Article published in DH Magazine n°153
Financing and taxation are still sensitive issues for hospitals in 2016. Regulatory constraints and fiscal obligations are added to the budget problems they face, despite the vital importance of balancing budgets whilst still managing to acquire high-performance medical equipment. New procurement and financing options are now available. Finance leasing, leasing with or without purchase option, new forms of financing offered by manufacturers in partnership with banks: all these offer hospitals new ways of diversifying their sources of financing and choosing the most advantageous option. Examples and analysis in this article.
DH MAGAZINE – Have you noted any changes in hospital procurement and financing practices? And why such changes?
PHILIPPE JOUGLARD − When we talk about medical technology assets in the broadest sense, IT systems and medical equipment, for example, these assets are increasingly computer controlled. A number of fundamental changes have come about since the 2010s. Regulatory constraints imposed by the supervisory authorities are constantly changing, becoming stricter, and all this is leading to significant changes in practice in the hospital sector. Instead of each hospital department operating independently with its own tools and its own information system, as it once did, we have moved on to a system where nowadays the supervisory authorities are challenging hospitals on the number of medical procedures carried out, on their policy or on their operating costs. The environment is changing rapidly. Looking at the technological environment, we are clearly now part of a complex ecosystem as the hospital, once a standalone structure operating independently and in isolation, is in the process of becoming fully integrated into the patient care pathway (general practice and care networks are just two examples). A gradual shift is taking place: technology is undergoing a process of deconcentration and becoming collaborative, and more work is now done through networks. The aim of identifying and controlling costs, freeing up human resources for tasks that add value and, ultimately, encouraging the right procedures at the right time to avoid redundancy and improve patient care against a background of an ageing population and budget cuts, are all clearly identified priorities.
So does this context affect the financial models used by hospitals?
Clearly! For years, heads of departments managed their activity quite independently: setting up their own information systems, purchasing their own medical technology – often at the price of technical incompatibilities and even competition between departments that pursue their own vision. Nowadays, hospitals are looking to rationalise. This requires two things above all: identifying costs and better lifecycle management of the technological assets deployed in the hospital. As a result, it is becoming less common to see capital invested in technology in the broader sense, and the emergence of two products: finance leasing, also known as purchase option leasing, and rental or operating leasing.
What distinguishes between them?
There are three key distinctions: flexibility, impact on the balance sheet and cost management. Finance leasing basically offers little flexibility: I have acquired an asset, I make lease payments on it for X months and, at the end of the lease, I take up the purchase option and the asset becomes mine. In the event of a technological breakthrough, the emergence of a new technology or the reorganisation of a department, it is difficult to change the equipment being financed. In contrast, the rental option aligns the equipment’s useful life against the lease payments. In the course of the contract, a hospital seeking the early replacement of its equipment (expansion, increase or reduction in the number of procedures) can do so. There is greater flexibility. In terms of their financial impacts, the two options are not treated in the same way. A finance lease is literally debt, whereas rental affects the income statement. It is an operating expense, one that is easier to recognise in an operating statement. For assets with a short turnover of 2 to 5 years, rental is the optimal solution. There is considerable scope to allow for innovation, and switching to a rental model is more advantageous and makes it easier to allocate costs by department or by procedure as part of a cost accounting approach. For major assets, such as an automated central pharmacy, for example, with longer lifetimes, then finance leases will be a better choice.
What would your recommendation be?
What we recommend is that hospitals use both products, depending on the nature of the asset. The assessment must be made over the lifetime of the asset, its financial cost and its utilisation.
Are these solutions prompted by demand from hospitals, or is it the financial institutions anticipating that demand?
It is the outcome of a convergence of the two. The financial institutions have set up dedicated teams that have understood how technology is evolving in hospitals. At the same time, the healthcare sector is increasingly recruiting managers from the business world, who are familiar with this culture of rental or finance leasing.
Is the interest purely financial?
The overriding interest is good management, good asset management, proper control over asset life cycles to avoid ending up with obsolete assets on your hands. We are moving towards controlled continuous improvement cycles for the tools that enable hospitals to function. But that does not mean constantly having the very latest equipment in place; that’s not necessarily the goal. The aim is to have the right equipment at the right time, suited to the needs of the hospital, coupled with cost control and visibility on costs.
Are there any disadvantages?
To say that there were no downsides would be to tell a lie. It is important to choose the right financial product for the right asset. Heads of departments need to work with hospital management on choosing the right financial tool together. A hospital that makes the wrong choice of product may find itself in difficulty. And then, of course, resorting to these products means setting up bodies within the hospital to manage and steer investment, which is a fairly new departure for the sector.
Could we envisage hospitals in the future where everything is leased? Would that help them balance their budgets?
Why not? But remember, it is not the financial tool that balances budgets; only proper management can achieve that. But it would certainly help hospitals start managing their expenditure and provide greater visibility over the future.
But we still have the feeling that leased equipment is not really ours.
Practices are changing. Why own an MRI or a scanner? We talk a lot these days about Uberisation, service on demand. Nowadays we increasingly operate in usage mode. We need to sound the death knell of ownership and move to a system where, at any given moment, you can have access to the best asset you need. DIn absolute terms, I would say that any asset that can be depreciated over a lifetime of 2 to 8 years is a candidate for leasing.
Can these solutions provide a response to hospital deficits?
Hospitals should not see products of this kind as a temporary measure for covering deficits. They certainly have a contribution to make, but they must also be accompanied by the introduction of a real management policy.
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