Financing PACS: Balancing Financial & Technical Needs

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Traditionally, the high cost of entry has been an obstacle on the path to obtaining a picture archiving & communications system (PACS). Finding financial resources for PACS implementation may be complicated, but the number of financing options has increased as the PACS market has matured. The key to obtaining the financing that's needed to acquire a state-of-the-art PACS is to understand which option will reap the biggest benefits for your facility given its particular financial situation.

OPTING FOR OWNERSHIP

An organization must treat equipment that it owns as a capital expense and include it as an asset on its balance sheet. If it takes on debt in order to own equipment, it also must include the debt as a liability on its balance sheet. Balance sheets are important because they're used by financial institutions to determine a facility's debt rating, which affects how much money it can borrow and at what interest rate. Debt rating is a critical factor used by its financial managers in determining whether to own or lease major equipment expenses like PACS. If a hospital decides it wants to own its PACS, there are two basic purchasing choices: cash purchase or capital financing.

Cash Purchase. If the facility has the cash resources, it can pay for equipment outright with cash. In the case of a multi-million dollar PACS, only the most cash-rich institutions are likely to have this kind of money on hand. Even though a large cash purchase ties up capital that might be spent elsewhere, a cash purchase provides immediate ownership with no debt.
 
When making a cash purchase of IT equipment, financial managers look at obsolescence rate. Software-intensive technologies like PACS are generally seen by CFOs as having little value due to their high obsolescence rate. "The CFO will be asking himself, 'do I want to own this asset?'" says Ken Ostrowski, director of operations for Fujifilm Medical Systems, Financial Services. "In most cases the answer is no, because in five years it's not worth anything."

Capital Financing. If an organization has a good credit rating, it can finance a PACS in a process that's similar to financing a house: the borrower obtains funds from a lender at an interest rate determined by its credit rating. Healthcare facilities can obtain both capital loans and capital leases. The primary difference between the two is when title passes to the borrower; the accounting is the same. Loans are structured so that ownership starts at the beginning of the financing period; leases normally pass title at the end of the financing period.

Capital financing is readily available from vendors and third-party lenders. But financing software-intensive systems isn't traditional and unknowledgeable lenders may balk at lending money for software-intensive purchases, says Mike Kennedy, senior vice president of strategic marketing for GE Healthcare Financial Services. "If you're going to loan money for equipment, you know if they stop paying that you can take it and sell it," he says. "Software is worthless to anyone but the party that's using it and [lenders] have to be comfortable with that."

Lenders like GE Healthcare Financial Services that focus on healthcare lending are more comfortable with software financing than other types of third-party lenders, Kennedy says.

PACS planners relying on capital expense dollars must prepare extensive return on investment (ROI) scenarios. Financial management will want assurance that they've invested in a vehicle whose ROI meets or exceeds that of other investment options.

In fact, says Rik Primo, division manager for image management at Siemens Medical Solutions USA, proving ROI is the biggest challenge in preparing for PACS purchases.  That's because financial management understands the hard savings associated with PACS, but savings associated with workflow efficiencies are harder to grasp. "For example, they can easily understand that by buying an MR and doing 30 procedures a day, it's going to generate revenue," Primo says. "With PACS, the dollars are much softer and it's more about improving operational efficiencies - which also causes savings - but isn't quantifiable."

A LOOK AT LEASING

On an organization's income statement, income generated by radiology and other departments is shown as revenue. Items such as salaries, equipment leases, and administration costs are shown as expenses.

Depending on an institution's financial situation, it may be more appealing to keep PACS expenses