Financing your Medical Equipment Purchase

Many hospital owners and administrators realize that Medical Equipment is an important adjunct to providing efficient services to their patients. Hospitals that are early to adapt new and better technologies are usually the ones that succeed in the market. Of course, quality of healthcare still depends on the people who provide these services, but we see more and more dependence of the same people on the latest equipment and gadgets. Meanwhile, hospitals that are less-equipped are forced to refer their patients to other providers and run the risks of eventually losing those patients.

Unfortunately, because they address a relatively small and specialized market, and since they involve healthcare which could affect the lives and well-being of the patients, medical equipment are very expensive commodities. With one financial crisis after another that the country experiences where the value of the local currency dropped many levels versus other currencies, medical equipment has become more expensive even than the physical structure of the hospital itself. It is therefore a major investment, yet a necessary undertaking, and it is important that decision makers do a careful study on how it can be financed.

Hospital owners are faced with a variety of options to finance the purchase of medical equipment. The options can be summarized as follows:

1. Self-financed acquisition
2. Vendor financing
3. Joint Venture
4. Financing from Bank or Financial Institutions

Self-financing

The most obvious financing option is to (1)self finance it – that is, to make the investment from savings from operation, or to infuse additional capital to the hospital enterprise. This option gives the hospital owner the best bargaining opportunity with the vendor of medical equipment. With cash in hand, and with more vendors targeting the same customers, the hospital owner can bargain for a better price discount or better specifications and add-ons. However, with the number of equipment acquisitions hospital owners need to make, and many other investment options presented his/her way, this option may not always be available.

Vendor Financing

Another option is to ask the equipment vendor to finance the acquisition. This option seems to be very attractive to hospital owners as vendors present their offer with one- to three-year term, often without interest. Some vendors ask only from about 20% to 30% down-payment, while the balance may be paid equally monthly for the rest of the term. Vendors don’t usually ask for any chattel mortgage except for the equipment itself. The only requirements that vendors ask is the signing of a contract and the release of post-dated-checks covering the balance.

However, it is very easy to realize that this is actually the most expensive option. Vendors are not financing institutions and they have a specific target on orders, revenues and, most importantly, cash and inventory turns. Although they claim that they do not charge any interests, vendors actually maintain higher margins when customers ask for in-house financing. Usually, it is better to ask these vendors for huge discounts rather than financing. I often advise customers to ask for financing only after they are confident that they are provided with the lowest cash price.

Joint Ventures

The next option available to hospital owners is acquisition through joint ventures where there are three further options:

(a) joint-venture with referrers (doctors who request the procedure provided the equipment),

(b) joint-venture with the vendor, or

(c) a combination of both.

Of the three, the best option is the first – joint venture with referrers. Aside from sharing the burden of financing the equipment, this option provides the additional advantage of loyalty from the doctors who needed and invested on the equipment. Rather than refer their patients to other providers, the doctors will naturally refer them to where they have some stake. However, some doctors, especially those who serve as consultant to many other institutions, do not want to involve themselves in such a joint venture arrangement for fear of perceived conflict of interests.

Meanwhile, a joint venture with vendors of medical equipment suffers from a similar disadvantage as with financing by the vendors themselves. Equipment dealers are not financing institutions nor do they want themselves to have deep involvement in running medical services. As such, they require a minimum sure monthly return for their investment. As much as vendors are concerned, they treat this kind of arrangement as if they have financed the project. Obviously, the third option suffers from the same disadvantage too. I do not recommend involving the vendor in a joint venture, except when the medical equipment dealer looks into some other relationship, such as to have a first installation, rather than just for direct profit from the investment.

I have some food for thought before getting into a joint venture agreement. Remember that an investment in medical equipment requires close study as to its feasibility. When a hospital expects many patients, it is very easy to get people into a joint-venture. Is there a need then for such a joint venture? Meanwhile, when the hospital projects too few patients, nobody would consider joining in. The question is, is there a need for the equipment?

Financing from Bank or other Financial Institutions

The best option often untapped by hospital owners is financing from banks or other financial institutions. The bank may ask for a chattel mortgage involving the equipment itself or mortgage on some other physical facilities of the hospital. With current interest rates from 11% to 16%, this is still considered a bargain when feasibility of the project is good, and considering that the vendor can provide better discounts for as if cash purchase.

There are two further available options financing institutions will offer, that of leasing or financing. Each has its own advantage and disadvantage and will be covered in a separate article.

The role of Medical Equipment in Healthcare Marketing

Every practitioner knows the value of medical equipment in healthcare as a whole. Every hospital owner realizes this early on such that they establish their own laboratories and x-ray departments even prior they start the operation of their facility. Later, when their hospitals were able to increase their patient base, they purchase more expensive diagnostic equipment such as ultrasound machines and CT Scanners. The leading tertiary hospitals invest on the even more expensive equipment such as the latest MRIs, Gamma Cameras and Linear Accelarators (LINACs).

Even individual physicians are increasingly becoming more dependent on medical technology to provide them more information in the course of their evaluation of their patients. Where doctors only use to have their own stethoscopes and sphygmomanometers, it is now common to see them with their own ECG machines, Spirometers and Dopplers. Many obstetricians now have their own ultrasound machines and fetal monitors which they use as part of their maternal healthcare. Aside from ECG machines, internists and cardiologists now have their own Holter recorders and ambulatory blood pressure monitors (ABP).

Unfortunately, this “Equipping” of hospitals and practitioners led to a general increase in the costs of healthcare. As a result, the healthcare service market has become more competitive with direct pressure on costs. Without doubt, medical equipment are necessary and major investments. A healthcare facility simply cannot do without them.

Medical equipment as part of marketing.

Not only does medical equipment help practitioners do their clinical diagnoses better. Medical Equipment also help the healthcare facility earn prestige in the eyes of their target markets. Paying patients would surely go to a hospital who can help them, and they believe that those with the right and better equipment are those that can help them better. It is therefore learned that medical equipment can be part of a marketing campaign by the hospital. Nowadays, it is very common to see hospitals advertising their latest acquisition. And if a nearby hospital bought a certain equipment, a hospital owner would surely be forced to consider buying the same or something better.

One hospital that has proven the value of medical equipment in marketing is St. Luke’s Medical Center (SLMC). Not only is SLMC known as the best equipped hospital in the Philippines, they are also known to have invested heavily in advertising this fact. I have seen one of their advertisements in the past where they claim to be better equipped than the majority of hospitals even in the USA.

As a result, SLMC has surpassed Makati Medical Center (MMC) as the leading hospital in the country in terms of both revenues and profits, although the latter also has the latest gadgets but do not have the same focussed advertising campaign. The new entrant, Asian Hospital, even while also having the latest gizmos available, cannot come close to the success of SLMC. SLMC has successfully occupied the number one spot in the customer’s mind as far as healthcare technology is concerned.

It is not only SLMC that has benefited much from marketing their medical equipment. Many other medical practitioners have long ago advertised their available technologies and met success from them. Dr. Vicky Belo for example is known to have the latest in lasers and techniques in dermatology and aesthetic surgery. The American Eye Center is known for the latest technology (also lasers) in ophthalmology. The Healthway Medical Clinics boasts that they have all brand new equipment when they started operation. Leading hospitals in some provinces, such as the Mary Mediatrix in Lipa City, Lorma Hospital (St. Luke's of the north) in San Fernando, La Union, and the De La Salle University Medical Center in Dasmarinas, Cavite, are just few of the examples who benefit from the market perception on availability of the latest equipment.

Meanwhile, in Cebu City, there is an exciting three-way competition going on among Chong Hua Hospital, Perpetual Succour Medical Center and Cebu Doctors Hospital, each of them feeling the others on what is the next technology they would compete on and no one giving up the title of being the best equipped. In Davao City, Davao Doctors’ Hospital has seemingly already occupied the slot. The next vibrant City to Cebu and Davao, Iloilo City now seems to have been occupied by Iloilo Doctors’ Hospital in terms of perception by the public as with the best equipment.

Should marketing be based on the equipment only?

Sometimes, the mere availability of the equipment is marketing in itself. In some cases, a brand new equipment has more marketing value than refurbished equipment. Still some others believe that some brands are marketable than another. But this is a case of over-simplifying things. Marketing of equipment should not be based on the equipment only, rather it should be based on the clinical capabilities that these equipment can do.

As the leader in healthcare marketing, SLMC has now shifted from advertising the equipment to advertising the people behind the equipment. Their recent advertisements show the training that the practitioners have undergone to operate the technology. They are now marketing the capabilities rather than just the equipment. Similarly, although Vicky Belo’s Belo Medical Center is known to have the latest equipment, they advertise the results using beautiful and sexy celebrity endorsers.

The reason here is obvious. Marketing the equipment only could result in the dangerous perception that the facility are for and by robots. Marketers should keep in mind that the technology is used in adjunct to healthcare services provided by people. Their campaign must therefore give technology a human face. After all, healthcare facilities exists for people to care for people.

The Story of MEDEV Part 3: So, what would MEDEV be?

But isn't there so many players in the market already? Why would there be a need for MEDEV? Who will buy from MEDEV? and why?

I pose the above questions to myself early on, and I realize I have to answer them truthfully to myself. I wouldn't want to go into business and fail later. I have just no time for that. The real question is, what should set MEDEV apart from competition for it to have the right to exist?

With my more that 10 years in the market, I am lucky to have direct contacts with different customers in the industry from different perspectives. I have worn many different hats. I was a service engineer, then a product specialist, then a sales executive, then an administrative supervisor. I was there to service the customer, provide them information, sell to them, and support them in whatever way. I have first hand information on their problems, their needs, and requirements as a whole.

Not only that. I wore those hats from different angles. I was with a small medical equipment corporation, then with a family-owned corporation, then with a Japanese company, then with an Israeli company, and then with a big USA corporation. I know how all these companies (now competitors) operate. I figured out how I can differentiate MEDEV from all of them.

Integrity.
In the medical equipment market, integrity is one thing that majority, if not all, of competitors ignore. It is a rule rather than the exception for many companies to claim things about their products that are simply not true. It is a rule rather than the exception for many companies to lower their equipment costs by misdeclaring them at customs and by not paying the proper importation taxes. Many misdeclare their total income and avoid paying taxes on them too. Surprisingly, even long established and respected companies are practicing these without remorse and as the way of doing things.

And for the simple reason that medical equipment are very complicated products and that customers are having a hard time evaluating their purchases properly, these companies are still rewarded with orders even by customers who value integrity so much.

For example, competitors will always claim that they are selling brand new equipment, even if the same equipment has already been used as demonstration units, back-up units or even used by another customer who was unable to pay for it. There even are companies who purchase refurbished equipment and sell them as brand new! To them, brand new does not necessarily mean it is really brand new. It just have to look like brand new.

Now when competitors say that their equipment is a demo unit, more often than not, it is really a worn out unit and they only say it is a"demo unit" because they cannot hide (or it is expensive to hide) anymore the physical damages or obvious scratches.

And then everybody will say that their product is top-of-the-line, or the latest, state-of-the-art. Take the Acuson 128XP10 ultrasound machine for example. Many still buys this popular product even if its last production is almost 10 years ago. Why? Because many thought that it is still top-of-the-line, today! So many customers have been duped to buy this product for at least $40,000 when it is sold at the internet for not even a third of that price!

If MEDEV would jump on the lack-of-integrity bandwagon, I am sure we would be very successful in no time. I am sure we can also easily get away with it. Many will say that that is what business is all about. But I am not a businessman. I am just looking for employment, remember? I am looking for a company with integrity. And if I cannot find one, I'll make one!

But if my competitors lack integrity, and if they mostly get away with it, how can I fight them head on? How can you compete on their price when they are offering even used equipment, which they bought at a bargain, as brand new?

That leads me to the other thing that will differentiate us apart from our them...

Service.
I mean Great Service! Some companies have engineers. We will have the best ones and those with the best experience on the products we carry, and we will train them better.

Some companies provide quick response to customer service requirements. We will provide faster response. We will equip our engineers with the right tools. We will also provide the engineers with back units and boards at their disposal. That way, they can decide on their own whether it is prudent to provide the customer with whatever back-up items are available. We will provide the engineers with cellphones so that they can immediately be contacted. We will provide them with means of transportation so that they can be at a place where they are needed the most.

Some companies provide training. We will provide better training. We will hire people who, even as members of the our service department, will primarily provide training to the customer. As with the other companies, we will make available training from different sites, even abroad. But to set us apart, we will also provide training on site, to those people who need and benefit the training most - the equipment technicians, the end-users, and in front of the equipment they bought.

In short, we will work our very best to return in the form of service every centavo the customer will pay us.

I believe Integrity and Service will set us apart from the competition. Yes, it will take us a long time to do that, for the customer need to experience us first before we can show them the difference. Nevertheless, MEDEV will be ready to do that, whatever and however long it takes.