In the healthcare industry, medical equipment leasing is often preferred over paying cash or borrowing to procure business-critical equipment.
But medical equipment leasing has five significant risks that any hospital, doctors group, or other healthcare provider should take into account when determining the best procurement method.
1. Costs beyond the stream of rents.
Companies that provide medical equipment leasing typically build into their lease agreements a substantial amount of risk, which they count on to cover their residual exposure and earn profit.
This risk takes numerous forms, including uncapped interim rent, end-of-lease costs, and return and notice requirements that may be almost impossible to comply with and lead to penalties, lease extensions, and potentially default.
Without properly structured lease agreements and ongoing vigilance to minimize risk and maintain compliance, healthcare providers can end up paying far more for equipment than the cost of rental payments.
2. Inadequate tracking and reporting of lease performance.
Without a commitment to monitor, report, and analyze ongoing lease performance, healthcare providers often don’t know their true cost of leasing. Therefore, these organizations are unable to make accurate buy vs. lease analysis decisions and identify the best-value equipment leasing companies. Poor visibility into lease performance can also result in mismanagement and process deficiencies that fail to minimize risk in equipment lease contracts.
3. Emphasizing lease classification over long-term cost.
Under current accounting standards, many equipment leases can be classified as an operating expense, and management often wants lease agreements structured to achieve this treatment. While there are benefits to an operating lease classification—particularly with regard to financial ratios—placing too much value on these positives can cloud long-term judgment. In many cases, purchasing could be the wiser course, but the desire to manage “to budget” causes healthcare providers to choose more-expensive medical equipment leasing.
4. Decentralization of leasing.
In many healthcare operations, medical equipment leasing is conducted piecemeal by various departments. This lack of a centralized leasing strategy results in:
- Missed opportunities to lower costs through higher-volume leases.
- A tendency for a particular department or group to limit their sourcing to one or a few equipment leasing companies, often at a higher cost than could be achieved with a corporate-level sourcing strategy.
- Non-uniform lease terms that create confusion and lead to risk exposure.
- Inconsistent tracking and reporting of lease performance.
5. Lack of expertise.
The greatest risk in medical equipment leasing is being unfamiliar with the equipment leasing industry. Frequently, leasing decisions are made by managers whose primary job focus isn’t leasing and who don’t have experience with the risks of leasing. Lessors understand the risks involved and the costs implications involved, and healthcare providers who evaluate and negotiate lease agreements without a corresponding expertise can easily agree to pricing, terms, and conditions that escalate cost unnecessarily.
Without the necessary expertise in-house, healthcare providers need to bring in outside expertise to help them structure a leasing program that accurately identifies and values risk, as well as exposes opportunities for cost-savings in lease agreements and operations.
Conclusion
Medical equipment leasing can provide many financial benefits for healthcare providers, but leasing is full of pitfalls. Enterprises need to enter into lease agreements with their eyes wide open, armed with the knowledge to minimize risks and costs.
