Faced with rapidly evolving, always-changing health care technology—as well as financial pressures such as squeezed margins, low investment yield, and tightened credit —many hospitals that belong to the HFMA are relying more than ever on equipment leasing.
Done properly, equipment leasing is a way for HFMA hospitals to keep pace with developments in diagnostic, treatment, and software technology without constant upfront capital expenditures, and with much of the risk of new technology mitigated.
But there are risks involved with equipment leasing that each HFMA member should understand, because they can largely be avoided.
1. Not performing sufficient financial analysis of leases.
A detailed lease versus buy analysis should be performed. To make this analysis most effective an analysis of the total economic transfer between any existing lessors and lessee should also be undertaken. Hospitals should have a clear idea of the historical all-in costs of leasing from a lessor so they can make a truly informed decision about whether leasing is the best option going forward, as well as compare the costs of competing lessors.
In addition, detailed financial analysis of the total economic transfer gives hospitals negotiating leverage. Many leasing contracts contain apparently benign terms and conditions that increase end-of-lease costs, so if you can accurately identify those costs, you can more persuasively call for better terms that reduce risk.
2. Failing to secure favorable end-of-lease options.
A specific way in which hospitals expose themselves to risk on leases is neglecting to secure the right to keep the equipment for fair market value at the end of the lease, either by buying or continuing to lease with a "not to exceed" and/or extend-to-own option. Without these options, hospitals have little leverage if they need to continue using a piece of equipment at the end of the lease.
It’s not uncommon for hospitals to reach the end of the lease and pay much more than they should for continued use of the equipment because to do without it would precipitate a crisis.
3. Not Adjusting Lease vs. Buy Analysis Based on Performance
Much risk can be avoided by paying attention to what's proven risky or safe before. At the conclusion of each lease, hospitals should evaluate the true all-in costs and then accordingly adjust their projections of all-in costs in future lease vs. buy analysis. This evaluation will also help pinpoint successful and problematic lease terms.
4. Not preparing for accounting changes.
The Financial Accounting Standards Board and the International Accounting Standards Board are working to coordinate their two standards. The deadline for their convergence has been pushed back several times, but it is virtually inevitable that regular lease term payments will be "on balance sheet" at some point in the near future. Among the changes expected to occur as a result of the convergence are the elimination of the accounting distinction between operating leases (off balance sheet) and capital leases (on balance sheet).
This change will obviously impact financial reporting ratios and debt covenants, and it will necessitate a reevaluation of a hospital’s leasing strategy to avoid unnecessary costs.
5. Operating a leasing program without expert leasing assistance.
Hospitals that belong to the HFMA obviously appreciate the vital importance of financial management, but equipment leasing is a specialized field, and many hospitals can benefit from the assistance of equipment leasing professionals to help control risk. The right service provider will easily justify its cost by helping hospitals:
- Evaluate existing lease programs.
- Develop detailed lessor analysis.
- Identify lease risks.
- Lower end-of-lease costs.
- Source the highest-value vendors.
- Negotiate contracts.
- Prepare for the looming accounting changes.
- Formulate a comprehensive leasing strategy to minimize costs.
Takeaway Point
A successful hospital leasing program requires a focus on lease terms and performance to identify and avoid unnecessary risks and costs within each lease.
