Radiology is a booming business, with procedure volumes growing in most facilities and locales. And imaging centers need to invest in new equipment to remain competitive and grow. Even a modest plan consisting of a new PET scanner and improvements to the physical plant can easily reach into the seven-figures. What's more, sites that don't do their homework and shop around for the best package may wind up in the undesirable position of paying for equipment long before (and long after) its useful life. That 'just right' package isn't all about the lowest interest rate, other factors like recourse are important.
Healthcare specialty financing companies like CIT Healthcare Finance (Tempe, Ariz.), MarCap (Chicago) and LFC Capital (Chicago) as well as the financing arms of major imaging vendors such as GE Healthcare, Siemens Medical Solutions and Philips Medical Systems understand the specific healthcare market and are often able to structure financing plans to meet some of the unique challenges encountered in the healthcare market. Options include capital and operational leases, non-and limited recourse financing and fee-for-scan arrangements.
THE INDIVIDUALIZED PLAN
Take for example Jersey Shore Radiology Associates, an 11-radiologist practice in Neptune, N.J., that decided to ramp up its practice with new MRI and CT equipment and leasehold improvements.
Practice Manager Laura Turek says radiologists realized the growth potential with the new equipment, but were concerned about making payments during a long build-out phase. Turek compiled information about the practice; including its financial records, practice history, current offerings, goals and information about relationships with local providers; and began shopping around for financing packages.
Jersey Shore opted for a $1.8 million loan through CIT Healthcare Finance because the company created a flexible package at a low interest rate. The deal provided the practice ample time to increase revenue with the new equipment; it called for interest-only payments during the year-long build-out and delivery period, half payments for several months and finally graduated to full payments. CIT also offered non-recourse financing, holding the practice solely responsible for the loan and relieving physicians of personal responsibility if the practice was unable to repay the loan.
KNOW THY TECHNOLOGY
Financing isn't all about dollars. It's also about getting your hands on the latest and greatest technology to maintain or boost your practice. But what happens to the practice that finds itself with a hefty loan balance on obsolescent equipment?
Take the pioneering radiation oncology practice that became the first on the block to launch a PET center 18 months ago with a five-year lease on a state-of-the-art PET scanner. Business grew, but as PET-CT scanners hit the market and physicians became aware of the clinical benefits, the center worried that it could not stay competitive with a PET scanner and faced a tough decision-get by with the PET scanner and potentially be overrun with competition or search for a financing company that could help them out of the situation.
The center completed some market research and presented the data to MarCap Corp. MarCap rolled the first financing package into a new lease and created a capital lease with limited guarantees on a new PET-CT scanner.
With the rapid rate of technology change, this scenario is becoming increasingly common. There are more than a few imaging centers with significant loan balances on four-slice CT scanners that would love to jump into 16-slice technology. One way to limit this situation is to keep up with technology by attending tradeshows like RSNA.
Although few centers take advantage of fee-for-scan arrangements, sometimes it's a perfect fit. Mike Nelson, MD, president and CEO of Breast-Med Inc. (Minneapolis) has tapped into iCAD's (Nashua, N.H.) ClickCad option for some clinics, private practices and small hospitals. The program puts breast CAD technology into the hands of the low volume sites doing 10 to 15 mammograms a day. Each site pays $5,000 to lease the CAD unit and pays $8 per case. Reimbursement in the $18 range allows the site to break even or turn a profit. Nelson points out that ClickCad also makes sense for sites that plan to upgrade to digital mammography in the near future, but want to offer CAD immediately.
MEAT & POTATOES FINANCING
Not every practice needs a creative financial package with an escalating payments or fee-for-scan options, but an individualized package fine-tuned to the company's specific needs serves any business well. When TRA Medical Imaging Centers (Tacoma, Wash.), a large full-service radiology practice with a 50-year history in the community, began planning for a new imaging center, Business Administrator Steve Jacobsen visited his local bank and several financing companies.
Although TRA had a good relationship with the bank, credit ratio restrictions prevented the practice from borrowing the $7 million necessary to finance the project. Jacobsen turned to GE Healthcare Financial Services (Chicago) to equip the new center with both GE and non-GE diagnostic imaging systems. The arrangement also provided $400,000 for leasehold improvements. Jacobsen admits, "We don't even explore creative financing. We try to stick to the matching principle concept where the payment for equipment matches its anticipated useful life. But all major equipment vendors can be as creative as you can imagine."
THE LEASING VS. BUYING CONUNDRUM
One of the most significant financing decisions is whether to lease or buy equipment. The constantly increasing rate of technology change, more rapid development cycles and shorter equipment lifecycles has had a significant impact on capital purchase budgets, forcing hospitals to re-assess their equipment acquisition strategies and re-evaluate leasing options.
Leasing can make great sense when the lessee knows the technology is going to change dramatically over the time frame of the lease. Leasing also can provide a hedge against inflation by locking in the payment and interest and allow credit lines to remain open for other needs. Lease payments are also made with pre-tax dollars, which can save at least a few pennies. Ron Wood, president and CEO of ProMed Associates (Vancouver, British Columbia), adds to the pro-leasing list. Leasing provides:
- Smoother budget cycles (reduced budget spikes) through elimination of upfront acquisition costs
- Standardized technology efforts (The lessee can implement new standardized technology across the board vs. a mix of new and old technology.)
- Simplified equipment disposal (The lessee pays the residual amount or walks away at the end of the lease.)
- Ability to stay at high technology levels (If equipment is leased for three-year terms, technology is updated more regularly.)
- Simplified strategic planning (If the lease term is five years, the lessee must plan for technology replacement.)
On the flip side, Wood says sites without an in-house asset management plan, including replacement plans for existing technology, should avoid leasing. If the center lacks negotiating or contract skills or can't adhere to leasing terms and conditions, it should avoid leasing. Finally, hospitals and imaging centers typically appear to pay more to lease technology than to purchase it. Jacobsen says his group never leases any equipment. He explains, "We're not sure we'll want the equipment removed at the end of the lease term." If a center pays off a loan for an MRI scanner in five years and decides it has a useful life of two more years, the scanner becomes a tremendous profit center.
THE ROAD TO SOUND FINANCING
So what's your best bet? And how do you figure out who to finance with?
- Assess the financial and service needs of the practice and strike a balance between the two. A bare bones interest rate typically equals bare bones service.
- Prepare background and financial information before meeting with banks or finance companies. Otherwise, the financing representative may present options that aren't available because of credit limits.
- Plan for cost overruns in the budget. They're inevitable, and it is easier to finance more the first time around than to return for more cash mid-loan.
Hospitals & Imaging Centers: PACS financing gets creative
PACS may be one of the largest capital outlays a healthcare facility makes - but it's also a rapidly depreciating item. And while it's relatively easy to complete a break-even analysis on a CT scanner, it's much more difficult to determine the break-even point on PACS. These financial strikes can make it difficult to finance PACS. However, financing companies and vendors are making it easier for imaging centers and hospitals to implement PACS.
Ron Armstrong, CEO of Strong Value Group (Fort Lauderdale, Fla.), worked with Agfa Healthcare (Greenville, S.C.) to develop its Four Point Guarantee Program, a PACS lease financed by a guaranteed film budget reduction. For example, if a hospital has an annual film budget of $300,000, Agfa coaches the client and guarantees a 75 percent reduction in film costs and applies the $225,000 balance to the PACS lease. The program was a perfect fit for Adventist Florida Hospital, a seven-hospital group in Orlando, that found it could not cost-justify PACS mid-project. The risk-sharing agreement with Agfa enabled the group to deploy PACS in its seven hospital and another 10 affiliates in a sixth-month period, says Administrative Director of Radiology Merle Peterson. What's more, while research shows that many hospitals struggle to reach their financial goals with PACS because they can't achieve the necessary film reductions, Peterson reports that several hospitals have dropped film use by 90 percent.
Fujifilm Medical Systems' (Stamford, Conn.) answer is the Synapse IT CAP program. The arrangement eliminates the initial capital outlay and hinges on a fixed cost per study, which is calculated through exam volume, study size and projected five-year growth. When Mercy Manhattan Regional Health Center (Manhattan, Kan.) found that its cash flow was a bit tight after nearly completing a $54 million project, Chief Operating Officer Jim Murguia realized Synapse IT CAP would allow the hospital to deliver quality to its network while growing into PACS. The hospital inked a deal with Fuji to install Synapse and pay $6.88 per study, which should be offset by the reduction in film.
LFC Capital, Inc. (Chicago) offers a number of creative lease options to help hospitals remain in current PACS technology. One example is its Technology Flex Lease, which is structured to allow for two technology upgrades over the course of an eight-year lease, eliminating the need to return to the board for additional funding for new technology and allowing customers to capitalize on low interest rates for the purchase and upgrades. Carolina Regional Radiology (Fayetville, N.C.) used the program to finance a PACS upgrade at its five hospitals and two imaging centers. Executive Director Marc Rothenberg, explains, "This was an opportunity for us to optimize our cash flow. We also didn't have to take the obsolescence risk [when we deployed the new PACS]."
The do-it-yourself model
One way to get the deal you want is to do it yourself. The University of Pennsylvania Health System took this route when it decided to deploy a new PACS in 2001. The hospital decided to finance the new system through an operational lease, using a portion of the film budget to finance the equipment. The lease is predicated on an 80 percent reduction in film printing.
Radiology accounts for half of the film budget; convincing radiologists to work filmlessly is fairly easy. The real challenge is cutting film across the enterprise, says Alberto Goldszal, PhD, director of information systems for the department of radiology. "Our contract targets radiologists and referring clinicians. If there are problems with the technology and referring physicians don't accept it, the costs shift to the vendor."
The health system designed an RFP that contained technical and financial components. Goldszal explains, "The whole contract is specified in functional terms. We didn't specify equipment, but asked that the data be delivered in certain terms." The health system partnered with Siemens Medical Solutions (Malvern, Pa.) with the vendor providing workstations, a short term RAID, archive and PACS administrators for the duration of the seven-year lease. The lease includes two technology refreshers - in years three and five, Siemens will upgrade all of the PACS hardware and software. Other key terms include the exit strategy. Goldszal says, "It makes sense to deal with issues such as data ownership and conditions for migrating to new providers up-front when you have the most leverage rather than at the end of the lease when you have the least."