You know what you want. Now you have to pay for it. But should you purchase that gizmo outright, or should you rent it?
Be careful how you answer. Many medical practices make buying and leasing decisions in the dark, lacking information about either the product or the lease agreement, or sometimes both. Worse yet, they never ponder the differences between leasing and buying a piece of equipment. Do you know which option is best for your practice? Or will today’s seemingly thrifty decision end up costing you more tomorrow?
A critical question to ask
Most practices have a “buy small, lease big” mentality, meaning that they pay cash for less costly equipment while leasing bigger-ticket items, such as imaging equipment. Others buy everything, either with available cash or a hefty bank loan. Practices such as these are asking, “How much money do we have right now?”
But that’s not the right question.
“The main thing is the technology,” says Fran Lavallette of Healthcare Facilitators in Orlando, Fla. His company consults with medical practices about purchasing and leasing decisions on a regular basis. “When the practice is looking at the equipment, how long do they think it’s going to stay relevant?”
In other words, stop worrying about how much it costs, and ask yourself this: How long is this piece of equipment going to be useful?
The answer to this question will largely determine whether you should sign a lease or a purchase agreement.
To illustrate, consider your ultrasound or EKG machine. Yes, it will function for more than a decade. But will you still want to use the same machine in 10 years? Any piece of equipment that the industry is likely to update often - either its hardware or software - is a good candidate for leasing.
It’s true that you’ll pay less in the short run if you simply buy the equipment, admits Lavallette, but don’t think you’ll recoup any of the cost when you decide it’s time to dump it. Resale values for older medical equipment and software is negligible. “If you try to sell this stuff, it has no return value.”
That was one of the primary concerns for Boise Orthopedic Clinic when it purchased an MRI three years ago. “With MRIs, generally the equipment doesn’t become too outdated,” says Connie Kniefel, the practice’s administrator, “but the software that drives it has to be continually updated for the protocols.”
A lease with an option to update the equipment at the end of the term gave Boise Orthopedic the kind of flexibility a bank loan couldn’t.
Kniefel doesn’t believe in leasing only really big items. The practice also leases smaller equipment, such as photocopiers, with flexibility built into the agreement. At one point, the practice leased a number of copiers, which they placed in a variety of places to save staff the time it would otherwise take to walk to a dedicated copy room. As the practice migrated to an EMR and needed scanning equipment, the lease allowed them to swap the copiers for more sophisticated machines that could both scan and copy.
So be sure to keep in mind how your practice’s needs might change in the future. Some equipment - office furniture, exam tables, and the like - doesn’t need regular updating, so it’s safe to purchase it. But for moving targets such as technology-based equipment, leasing may be your best bet.
Make a business decision
If you ask most practices whether they performed a needs assessment before purchasing equipment, you’ll likely hear crickets chirping. Most practices only go as far as saying, “We need it.” You need to go a step beyond. “[Practices] need to do feasibility studies and really determine how much it’s going to take to afford the equipment, as far as how many patients they have to see and procedures they need to do,” advises Lavallette.
It’s a good idea to look at how many procedures in the last year were or would have been supported by the equipment you’re considering. Based on that number and the amount each procedure would net the practice, how long will it take to recover the cost of the equipment?
Boise Orthopedic did its homework before signing a lease on its MRI. “We did a business plan and had various scenarios for what happens if the payers or if the scenario changes for the favorability of payment for advanced imaging,” says Kniefel. “They figured out how many MRIs they were already outsourcing, so they had a good idea what the projected volumes would be.”
Practices should also base financial projections on their typical payer mix. A larger Medicare population, for example, means a lower collectible for procedures. Typically, says Lavallette, practices make decisions based on “the vendor told me I would make $900 on that procedure.” That might be your practice fee, but that’s not what you’ll collect from an insurance company. You need to figure net income into your calculations to understand the true revenue potential of any piece of equipment.
Get a lease on leases
Buying equipment with a bank loan is pretty much like the mortgage on a house or the loan for a car. You’ll go through an approval process to verify your practice’s assets, and then sign an agreement to pay principal plus interest (usually at a fixed rate) over a set period of time.
Leases work differently: Terms can be set between 36 and 60 months, and sometimes require one or two months of advanced payments. Although most leases carry a higher interest rate than a bank loan (12 to 15 percent on leases vs. 8 percent and less on bank loans), you’ll find that the more expensive the equipment, the more likely you can negotiate a competitive rate. Case in point: Boise Orthopedic leased its MRI through the equipment manufacturer, which gave the practice a lower interest rate than the local bank.
But here’s the big question with most leases: What happens when the lease expires?
Some come with a one-dollar purchase option, called “buck-outs” in leasing industry-speak. A buck-out clause means exactly what you’d suspect: When the lease terminates, the practice can buy the equipment for $1 - a good option for practices that want to buy less expensive equipment, avoid any hidden fees at the end of the lease, and make sure that the equipment is upgraded or maintained over the leasing term.
Larger equipment typically comes with a fair market value lease. At the end of this lease, the practice would be expected to pay whatever price the equipment could be sold for on the open market. The advantage of this kind of lease is that the payments are typically lower because the leasing vendor knows the equipment will retain some value. On the other hand, the leasing company usually assigns the fair market value; an unethical company could inflate the price. If possible, try to agree on the fair market value of the equipment and have the leasing company write it into the leasing contract.
Larry Wintersteen, a practice management consultant in Star, Idaho, has been advising practices for more than 35 years. He is seeing more practices opt for leases because of the ability to upgrade equipment. But that doesn’t mean leasing is without risks. “You need to read the fine print,” warns Wintersteen.
Some good questions to ask your leasing vendor are:
One last warning: Even if you do negotiate a fantastic deal from a vendor or leasing company, keep in mind that there is one fundamental difference between leasing and buying: Unlike a bank loan, you can’t pay off your lease early. Sometimes a company will let you break your lease with a substantial penalty, but usually you’re stuck with those monthly payments for the entire term of the lease. A lease is a commitment. Be sure you’re practice is ready to make it.
Robert Anthony, a former associate editor for Physicians Practice, has written for the healthcare and practice management industries for six years. His work has appeared in Physicians Practice, edge, Humana’s Your Practice, and Publisher’s Weekly. He is based in Baltimore, Md. He can be reached via firstname.lastname@example.org.
This article originally appeared in the September 2007 issue of Physicians Practice.