Alternative financing deals, guidance from GPOs playing bigger role in tech purchases
When Novation completed its shopping for CT and MRI equipment in September, the Irving, Texas-based group purchasing organization noticed some significant changes in how its member hospitals are buying such technology. Not only did the facilities participating in the GPO’s annual imaging group-buy event increase by more than 50%—from 60 providers in 2007 to 92 in 2008—but the number that opted to use the financing vehicle Novation negotiated with its vendor, Siemens, increased thirteenfold.
Novation attributes the increased customer participation to hospitals needing more help cutting the best possible deals on their capital purchases. “Hospitals are relying more and more on their GPOs to research the market and help make decisions about capital purchases, because they’re more challenged in these economic times to have the money to send out employees to research and look at the equipment,” says Ed Schrader, Novation’s senior director of program services.
Providers’ surging interest in alternative financing options reflects another new and fast-changing reality: Where hospitals previously encountered few barriers accessing money for capital purchases like imaging equipment, the economic downturn is forcing healthcare system executives to take long, hard looks at how best to negotiate and pay for such purchases. With cash-on-hand dwindling and traditional credit vehicles such as the tax-free bond market becoming more expensive or unavailable, hospitals are embracing financing choices that historically were seen as undesirable.
“We’ve had (financing packages) in the past, but this was the first year we saw a big uptake in the number of clients that used it,” says Kelly Rodriguez, capital assets manager for Novation. “Last year, we had just two members use the financing option. This year, it was 26.” The arrangement gave members the option of working directly with Siemens to finance or lease the imaging equipment, Rodriguez says.
Imaging-equipment purchases are not the only capital acquisitions being affected by the tightening economy. But purchasing experts say a number of factors have combined to make imaging-equipment buys—which can easily run upwards of $1 million—particularly challenging. They include not only the current financial crisis, but also evolving rules for imaging-procedure reimbursement, and anticipated, yet uncertain, shifts in treatment approaches for an aging patient population.
“We’re still sort of seeing the shakeout” of the Deficit Reduction Act of 2005, says Michelle Pollack, imaging specialist for the Greater New York Hospital Association’s GPO, GNYHA Ventures, of the CMS payment rules that have reduced Medicare reimbursement for certain imaging procedures. “We’re still waiting to see what the market will look like at the end of next year, and hospitals are waiting to see what the new model of care will be for the baby boomer generation before they make major imaging purchases.”
Despite those shifting marketplace conditions, opting out of such key clinical-care technology is not an option for most hospitals. Tim Harlin, chief executive officer of 25-bed Randolph Medical Center in Roanoke, Ala., says his critical-access hospital was forced last year to purchase new CT equipment when an older machine was damaged by a power drag. Without new imaging equipment, Harlin says, the rural hospital would have been unable to provide much needed care to the community—causing the facility to lose ranking, patient business and revenue.
“Our rate of cardiovascular disease is high compared to other areas, so our board decided to take the large step and acquire a 64-slice CT so we could be a provider of choice,” Harlin says.
That decision meant an outlay of about $1.6 million for the tiny hospital.
In the past, hospitals needing to make such expensive capital purchases have often done so using cash on hand or by tapping the investor market through tax-exempt bonds. But both have become less available and desirable options in recent weeks as the investment markets have tanked.
“A number of hospitals have lost money in the financial markets, so they’ve seen their portfolios diminish. They’ve seen their days’ cash on hand go down and their need for cash go up,” says Randy Waring, managing director of the Hospital Enterprise Group for GE Healthcare Financial Services. At the same time, the public bond markets and bank financing are drying up, making it more difficult for hospitals to access investor capital and traditional loans. “Now, even the (financially) strong hospitals are borrowing in the high 6% (range). If you’re a triple B-rated hospital, you’re going to pay at least in the high 7%” range, Waring adds.
That reality is reflected in a new American Hospital Association survey, titled
Report on the Economic Crisis: Initial Impact on Hospitals. Pulling data from a variety of sources, including an AHA survey of hospitals, the report found that 33% of hospitals reported increased interest rates on variable-rate bonds; 11% were unable to issue new bonds; and 4% were unable to access cash reserves held by their financial institutions. As a result, some 45% of hospitals in the survey were delaying planned clinical technology and equipment purchases.
Roland Chalons-Browne, president and CEO of Siemens Financial Services, the U.S. commercial finance and leasing arm of Siemens, sees the fallout of those findings. “It’s quite likely that during 2009, we’ll see a reduction of capital equipment purchases of 20% to 40%, and imaging equipment is often the more expensive of those purchases,” he says.
Institutions that are unable or unwilling to delay such acquisitions, however, are now more willing to consider purchasing options that in a healthier economy often prove more costly than traditional vehicles. Captive and third-party leasing are among the options, says Timothy Evenson, vice president of sales and marketing for Philips Medical Capital—which provides financing to hospitals looking to acquire equipment from Philips or one of its competitors. Evenson noted that the number of leasing arrangement quotes that Philips is making now compared with a year ago is up by 20%. “Purchasing arrangements are long lead, so we don’t have actual sales comparisons yet, but we assume that quote activity will translate into business.”
Under a captive lease agreement, hospitals strike a deal to lease the equipment directly from an imaging vendor, such as Philips. Under a third-party lease agreement, a financial institution such as bank or Philips Medical Capital agrees to purchase the equipment and lease it to the hospital. Both arrangements have their advantages and drawbacks, according to capital-equipment financing experts.
Since captive leases are negotiated directly with the vendor, companies may be more willing to throw in add-ons like extended service warranties and training assistance in order to support the sales of their equipment, Waring says. With a third-party lease arrangement, buyers may have better success negotiating the interest rate since the leasing companies also will make money on resale of the equipment once the lease expires.
Evenson says there’s another reason leasing may prove to be a smart choice for hospitals looking to purchase new imaging equipment. “On things like imaging equipment, which is a rapidly changing technology, leasing has always provided a better deal” because hospitals can trade in the equipment for more-advanced models, he explains. That factor is a particularly important consideration for CT, PET and nuclear camera technology, which is constantly evolving, he says.
Hospital and vendor representatives say confidentiality agreements prohibit them from disclosing their actual interest rates on leased imaging equipment. They noted also that rates vary based on the type of equipment a hospital leases, as well as the provider’s credit rating and payer mix. “It can be anywhere from 1% to 10% interest; It’s hard to say,” Evenson says.
Nevertheless, there are steps hospitals can take to strike the best deal, says Harlin, who after a good deal of research decided his hospital, Randolph Medical Center, could negotiate a much better acquisition agreement by working with its GPO, Dallas-based Broadlane, to obtain a new 64-slice CT.
In early 2007, Randolph participated in Broadlane’s group live-buy event for CT systems. To participate, hospitals had to commit to purchasing imaging equipment from the bid-winning supplier prior to the event. The providers then convened for two days to perform an evaluation of the equipment, which included checking out the technology and hearing bid presentations from the participating vendors.
“We went through due diligence on the product specifications with the hospitals,” says Jeff Woodyard, Broadlane’s vice president of imaging supply-chain services. The GPO enlisted the medical-device evaluation organization ECRI Institute to help hospitals evaluate the CT equipment.
“We didn’t have a lot of expertise in that area, so it was well worth it for us to participate so we could learn about safety issues, technical specifications and ongoing maintenance and services issues,” Harlin says. “Just by sitting in the room with others we were able to negotiate a much better deal for ourselves than we’d been hearing on our own.” Randolph ultimately was able to realize a 30% savings over what they’d been quoted prior to the live-buy event, and they negotiated a less costly five-year maintenance contract on the Toshiba unit that won the bid, Harlin says.
Randolph decided to lease the unit since, as a small rural facility, it had limited financing options. But the hospital has realized some advantages from that payment option as well. “The lease payments will hit our cost report, so we can get cost-plus reimbursement from Medicare,” Harlin says, who noted Randolph qualifies for such reimbursement under a CMS rule that provides cost-adjustment payments to critical-access hospitals and sole community providers.
But while Randolph was able to realize additional savings by working through its GPO, 180-bed New York Downtown Hospital was able to strike a better deal by leveraging its plans to expand its imaging services, says Tony Alfano, the hospital’s senior vice president of operations.
Late last year, New York Downtown used roughly half of a $5 million grant from the Lower Manhattan Development Corp. to buy imaging equipment. The joint city-state development fund was created after the Sept. 11, 2001 attacks. The hospital struck a deal with GE Healthcare that included a 64-slice CT, an MRI and a digital mammography machine. The agreement also includes an extended service agreement and discounted software upgrades on the equipment, which the hospital decided to purchase instead of lease. “Typically those upgrades could cost you 50% of what you paid for the original software,” Alfano says. “Under our contract, we’ll pay less than 5% of the original software costs.”
Alfano says the hospital was able to strike such a good deal because GE saw an opportunity to become the provider’s vendor of choice for future imaging-equipment purchases. The hospital is located in Manhattan’s downtown financial district—one of the city’s fastest growing residential areas—and the provider has plans to open an imaging facility inside a blended residential-retail space within the next two years.
“I’d venture to say that the deal we struck with GE was 20% to 25% better than what we would have struck through our GPO,” Alfano says.
What do you think?Write us with your comments. Via e-mail, it’s
mhletters@crain.com; by fax, 312-280-3183.
REPRINTS
BOOKMARK & SHARE
