agreement can include upgrades at a very minimal increase in the purchase price or at no cost,” explains Broker. “The cash flow generated from operating each month will cover the lease payment, thereby not requiring capital budget money from the hospital.”

Some of the more prevalent pieces of equipment that are leased, according to Winston Abbott, vice president of sales and marketing at CitiCapital (Harrison, N.Y.), formerly Citicorp Global Equipment Finance, are MRI and CT systems, cath labs and ultrasound units.

What’s the hottest equipment to lease these days? Open MRI systems (yes, still), short-bore MRI systems and PET scanners, says Terry Gill, vice president of leasing, for Marcap Corp. (Chicago).

The financial condition of the lessee often is a key reason to lease, along with the type of equipment, according to Jim Ambrose, general manager of GE Healthcare Financial Services (Waukesha, Wis.).

“Typically, companies think of leasing as a mitigant against obsolescence, and also when cash flow is tight, when the balance sheet needs to be cleaned up or when they can’t use the cash depreciation that would apply if you bought the equipment,” Ambrose adds. “Leasing is generally the most flexible financing vehicle. Through the lease, you can control the monthly payment amount and term. It would ultimately provide a structure that is convenient for lessee’s cash flow.”

“Leasing is an excellent way to efficiently adjust the amount of risk the principal of a facility is willing to commit to as well,” says Gill.

Unlike banks that require traditional credit histories and deeper personal guarantees from the principals of the facility, Marcap is willing to go on “story credit.” “Tell me the story of what you’re trying to do,” Gill explains. “And based on our previous experience with equipment and various markets, we’ll help to make it work.”

Marcap, which specializes in leasing imaging equipment to start-up imaging and surgical centers, also is willing to assume more risk than other, more traditional leasing companies that act more like banks in their lending practices. In exchange for higher risk assumption, however, facilities pay a higher rate on their leases of 1 to 2 percent, Gill says.

Financial advantages
Less cash outlay, off-balance sheet treatment, and avoiding technical obsolescence are the main advantages to leasing medical equipment, says Rich Hanzel, director of marketing at Marconi Medical Finance (Highland Heights, Ohio).

“With a cash purchase, you need 100 percent of the purchase price to acquire the equipment. With most bank loans, you need a 10 percent or more down payment. With leasing, only the first payment is required and that payment is about 2 percent of the total equipment price,” states Hanzel. “With leasing, you do not have to capitalize the equipment on the balance sheet and this prevents negative debt-to-equity ratios from appearing. Also, with the rapidly-evolving technology in the medical equipment market, leasing allows customers to obtain and maintain state-of-the-art equipment at all times. Hospitals need to consider whether it is important to own the equipment or to have use of the equipment.”

The flexibility of the lease arrangement also may be a reason to consider leasing as a payment option.

“Leases can be structured many different ways, including things like purchase options during the term, which provide flexibility of leasing with ownership potential,” says GE’s Ambrose.

Leasing “allows the end-users more flexibility to deal with their capital equipment acquisitions and frees up borrowing lines for working capital. It helps their cash flow and at the same time protects them from technological obsolescence,” acknowledges Abbott.

“The financial advantages of leasing are that it conserves working capital, works around budgetary constraints, makes acquiring equipment more affordable, and provides flexibility in cash management,” explains Bob Wilcox, director of financing services at Philips Medical Systems North America (Shelton, Conn.). “Leasing has definitely made financing as convenient as possible with faster credit approval periods, master lease arrangements, one stop shopping and continued servicing.”

In addition, the risk of owning the equipment is borne by the leasing company, rather than the hospital.

Leasing disadvantages
There are some potential downsides to leasing.

“The only possible disadvantage would be that you are constantly in payoff,” says U.S. Radiology Partner’s Broker. “But, even if the equipment was purchased, you’d still have payments.”

Wilcox notes that hospital CFOs have different balance sheet considerations as they relate to their preference regarding leasing. It depends greatly on a buyer’s financial needs and requirements at a specific point in time.

“If the hospital has traditionally paid cash for capital equipment, the probability that they will finance is not likely. If there is a product which is technologically advanced, such as MR, CT and PACS [picture archiving and communications system], there may be good reasons to use leasing as a vehicle to obtain the equipment,” Wilcox explains.

“I would say that the only disadvantage to leasing would be if you’re a for-profit company and you need tax depreciation, a true tax lease may not be the best alternative for you, unless the obsolescence risk is worth it,” says Ambrose. “They have to weigh the balance of how important is it not to have the tax risk.”

Hanzel also adds that a medical facility could possibly pay more through leasing for equipment that has a long life.

“If the facility has a strong [equipment] ownership desire, financial wherewithal and risk is not an issue, leasing may not be the best option,” says Marcap’s Gill. “But not many healthcare facilities are in that position today. So leasing is very attractive because it allows flexibility in equipment choice and payment without a lot of risk long term.”

Medical equipment options
Leasing options include length of the lease, type of payment (monthly or quarterly), amount of payment, possible additional fees for maintenance and/or software upgrades, and possibly an initial installation fee. There also are a few different types of leases.

Standard lease periods are three, five or 10 years. Payments are typically monthly, but a small percentage of leasing companies allow quarterly payments.

In an example given by Broker, a high-field MRI system with a $2.2 million purchase price would have an approximate $40,000 monthly lease fee. The average monthly revenue generated at the facility leasing this system generates approximately $330,000. Obviously, the facility’s operating income far exceeds the lease payment. An extra-busy MRI center that generates more than $4 million a year in revenue might spend $500,000 per year on a lease payment for the system.

Of the most popular types of leases are a capital lease or an operating lease. Other products offered are the tax-exempt lease or the lesser-used fee-per-use lease. Most lenders have a full complement of financial offerings to meet the customers’ needs.

“Low-volume radiology departments may prefer payment per procedure, at the manufacturer’s discretion,” says Broker.

The standard practice is that at the end of the lease agreement, the lessor automatically renews, in what is referred to as an “evergreen” contract.

Hanzel cites two general categories of leases: the fair market value lease and the full-payout lease. In a fair market value lease, the customer pays to use the equipment over a specified period of time. At the end of that time, the customer can purchase the equipment for its fair market value, renew the lease or return the equipment. With a full-payout lease, the equipment is sold to the customer at the end of the lease at a nominal amount, usually one dollar. From these two basic types of leases, all other structures are developed.

Vendor/lender partnerships often provide more competitive financing rates than an independent finance company, notes Abbott. The equipment manufacturer often differentiates itself from its competitors by providing the end user with an attractive financing solution as a part of the overall package.

“Rates will vary among leasing companies due to the tax structure of the lease,” says Abbott.

Interest rates vary widely, from a negative rate to double digits. Factors that influence the interest rate are the same as in consumer lending: type of assets and the credit-worthiness of the end-user.

“Rates vary, depending on the type of the lease, which range from a capital lease/loan to a tax-exempt municipal offering to a standard fair market value operating lease,” Abbott states.

An initial installation fee is oftentimes rolled into the lease payment, according to Broker.

“Hospitals need to shop around and look at payments that are flexible,” says Hanzel. “Some [payments] are lower today, and more in the future. Fee per use [leasing] is an excellent lease payment program for PACS. It helps cut costs and takes away the risks of buying new technology and uncertainties.”

Leasing checklist
A major factor to consider in analyzing a lease is the amount of the monthly payment. Since the acquisition of equipment with a lease is a cash-flow decision, the payment amount is critical, but it is not the only thing to consider. Flexibility is a key variable also to consider in lease proposals.

“Hospitals need to look at the entire lease proposal and the company offering the proposal to make an informed decision,” says Hanzel. “Often people spend too much time looking at the monthly payment.”

The right leasing company for you is not the one with the lowest payment, but the one with the most flexibility and willingness to work with a facility over the terms of the lease. “And be sure the leasing company explains the terms so you really understand them, including the often-complicated interest rates,” says Marcap’s Gill.

There are other questions to ask, such as: Is your facility able to upgrade a system as new technology becomes available?

Does the leasing company understand the changing healthcare market, and is it willing to adjust the lease accordingly?

Can the lease incorporate other associated costs, such as construction costs, service contract costs and insurance costs?

“Expected procedural volume and productivity should be considered when choosing a lease option, along with detailed service maintenance contracts,” says Broker.

Financing is one of many variables to consider when purchasing high-tech, high-priced diagnostic imaging equipment, according to Wilcox.

“Other considerations that figure into the equation are ‘What will the return on the investment be? Are the procedures performed by this system reimburseable? What is the patient population mix? And what is the competition in the area?’ among others,” he says.

Ambrose offers a few questions for hospitals to answer before making a decision to lease medical imaging equipment: What is the rate of technological change associated with the equipment? Is the equipment upgradeable? What is the viability of the project?

“Look at the terms and conditions of the lease,” he says. “How flexible are they really? Be sure to ascertain how much risk the leasing company really taking,” Ambrose says.

Reasonable monthly payments and the reputation of the company are critical to choosing a lease, according to Broker.

“Hospitals need to consider their future equipment requirements, their needs to upgrade the equipment, cash flow constraints and available tax benefits,” advises Abbott. Needs may include future expansion and development and flexibility for such growth options and taking advantage of depreciation of tax benefits.

“An equipment manufacturer that is willing and able to positively adjust terms of the lease payment in case of an operating shortfall is the key that differentiates manufacturers,” says Broker. “Some will work with you more and some will hold you to a very rigid payment, but that attitude has become less prevalent over the last five to 10 years. Establishing a rapport with the sales and service guys is very important. You want this to be a partnership. We partner with hospitals and radiologists, as opposed to having a client/vendor relationship.”

“Lessees should read the fine print of any lease contract options to ensure that there are no hidden fees, extra renewal costs, unidentified legal fees as well, or covenants associated with the lease,” says Abbott.

Sign on the dotted line
Customers are continually being cost-conscious and always seeking ways to acquire low-cost financing with a good finance partner who understands their needs and marketplace.

The decision to lease medical imaging equipment is two-fold, says Wilcox. The decision is about selecting the appropriate technology based on features and benefits of the equipment, as well as hospital costs, such as full-time employees (FTEs) as well as the financial decision to seek the most favorable finance plan for the institution.

“As more and more factors are affecting the budgets in a hospital, the knowledge of innovative means to obtain the latest healthcare technology is critical. Leasing is rapidly becoming the means of choice,” says Hanzel. “Understanding that having the ‘use’ of the latest technology is more important than ‘owning’ the technology, and using leasing as a means to keep costs low are the key factors helping hospitals obtain needed equipment while staying within shrinking budgets.”

“Medical equipment leasing has been available for the last 20 years. But in the last 10 years, as rapid technological changes occurred, in excess of 80 percent of equipment has been leased rather than purchased, at small and large facilities alike,” states Broker. “It is very rare today that any piece of medical equipment over $50,000 is purchased flat out.”

Maintaining and hopefully increasing the market share is the real competitive advantage of leasing medical imaging equipment, Broker points out.

Referring physicians want the latest in cutting-edge technology for their patients, and expect regular upgrades in diagnostic imaging equipment. Facilities must keep up with the changes and with their competition or they may lose patients.