Imaging-equipment Financing in an Era of Uncertainty

When Medical Imaging LLC (Tupelo, Mississippi) needed to replace the MRI systems in two of its imaging centers, the practice faced an increasingly common challenge: Although both of the centers needed new equipment, the practice couldn’t afford to purchase two advanced imaging systems at the same time. “We need to conserve capital,” Lee Frans, executive director of the practice, explains. “As we wait to see how the health-care environment pans out over the next few years, we need to be cautious.” All the same, updating imaging equipment from time to time is a competitive necessity that cannot be disregarded. Medical Imaging wanted to implement two MRI systems from Hitachi Medical Systems America: the Oasis 1.2T boreless system in one of its imaging centers and the Echelon Oval 1.5T system in another. Through Hitachi’s relationship with Key Equipment Finance, the practice began exploring creative financing options that would enable it to acquire both systems at once. “We had been talking about doing this for three years, and we wanted to go ahead and get it done,” Frans says. “We don’t know what the market will look like in the future, so it made more sense to get this equipment now than to wait another year.” Changing Dynamic The process of evaluating, purchasing, and financing imaging equipment has changed dramatically in the past decade, Frans notes. “In the past five to eight years, vendors have changed their pricing,” he says. “As a direct result of the downward pressure on reimbursement, their prices have become much more competitive. To sell a product, they have to be able to fit it into an organization’s budget, and that budget is likely to be smaller than it was.” Even the ongoing cost of service contracts has yielded to the vagaries of the imaging market. He adds, “Vendors are becoming as competitive as possible on the service front.” Having been a Hitachi customer for seven years prior to the purchase of the two new MRI systems, Medical Imaging knew that it would be satisfied by the company’s service contracts, and the price fit its needs as well. “The pricing of its service, in our experience, was 10% to 12% lower than the pricing offered by some of the other OEMs,” Frans says. Health-care organizations’ financial resources have become more limited, thanks to the struggling economy, and banks aren’t lending as freely as they were before 2008. “When the housing bubble burst, the local banks really pulled back on access to capital,” Frans notes. “That’s why major players (such as Key Equipment Finance) that are working in this sector of the market are going to become more and more interesting to the radiology community.” Alternative Approaches As Medical Imaging explored its financing options, in the hope of being able to acquire two new MRI systems, the practice discovered that leasing to own is an attractive proposition, in today’s financial environment. “Five years ago, the interest rate on this kind of arrangement would have been prohibitive,” Frans says. “By leasing to own with a fair market value buy-out at the end of the term, we combined a low cost of capital with the low interest rate that is available today.” The low interest rate also meant that the practice could explore a longer lease term, further reducing its capital costs. “The long-term lease option is much more viable now,” Frans notes. “In years past, equipment would have had a five-year turnover, but now, we expect our life cycle for advanced imaging equipment to stretch to seven or eight years, or even longer.” Accordingly, Medical Imaging elected to take a seven-year term on its leases. “We expect to have these systems for at least that term, if not longer,” Frans says. In the end, Frans estimates, Premier Radiology will pay about 4% more for the two MRI systems, amortized over seven years, than it would have paid if it had purchased them outright, due to the costs associated with capital. The practice implemented the Oasis system in May and the Echelon Oval in August, meeting its goal of installing both new MRI systems in 2013. “It may be a long time before we choose to do something like this again,” he says. “The timing really came together.” Frans concludes by observing that innovative financing arrangements like Medical Imaging’s seven-year leases are likely to become the new norm for imaging centers trying to do more with less. “We got what we needed—two units in one year—for very close to what we would have paid, in previous years, for a single unit,” he says. “Obviously, all of us in radiology are dealing with downward pressure on reimbursement, and it’s going to become more and more difficult to provide the technology that is needed to be competitive in the marketplace. Groups will need to evaluate as many financing options as possible to find the smartest way.” Cat Vasko is editor of ImagingBiz.com and associate editor of Radiology Business Journal.