What Every Hospital Executive Should Know About Leasing
Written By: Larry Stevens
According to the Equipment Lease and Finance Association Foundation, American businesses acquired $2.03 trillion in new equipment and software during 2021 and the 2022 estimate is $2.2 trillion. Of the total amount of equipment and software acquired in any given year, nearly 60% is acquired through some method of financing. The broad category of medical equipment which Med One primarily serves is the most likely business vertical to utilize financing. An estimated 75% of all medical equipment and software acquired in the United States is acquired through a lease, loan, or line of credit arrangement.
We are often asked the question, “Why would anyone rent or lease? Why wouldn’t they just buy their equipment?” Among the many possible answers to this question—we find that hospitals and other medical providers may choose leasing to acquire the assets they need for various reasons:
- Customers are looking to preserve the flexibility of keeping cash which is available through lines of credit or cash reserves unencumbered and available for operational working capital.
- Capital budgets most often require that the use of loans or lines of credit be treated as a reduction of available capital—leases, however, may be structured to reduce the impact on capital.
- Leases are usually easier to obtain and have more flexible terms than loans for buying equipment.
- Customers are more likely able to structure specific needed terms and conditions through a lease rather than a loan or line of credit.
- Leasing provides a way for the customer to address the problem of obsolescence and utilization.
- There are many other reasons specific to the individual needs of any given customer.
According the ELFA Foundation, there are some 400 plus companies which have an organizational focus on leasing, and hence, are known as leasing companies. These companies have organizational structures which include:
- Banks and bank-subsidiaries.
- Specialized Financial institutions.
- Independent lessors.
- Manufacturer captive lessors.
- Other boutique lenders.
Now to address the question addressed in the title. What should every hospital executive know about leasing?
It seems that with almost every transaction from construction projects to finance contracts, there are three main elements to the “deal” or at least variations of this theme.
Price, Time and Quality
Were you asking me to build you a new home, I would be comfortable with you controlling two of those elements if I could control one of them. For example, you may wish to specify the price (within fair and reasonable limits) and you may wish to set the timing criteria (when will the project be completed). We could probably do business together if I am able to dictate the quality. Should you want to control the quality and the timing, I should be able to control the price. I am willing to build your house to your quality specification and within the time frame you dictate—as long as I can control the price.
Some variation of this principle is present in almost every business transaction. Financing major equipment purchases is no exception. Leasing and financing have become so commoditized in recent years—with pricing being the major driver—that most executives do not know there is a wide variety of flexibility that can be built into a lease. This works to the detriment of the lessee who is left unaware that there are many, many aspects and benefits that they are likely overlooking. The ability to structure lease terms that will better fit your institutions’ specific needs is possible if you choose the right leasing partner. A partner that has the willingness and the structural capability to provide true flexibility. The number one benefit that Med One brings to the leasing conversation is our willingness and ability to structure a lease to meet the specific needs of our customers.
We know that those evaluating whether to enter a lease arrangement to acquire equipment are often focusing on the single aspect of the monthly payment. This single focus tends to crowd out and obscure the capability of the leasing partner to provide true flexibility and long-term benefits. A singular focus on immediate pricing results in many less obvious issues being left out of the evaluation. There are many ways to provide lower monthly lease payments than a competitor. All of them to the long-term detriment of the customer. Evaluating a lease from the standpoint of the lowest monthly payment often results in unanticipated costs or restrictions and tends to increase the overall cost of the transaction and decrease the ultimate satisfaction of the lessee.
In a previous article in Med One to One titled “Rate is the Bait,” the author pointed out many of the hidden ways that a focus on pricing can come back to bite a lessee. Evaluating any type of financial offering must be done by considering the entire transaction—particularly the provisions and obligations of the underlying agreement. If careful consideration is not given to these items, any savings anticipated from a lower monthly payment could quickly vanish due to misunderstood provisions or undisclosed charges.
Of particular concern during times of rapidly escalating prices and costs is whether pricing is fixed for the entire term of the lease. Many lease agreements have built in payment escalation clauses tied to raising interest rates. Others have mandatory extension clauses at the end of the initial lease term. An attractive lease payment during the beginning months of the lease can quickly take a turn for the worse if the lease payment and the term are not fixed at the beginning.
We also know that there are many hospital executives who have made the predetermined decision, “We will never lease, we will pay cash, or we will delay the acquisition.” My suspicion is that when a decision maker takes that kind of hard stance, it is driven either by past bad experiences, or by misinformation. High on the list of things to worry about for hospital executives are satisfactory patient care and outcomes and staffing satisfaction. A key component of mitigating both concerns is having enough of the latest technology equipment for the clinical staff to successfully care for patients. A well-structured lease can help to accelerate the acquisition of critical equipment that might not have been contemplated during the capital budgeting process.
Med One has several prominent hospital groups that have negotiated a specific lease/rental master agreement that facilitates this very well. They can immediately acquire some types of assets while they are waiting for final budget approval. When budget approval is finalized, they have the seamless option of moving the transaction into a cash purchase or a longer-term lease. This is a big win for them in keeping clinical staff happy and focused on excellent patient care.
“Evaluating any type of financial offering must be done by considering the entire transaction—particularly the provisions and obligations of the underlying agreement. If careful consideration is not given to these items, any savings anticipated from a lower monthly payment could quickly vanish due to misunderstood provisions or undisclosed charges.”
Often, new technology innovations may be introduced mid budget cycle which could prove to be a revenue driver of a superior patient care option within a hospital setting. Usually, this type of technology has not been budgeted for and it may take some time to justify a capital acquisition. A well-structured lease can provide the use of this equipment immediately until budget approvals are ultimately obtained.
One aspect of the whole capital budget process that seems to be regularly overlooked (particularly in periods of high inflation), is the fact that new equipment never seems to get any less expensive by waiting. There are also times particularly at the end of a quarter or the end of a fiscal year when manufacturers are willing to offer deep discounts in an effort to accelerate the sales process. When the leasing partner can acquire the equipment at the discounted pricing, the savings is passed through and reflected in the structure and pricing of the lease. Thus, the customer can take advantage of today’s often deeply discounted pricing of the equipment and pay for its use through a lease with dollars that are rendered cheaper through inflationary pressures during the lease term.
An underappreciated power of a good lease structure is the ability that it provides to a health care provider to take control of the obsolescence of patient care equipment being used in their facility. Capitalized and owned equipment is very difficult to get off the books and therefore difficult to retire. If you are working with a quality lease partner, there are ways to provide seamless upgrading of equipment at appropriate intervals to ensure that patients are always being cared for with the most up to date and safest technology. Our suspicion is that were risk management departments to take a close look at some outdated technologies being used to care for patients, red flags would be raised all over the facility.
The title of this message is “What Every Hospital Executive Should Know about Leasing.” My point is that leasing has become a recognized and often used method of acquiring equipment in all capitalist economies throughout the world. Leasing carries with its use multiple advantages in the capital equipment equation. Unfortunately, it has become commoditized by focusing so heavily on the basic pricing. As a result, many of the obvious benefits are almost always overlooked in the examination. In fact, most executives are not even aware of the many long-term benefits that can be derived by allowing for a more flexible and imaginative structure in their leasing arrangements. Using the single examination criteria of pricing, leaves many, many benefits left unexplored and thus unused.
