Financing New Technologies: Early Adopters, Lease vs. Purchase, and Joint Ventures

Biting the bullet on a new purchase is always an uncertain proposition, especially in a volatile market. Practices need to learn about the market, weigh the pros and cons of leasing and purchasing and consider competition, reimbursement and regulations.

Cardiology practices are constantly bombarded by opportunities to invest in new technology and need to choose between an early adopter strategy and waiting until the technology matures and penetrates the market. It can be a fine line between the two scenarios, and mistakes can be costly.

“Early adopters face higher risks as they introduce new technologies but can gain greater market share,” says Michael Rossi, MD, managing physician of Lehigh Valley Heart Specialists in Allentown, Penn. “Later adopters may lose market share to early adopters but may benefit from increased product stability. Plus, late adopters can learn from early implementations and may leapfrog the competition.”

Regardless of the timing, the first step for any practice considering investing in a new technology is the feasibility study, says Richard Beveridge, president of Richard Beveridge & Associates in Salt Lake City, Utah. The feasibility study should outline the local market for the technology and drill down to include realistic market share. It also can address variables like IT infrastructure. PACS or 64-slice CT, for example, may require a network upgrade or new workstations. IT costs can be factored into the equation, but also deliver benefits beyond a single piece of equipment.

The next hurdle compares total costs and revenues to determine the breakeven point (see graph on page 15). If the breakeven point exceeds projected market share, the practice can consider a joint venture. If projected market share shows the practice meeting the breakeven point, the practice can begin to weigh financing scenarios. “Practices should be sure to define assumptions in the breakeven analysis and stick to them,” states Beveridge. That is, if the practice projects a feasible 35 percent market share, it should use that number rather than edge it up to 42 percent if the numbers do not work out to the practice’s advantage. Beveridge & Associates also offers clients a Monte Carlo simulation, a computerized model that randomly varies drivers like market share and reimbursement 500 times to provide a realistic sense of risk associated with a given investment.

Lease vs. purchase

Leasing and purchasing each carry pros and cons, and each may be the right choice depending on the technology and situation. Practices should use the following questions to guide their decision:

  • Is an exit strategy needed? Although there are no guarantees, a lease can provide an exit strategy if equipment is not utilized as projected, says Jim Burns, vice president of Corazon, a consulting firm in Pittsburgh, Penn. Similarly, lease terms may provide some flexibility if volume or needs exceed initial projections.
  • Will the technology be obsolete at the end of the term? If a replacement will be needed in three to five years, a lease may be more attractive because it simplifies disposal. On the other hand, the productivity and profitability of an electrocardiograph or nuclear camera outlives the typical lease term, says Rossi. That is, an electrocardiograph will continue to add to the bottom line for years after the practice has paid for the system as a cash purchase.

The practice should review tax and cash flow implications, too. “A practice that amortizes the equipment as a non-cash expense over the life of the lease can add the expense back to cash flow and use the funds to remain current on other technology investments,” says Beveridge.

Various lease structures offer bottom- line benefits. A capitalized lease, which entails higher monthly payments, allows the practice to purchase the equipment for $1 at the end of the term and provides the tax benefits of depreciation over the life of the lease. An operating or off-balance sheet lease, however, offers cash-flow friendly lower monthly payments but no depreciation benefit. The practice retains the right to purchase the equipment at fair market value on an operating lease.

Leasing under the microscope

When Los Angeles-based Apex Cardiology decided to deploy a GE Healthcare CT scanner and Centricity PACS in 2005, the practice evaluated various financing solutions. Leasing was more attractive than purchasing the system for several reasons, says Mason Weiss, MD, managing partner. Cardiac CT technology continues to evolve, and the practice did not want to own an antiquated system at the end of the lease term. The lower monthly cost of leasing also minimizes the impact on monthly cash flow. Finally, leasing offers options.

If Apex Cardiology decides to sub-lease its CT scanner or PACS to another practice, the practice can require the partner to assume a portion of the lease rather then negotiate new terms on purchased equipment. Because the practice decided to lease its systems through GE, it has been able to wrap additional equipment into the lease after the initial installation. “Practices on a tight budget should remember they are paid for basic image acquisition. Bells and whistles can be added at a later date if needed,” explains Weiss. That is, usually a practice that finances through a vendor can wrap additional workstations or storage into the lease over the life of the lease.

Still, leases aren’t right in every situation. “Practices will pay a premium to lease equipment,” notes Burns. The question to answer: is the premium worth it?

The last word

Practices investing in technology need to undertake due diligence, completing a thorough feasibility study, investigating all lease and purchase options and ensuring that pricing remains competitive. The end result justifies the time and effort as the practice that does its homework can tap into technology to improve its bottom line, patient service and physician workflow.


Tread Very Carefully with Joint Ventures
One option for practices that lack the volume to justify new equipment like a 64-slice CT scanner is the joint venture; however, regulations regarding joint ventures are evolving.

“Cardiology practices in the market for new imaging technology should consider the regulatory climate as well as the economics of the investment,” states Thomas Greeson, partner with Reed Smith LLP, Falls Church, Va.

Although the economic picture for cardiac CT imaging looks more promising since the government’s decision in March to leave reimbursement up to local payors, cardiology practices aren’t out of the woods. The Centers for Medicare & Medicaid Services recognizes that the government spends a tremendous amount of money on imaging services and could attempt to curtail spending, says Greeson. In fact, looming changes in the regulatory arena could have a negative impact on revenue.

Currently, the Stark Law permits cardiologists to form a legal entity to buy or lease a scanner and sell or lease the equipment to a hospital they have a referral relationship with. CMS may amend the law to prohibit referrals to the hospital. The economics could make leasing company joint ventures less palatable and even unprofitable. A decision is expected by the end of 2008.

CMS could restrict in-office imaging in a second, less likely, scenario. CMS may require imaging equipment to be in the same office as the cardiologist, effectively limiting profits for a practice that houses a scanner in a separate part of the same building. That is, if the Anti-Markup Rule goes into effect on January 1, 2009, as currently written, physicians could refer patients to a CT located on a different floor or in a different office, but they could not profit from the referral for Medicare patients.

Like advanced technology, joint ventures may have a limited lifespan. The wisest and most successful partners develop a dissolution strategy prior to forming a joint venture. That way, if Stark is invoked, all players understand the next steps. A solid dissolution strategy may dissuade practices from an unwise decision.

“Tread very carefully with joint ventures. Get good advice from transactional lawyers and review the ins and outs of the regulatory climate,” sums Greeson.

Purchase Options Abound for Electronic Medical Records
Electronic medical records (EMRs), which are rising in popularity of late, represent a hefty investment for most cardiology practices. It’s important for practices to use sound budgeting and financing processes as they invest in health IT systems. Following are some pointers for practices in the market for an EMR from Joe Rubinsztain, CEO of gMed, a Westin, Fla.-based company specializing in digital solutions.

Step 1: Calculate the impact of an EMR on cash flow. Factors to consider include reduced personnel and transcription costs.

Step 2: Determine adoption costs. Costs should be divided into four categories: licenses, services such as technical support, infrastructure and lost productivity. Infrastructure costs and requirements, which include hardware and networking, can vary widely. A practice with a PACS is likely to have a sufficient network infrastructure and a robust network. A single site practice may require new hardware, but its networking needs tend to be fairly straightforward. A large group with multiple sites, on the other hand, may require a larger investment in the network to ensure connectivity among all sites. Lost productivity, or the lower throughput, during the learning curve can be calculated with a basic formula, says Rubinsztain. Calculate each physician’s productivity at 50 percent for the first two weeks following EMR deployment, 75 percent for the following two weeks and 100 percent after four weeks.

Step 3: Weigh the pros and cons of various financing options: software donation, purchase and lease.

Donations: Check the fine print
New federal rules allow labs or hospitals to donate up to 85 percent of health IT software and services to physicians if the practice receives Medicare payments. The fine print may discourage some practices. For starters, the rule does not cover hardware. In addition, donations are likely to include expectations, and the practice may not want to tie itself to a single provider. The donor relationship can become especially tricky if the two parties cease their relationship. Finally, the practice should ask itself if it wants to share patient data with a hospital or lab via a common EMR.

Purchase: New benefits
Purchasing an EMR carries new advantages since the feds raised the rapid depreciation ceiling from $125,000 to $250,000 in 2007, which means practices can claim $250,000 in accelerated depreciation to reduce the tax burden and show improved earnings. On the downside, even a staggered payment schedule does impact the practice’s cash flow.

Leasing options
Practices can opt for a straight 48- or 60-month lease on an EMR or a lease with the option to buy the software at the end of the term. Payments are relatively low and even over the course of the lease, a practice can expense the software and infrastructure. On the other hand, leased EMRs are not eligible for rapid depreciation.