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.