Asset finance best medicine for medical equipment purchases

Faced with greater patient demand, continuing technological innovations and strong pressure to make efficiencies, healthcare organisations around the world are increasingly turning to asset finance to support medical equipment acquisition, according to new research from Siemens Financial Services unit (SFS).

In a study of the global top 40 medical equipment manufacturers, “Rising to the Challenge”, close to 70% of respondents reported an increasing demand for healthcare equipment finance from their customers over the past two years. During this period, the proportion of global medical equipment sales financed through asset finance grew by an average of 6.9% annually.

 

 

 

Over 60% of respondents believed that finance penetration will continue to rise over the next two years. Two thirds maintained that their healthcare customers are feeling a squeeze on their capital budgets, and over half (57%) said there is increasing demand for tailored financing options for healthcare organizations looking to acquire new equipment.

“Healthcare organisations around the world are labouring under increasing financial pressures,” commented Chris Wilkinson, head of sales for healthcare and public sector for SFS in the UK.

“Constrained budgets, however, should not compromise diagnostic and clinical efficiency and accuracy, which can only be maintained through continuous technology investment.”

Challenges for developed economies

Western healthcare systems are under increased pressure to improve healthcare outcomes while capping or even reducing budgets, despite growing demand for healthcare driven partly by the challenges of an ageing population.

With capital spending suppressed, purchasing managers are often constrained to maintain existing equipment, so replacement cycles are lengthening. Under-investment in medical technology can lead to diagnostic and treatment inefficiency, directly undermining standards of patient care.

In these countries, asset finance is increasingly being used to spread payments and avoid large upfront capital expenditure, as well as offering a way to manage treatment/reimbursement through transparent cost-to-use calculations.

This is the case in the UK, there are signs that the NHS is struggling to meet the 2015 Nicolson target of £20 billion in ‘efficiency savings’, with the prospect of more belt-tightening to follow. Both the public and private sector need to maximize their available funds and attract patients with the highest standards of clinical excellence, enabled through access to top notch medical technology. The situation is somewhat similar in the US, where the Affordable Care Act will increase access to insurance and therefore healthcare services for over 30m Americans and is likely to drive down reimbursement rates.

Challenges for emerging economies

Healthcare systems in emerging economies are also under pressure, mainly due to rapid infrastructural growth as they seek to extend access to affordable healthcare to their entire populations and improve health outcomes. Central authorities in these countries are keen that new healthcare institutions do not take on unsustainable levels of debt, and institutions are often looking for additional sources of finance where their standard borrowing limits have been reached and refinancing is required.

This is evident in India, for example, where private sector growth is strong, but frequently hits a financing ceiling as facilities are developed and expanded. Asset financing techniques offer another alternative equipment financing (or sometimes refinancing) channel.

In China, where there are concerns about attracting sufficient volumes of trained clinicians and care professionals as the country goes through a period of very rapid development, asset finance solutions are providing Chinese hospitals and clinics with a way to free up liquidity for immediate tactical needs, and efficiently align the cost to use of medical equipment with the benefits the institution (and its patients) are gaining from that technology.

Types of Financing Arrangement

SFS research suggests asset finance solutions tend to fall into two categories. The first type of deal, where there are no significant consumable costs, tends to be a more standard leasing package. In cases where relatively costly consumables and soft costs are involved, then the finance payments tend to bundle the components, sometimes taking into account the expected volumes/patient throughput.

The research also reveals growing financial sophistication in global healthcare. Many healthcare institutions have decided to harness private sector capital, in order to ‘pay to use’ their equipment, rather than tie up their own scarce funds in depreciating assets. In some technology categories, it also makes little sense to write down an equipment investment over 10 years when a significant technology upgrade is likely to come along in the next three to five years.

Total Cost of Ownership

Almost two thirds of survey respondents (64%) report customers making more use of Total Cost of Ownership (TCO) methodologies in equipment acquisition evaluation. This approach recognizes that capital outlay is only a fraction of total operating expenses for technology and takes into account administration, installation, maintenance, service, outages, upgrades and user training. TCO can be many times the initial capital cost of a piece of equipment, and older equipment tends to carry greatly inflated service and maintenance costs.

 

Flexible financing

As the cohort of finance professionals in the healthcare sector grows, respondents noted that asset finance propositions are coming under scrutiny to ensure they are both competitive and flexible.

According to SFS research, demand is increasing for combinations of equipment, consumables, software and service; set-up period tailored finance (grace periods); financing end-to-end clinical or diagnostic processes; refinancing deals; and rapid finance arrangements to meet tactical favourable taxation opportunities.

Survey respondents identified the effective management of total cost of use in practice, especially where equipment service and maintenance are bundled into a fixed monthly charge for the financing period, as a major advantage of asset finance for medical equipment. Healthcare finance managers can look at monthly payments in relation to monthly patient throughput rates and quality of diagnosis and care, making it easier to understand, allocate and calculate cost-per-treatment/diagnosis and therefore manage costs more closely, accurately and effectively.

Looking to the future

 

 

SFS’s research predicts that over the next three years, particularly strong demand is expected to come from tier 1 and 2 hospitals in China; Russian and Indian private sector hospitals and clinics; Eastern Europe; the Middle East and Turkey; South America; and highly pressurized healthcare organizations in Southern Europe.

Overall, respondents to the SFS survey and other research sources indicate that annual growth rates for medical equipment leasing and renting is outpacing growth in the healthcare equipment market as a whole. The natural conclusion is that a steadily increasing proportion of healthcare equipment is being acquired through an efficient financing plan, in the form of leasing or renting.

Wilkinson concluded: “Using sustainable financing techniques such as asset finance, healthcare organisations can afford essential equipment upgrades and replacement to deliver better diagnoses and improved health outcomes despite budget pressure.”