– By Matt Skoufalos –
Capital equipment purchases can be among the most technically complicated business decisions that any health care organization makes. As economic conditions become increasingly volatile amid the global novel coronavirus (COVID-19) pandemic, those complications have only become more labyrinthine amid statutory shutdowns of health care facilities and corresponding slowdowns in the patient volumes upon which most imaging revenue cycles turn.
However, in the midst of that chaos, a variety of flexible solutions exist for those entities looking to buy, lease or simply shop for new medical imaging equipment.
Chris Fletcher, senior vice-president of national accounts for Crest Capital of Alpharetta, Georgia, said financial mechanisms aren’t constrained to the costs of a specific piece of technology itself. “Soft costs,” from installation and training to taxes and delivery fees, may comprise as much as 25 percent of a deal; financing options may even be leveraged for fees associated with extended warranties or service agreements.
The majority of the items for which Fletcher oversees financing range in price from $20,000 to $250,000; many of his clients are private-practice imaging centers, who will seek coverage for everything from an X-ray machine to the furniture in the waiting room outside of it, to the signage on the building itself.
“We finance any type of imaging equipment that a radiology practice would need, and it goes way beyond that,” Fletcher said. “We try to make it as easy as we can for our customers to get what they need.”
Private financial companies like Crest Capital have found their niches in the medical equipment industry by offering lending terms comparable to those found at banks, save with fewer restrictions and greater flexibility, Fletcher said. Typically the only collateral of which his agency holds ownership is the equipment that’s being financed; a bank could ask for much more in return.
“When you go to a bank for financing, the bank will finance it for you, and they’re going to give you the absolute rock-bottom lowest rate,” he said. “But they’re also going to slap a blanket lien over your entire practice. That means everything you own, the bank has a say in that.”
“If you’re going to sell your old X-ray machine because you want to buy a new one, they’re going to have say over that,” Fletcher said. “They’re also going to require that you keep a minimum balance in the bank, typically 80 percent of the loan. If that’s the case, whose money are you actually borrowing?”
“And they’re going to want you to re-qualify for the loan every year – which means do not have a bad year, because they’re going to be able to call in the loan if they think you’re having trouble,” he said.
About the only customers with whom Crest Capital typically does not work are start-ups. Borrowers must show at least two years worth of business activity showing “decent credit and enough revenues that it makes sense to us,” Fletcher said; “that this company is growing and they need the funds.”
“I like to say we make successful businesses more successful,” he said. “For most deals under $250,000, we don’t even need your financials and your tax returns, you just need to fill out the application.”
The price of that flexibility is a percentage point or two more on the loan, but as institutional lending rates are hovering around 6 percent for the most qualified borrowers, the market is “fairly friendly,” Fletcher said. Those rates shift based upon the federal funds rate, which is set eight times a year by the Federal Open Market Committee, the institution that establishes monetary policy from the U.S. Federal Reserve System. They also vary according to the presumed risk of the loan. That risk calculus depends upon a number of variables, from the financial strength of the borrower to the things like whether there’s a strong secondary market for the equipment being financed.
In 2020, risk is also heavily influenced by the national response to the COVID-19 pandemic. Those conditions – weeks or months of cancelled or prohibited elective procedures and imaging studies, staffing depletions and payroll concerns, and intense new protocols around throughput and patient cohorting – can’t be overlooked in building out a loan, Fletcher said.
“Almost all of our customers in the medical imaging space are seeing a decrease in patients, some as much as 50 percent,” Fletcher said. “[With] the new protocols involved, every appointment takes that much longer. You can’t put 10 people in your waiting room anymore.”
Although the pandemic has surely affected the way companies are doing business, medical imaging space is a strong sector expected to rebound.
“It’s a very necessary thing, imaging, and as technology moves forward, that industry will just get stronger, we feel,” Fletcher said.
When choosing a lender, Fletcher advises borrowers to use the same discretion that financial companies do in vetting their customers: consider the ease of the partnership and the terms of the deal as well as the speed at which it can move, and the goals of the loan. For equipment vendors, an independent financial partner can help qualify borrowers within a matter of hours.
“When a vendor can show the machine, and can also say ‘payments as low as XYZ a month,’ that’s attractive to a lot of people, and if the rate is acceptable, it helps close deals,” Fletcher said.
Jon Biorkman, president of health care financial services for GE Healthcare of Chicago, Illinois, said that the COVID-19 pandemic has truly forced buyers of medical imaging equipment to completely re-evaluate not only their asset management plans but “the fundamental building blocks of corporate finance, capital budgeting, capital structure and working capital.”
“Health system leadership teams are developing multiple scenarios to account for the future variability of operating and non-operating cash flows,” Biorkman said. “In many cases, a greater premium is being placed on current liquidity, both cash on the balance sheet and the ability to borrow.” As a result, Biorkman said some health care providers are looking for different ways to procure medical imaging equipment. Typical cash purchases or borrowing mechanisms are now being supplemented by new financing structures “that allow for future optionality, cash flow savings, and certainty of capital,” he said.
Two such models are shorter-term leases and escrow agreements. Shorter-term leases let facilities use the equipment without having to spend the full purchase price up-front, deferring decisions to buy “until a time when more market variables may be known,” he said.
“Historically, most providers have looked to lease health care assets over periods that range from four to seven years,” Biorkman said. “An advantage of shortening the duration of the lease to one to three years is that the end-of-term options (e.g., purchase, return or renew) occur at a time that may better align with market clarity.”
Most leases don’t require an initial capital outlay by the customer, therefore preserving their cash reserves at a time when the business of health care is subject to the same unpredictability as the remainder of the global economy.
“It’s a strategy to gain the ability to use the equipment today, while deferring a more ‘permanent’ decision,” Biorkman said.
Escrow agreements allow buyers to “pre-fund capital” for equipment that is delivered at a later date, while locking in today’s interest rates, he said.
“The goal is to match the size of the escrow agreement with health care equipment that is expected to deliver and install over the next six months,” Biorkman said. “This structure is attractive because a CFO doesn’t have to go through a full underwriting process for each equipment delivery, and the interest rate is set at the moment of funding, thereby reducing future risk on both fronts.”
A range of health care providers are taking advantage of these financing options across multiple imaging modalities, Biorkman said. They vary by credit rating and size, but their borrowing needs are driven by a few common themes: “liquidity, optionality and diversification,” he said.
Preserving “liquidity” refers to the strategy of keeping available cash and revolving lines of credit, which allow businesses flexibility if patient volumes, reimbursement rates and the mix of payers become unpredictable. “Optionality” refers to financing structures that allow buyers to choose whether to buy a piece of equipment immediately or to defer a purchase until such time as they have a greater handle on business trends that can support such a decision. “Diversification” refers to the need for a variety of lending options supporting a company’s capital structure, the combination of debt and equity by which its overall operations and growth are financed.
“Communication with financing relationships is as important today as it has even been, specifically the frequency and transparency of financial projections,” Biorkman said. He advised potential buyers of imaging equipment to “clearly articulate your financial situation prior to COVID, your current state and a projected future state.”
“If health care was a focus industry for a lender before COVID-19, in many cases it is still a focus area today,” he said. “Committed lenders understand customer dynamics, including patient volumes, reimbursement mix, and competitive positioning, and the best ones clearly understand the underlying value of the health care equipment.”
Recently retired radiology director Adrian Riggs of Roseville, California said that buyers should hew to the same underlying principles that have always guided any new equipment acquisition. Customers should negotiate prices with equipment vendors before taking the package to financiers, particularly given the complexity of structuring an equipment deal and the work required to bring it together.
He encouraged shoppers to explore the total cost of ownership (TCO) of any piece of equipment when planning an acquisition, including: service costs, parts replacement, routine maintenance, obsolescence protection, and any related construction and staffing needs that may accompany its installation and operations. Any quote should make its way through the clinical, facilities and financial departments – which often work in silos – and should include projected service costs for the next five to seven years.
“It’s best if you have the operations executive and the purchasing folks together at the beginning to talk about TCO, because you have a built-in increase every year,” Riggs said. “The vendor might have a screaming deal on buying it, but it costs you more in the long run.”
Riggs also recommended that prospective equipment purchasers decide whether financing or a non-capital lease is appropriate for their circumstances, as costs can escalate if customers continue to re-lease the same piece of equipment. As in home ownership, “it’s cheaper to buy than rent,” he said.
“Liquidity is very important,” Riggs said. “We’re seeing a big hit in the revenue in the hospital system. When we had the big shutdown in March, we saw imaging modalities down 80 percent.”
“The health system still had to take care of patients who were presenting with symptoms that needed to be imaged or needed to go to surgery,” he said. “It’s just the money-maker often is elective surgery, because they’re high-volume, lower-cost. Plus, we still have to have the staff; you can’t shut down.”
Building out the capacity for lower-cost, higher-volume studies, like bone density scans, X-rays or ultrasounds may not incur the same expenses of installing or replacing a high-end CT scanner or MR machine, but if patient volumes aren’t there – particularly during the pandemic – even those reduced revenues might not justify spending the money in the current financial climate.
“We have this perfect storm of really reduced revenues but not a commensurate reduction in expenses,” Riggs said. “If you lose 50 percent of revenues but only lose 10 percent of expenses, it turns your books upside-down.”
“I think everybody’s nervous about spending down their reserves at this point, and it would lead them to do financing in the short term,” he said.
Tana Phelps, marketing manager at Cassling of Omaha Nebraska, an advanced partner of Siemens Healthineers, said her customers are definitely seeing a need for financing flexibility “more than ever” during the pandemic.
“Right when COVID hit, there was a big need for mobile X-ray and point-of-care ultrasound,” Phelps said. “While everything else was grinding to a screeching halt, these were taking off. Certainly volumes have slowed, revenues have slowed and elective procedures have slowed.”
Phelps also pointed out that equipment rentals can be a nice bridge in an uncertain economic climate, particularly if a facility is amid an upgrade and needs a mobile system to handle the load during construction. Instead of buying outright, equipment leases allow customers to apply payments toward the purchase price of a piece of technology.
“We continue to try to be flexible,” she said. “We’ve seen people who have to completely abandon plans, people who had to slow them down, and we’re expecting a really busy quarter right now because they had to change their priority.”