Never Enough Capital? Consider These Strategies to Stretch Your Budget
Hospitals rarely have enough money to fund all the competing demands for new capital projects within a given budget year. Whether new construction, remodels, IT infrastructure or medical and lab equipment, hospitals routinely face capital funding requests that far exceed what is available. Department leaders become conditioned to “doing more with less”. Having to extend the life of existing equipment as purchases are deferred from one budget year to the next.
Market conditions in the post-pandemic hospital industry remain uncertain. While patient volumes are high, so are interest rates and costs – including the price for new equipment – straining capital resources even more. When capital is stretched thin, paying outright for equipment (cash), may not be an option. But this only one of many different ways to secure new equipment available to hospitals.
Different ways of looking at the same old problem might just be the ticket to getting your providers, staff and patients the equipment they need to deliver quality patient care. Even when you think there isn’t enough money available. One option is to pay differently, another, while seemingly obvious, is to pay less. Curious?
Pay Differently…
While traditional purchases may be paid in cash or in an installment loan from a supplier or bank, that is old news. Today, equipment manufacturers, distributors and lenders offer many different payment options that can help you get more bang for your capital buck. It is important to point out that every hospital CFO may approach funding annual budget needs with different philosophies and varying degrees of comfort with creative financing strategies. Ultimately this will guide how much you can or cannot leverage various options outlined in this post.
- Lease – Leasing is another funding approach that reduces the amount of cash required up-front to acquire new equipment. Whether to take advantage of lease incentives offered by manufacturers or leasing companies that lower the cost of borrowing and offer lower monthly payments compared to a traditional loan, leasing can be a good option to consider to get equipment when capital funds are limited or cash is tight. Like traditional borrowing, each hospital’s credit-worthiness will be a factor in the cost and availability of competitive lease options. Despite all the potential benefits of leasing, keep in mind it can result in a higher overall cost over the life of the lease, particular when factoring in the end-of-lease buyout costs.
- Placement Agreement – Placement agreements can be structured in different ways, but generally involve the supplier “placing” the equipment at the hospital for use, subject to the purchase of related materials – surgical supplies, implants and related consumable or single-use items in an agreed upon minimum volume for a set period of time. Recently, there has been an increase in the offering of placement agreements by suppliers to hospitals, both to provide a flexible option for hospitals but also to give suppliers a way to get more of their product in use with minimal capital or upfront cost required. For hospitals confident in their anticipated volume of cases for a particular product category, placement agreements can be attractive options worth of consideration.
- Reagent Rental Agreement – This is variation on a traditional placement agreement typically found in the lab category. It provides for the acquisition of new equipment at little to no upfront cost, subject to an agreed upon minimum purchase volume of reagents – chemicals used in the processing of lab tests – with the equipment costs wrapped into the price of reagents as a premium fee for a set period of time (years). This option can help stretch capital dollars, and once the original “rental” period is complete, the hospital typically has the option to extend the agreement, return the equipment to the supplier without penalty or buy out the equipment usually at the “fair market value” to be determined based on the then market conditions at the end of the rental. With many potential benefits, reagent rentals can be a good option for some hospitals but be certain to review the fine print that may contain important financial and purchase obligations that can impact total cost over time.
- Pay-per-use/Pay-per-Click – The pay-per-click payment model typically applies a set fee per procedure the hospital is obligated to pay in exchange for getting the equipment it needs at no upfront cost. Pay-per-use (sometimes referred to as pay-per-click depending on modalities and supplier lingo) is a good way to align equipment costs with revenue from the use of equipment for patient care. This can be appealing for some hospitals and CFOs, but the agreed upon minimum volumes of cases each period is an important measure to consider in advance. If you don’t meet the minimums typically minimum fees are still due, and if you exceed to project volume the costs may grow beyond what would have been required in an outright purchase.
- Bundled Service Agreements – One additional option that may be relevant for some hospitals is bundling capital costs into ongoing equipment service and maintenance agreements offered by most manufacturers for when the original equipment warranty expires. Traditionally bundling capital costs into service agreements is less common for new equipment, but it is often seen as a way to fund ongoing capital required for costly software upgrades, workstation replacements, add-on features and more. Increasingly, suppliers are motivated to get service agreements in place (they can be lucrative but also help ensure customer retention) and will work with hospitals to find creative ways to leverage these agreements.
- Join the Crowd Cloud– A growing number of equipment suppliers are offering subscription-based payment models, for system software in particular, that often needs upgrading every couple of years. A subscription is a great way to avoid big-ticket purchases of new or upgraded software with a fixed monthly payment over an agreed upon period. This also provides operational benefits by keeping software up-to-date at the at the most current version, and should offer clinical, operational and IT staff the peace of mind knowing this is in place. Ask your suppliers when you are buying equipment about various options for subscription-based payments.
And Pay Less…
No matter how you choose to pay for equipment, don’t overlook one of the simplest ways to reduce how much capital you need: pay the least you can. At first this probably seems obvious, but there are several time-tested, proven strategies to ensure you spend no more than is needed to get the equipment your hospital needs (and ensuring you budget for and request the right amount of money).
- Maximize trade-in values – Trading in equipment being replaced, or other equipment not being used is an easy way to unlock additional value and reduce the amount you need for new equipment. What you may or may not be aware of, is that trade-in values are often just an additional discount mechanism used by suppliers, and frequently equipment traded-in is destroyed when received by suppliers. In these cases, it may be possible to get the trade-in discount and keep the old equipment for parts, resale or donation. Better than a landfill. And just because you aren’t replacing old equipment it doesn’t mean you can’t get the trade-in discount. Other departments may have old equipment, or you might consider buying an old, as-is system on the cheap to trade in, often for 20x or more what you paid. There are many ways to use the trade-in line item to generate additional savings and value; just don’t miss out.
- Take Advantage of Time-Sensitive Promotions – Like many industries that offer special discounts or “coupons,” medical equipment suppliers will sometimes offer time-sensitive promotions based on the product you are buying, the time period you are buying in, etc. Much like cutting coupons at home, you have to choose whether or not to pursue these deals but unlike coupons, it’s unlikely you’ll find out about them without asking the supplier. Given tight budgets, there is no reason to not ask your rep or distributor if there are any promotions available that you qualify for. The worst thing they can tell you is “no.”
- Benchmarking – Like with any medical, lab or IT purchase, the only way you know if you are being quoted a good price is to benchmark your price against (good, and actionable) industry data. This is the best (and really only) way to be confident you are getting the best price, terms and value for your organization. This can help establish a basis for the most effective supplier negotiations and unearth additional savings you may not have known to look for.
- Consider Demo or Used Equipment – One good way to pursue savings on new equipment is to buy a demo unit if they are available. If so, suppliers often can discount these “barely used” systems more than for “new, new” and with the identical warranty. Buying a used or refurbished version of the desired equipment can save you as much as 50% or more compared to the price of new. Because there is no difference in the reimbursement that can be realized from the use of pre-owned/demo vs. new equipment, this is another way to save when circumstances allow.
- Extend Equipment Life with Upgrade vs. Replacement – Sometimes new equipment being requested is due to a new feature or functionality that offers operational, clinical or other related benefits. In some cases, however, new functionality can be added to existing equipment and often at a lesser cost. You may not be able to get 100% of all the new “bells and whistles” but if you can get the functionality you really need, an upgrade – software as well as hardware components – may be a path worth considering. Upgrading existing technology can be an extremely cost-effective alternative for getting the latest technology needed for patient care without breaking the bank.
How Paying Less (and Differently) Saved $877,000 (>50%) on a new MRI
Consider the recent example of a hospital with capital requests that totaled more than 10 times what they had available in capital funding for the year. For the Radiology department, their request for funding to purchase a new MRI to replace an older, heavily-used system that after 15 years was showing its age, was at risk of getting deferred for the third year in a row. With outdated software and less than optimal image processing speed, the ROI on a new MRI was very positive, but the funding was insufficient.
Instead of accepting another year of waiting, the Radiology team uncovered the possibility of an upgrade to the existing system that they could buy and save more than 65% compared to the price of the new MRI. And this is before taking into account additional savings on construction cost that wouldn’t be required if the existing MRI was updated in place without removal. The upgrade got funded and is in-process, saving more than 75% of the total estimated cost for new, and avoiding 4 weeks of downtime that would have put a strain on clinical operations. A win all around.
Don’t Get Stuck – Pay Differently and Pay Less to Stretch Capital Budgets
There is never a one-size-fits-all financial approach that works for every hospital and many factors will influence how well the strategies outlined in this post fit your hospital’s need. From CFO philosophy, hospital financial health, supplier cooperation and more, there are many variables that may play a role. But it doesn’t matter if you don’t at least consider ways to pay differently or pay less, particularly when there isn’t enough money to go around. This post is meant to be food for thought and by no means a prescription for what is “right” for different hospitals.
We understand that budgeting and spending capital dollars can be far more complicated than just how or what you pay. Our hope is the ideas shared above can be a useful reminder that sometimes when you feel stuck, there may be more ways to get “unstuck” than you think; capital funding is no different. Trying to solve the same old problems by looking at things a bit differently might just be the ticket to getting your providers, staff and patients the equipment needed to take care of patients. Isn’t that the goal?