Equipment, Evaluation and Purchasing: Part 2
Subtle Shifts Affect ASC Financial Industry
By Michelle Beaver
As the surgery center industry evolves so does the financing and acquisition of equipment for new and existing facilities. Certain core principles remain, however, the most prominent being: acquire what you can afford. Nothing more, nothing less.
The most common mistake that operators of new ambulatory surgery centers (ASCs) make is that they acquire too much equipment too soon, says Alex Seifert, associate director of new business development at Arthrex, Inc.
“Many OR (operating room) teams get delusions of grandeur when planning for their new ASC,” Seifert says. “They end up building a Taj Majal instead of acting frugally and acquiring the correct amount of equipment that can be serviced by their anticipated patient volume.”
But before ASC team members develop a realistic shopping list they need at least a modest understanding of the finance industry.
Changes in the Marketplace
After considerable evolution, the ASC finance industry is settling, says Jeff Fox, vice president of surgery, dialysis and hospitals for MarCap Corporation.
“With any industry that’s maturing — and the ASC industry is definitely maturing — in some markets there is a change of posture from the payors,” Fox says. “It’s becoming more difficult getting on payor contracts in some markets. For the first time in my career I think we’re at a high point of centers that are behind on their ability to pay their payments on a timely basis and in some cases centers have been closed.”
Indeed, some financiers are hesitant because too many facilities have failed to make minimum payments, Seifert says.
“It is possible that companies will do more due diligence, perform more stringent credit checks and enforce contracts more closely than in the past,” he says. “Many companies may also act more conservatively when offering lease options to customers with a reputation of breaking lease contracts or jumping from one company to another.”
The market is aggressively offering low or no-recourse financing, according to Anthony Mai, national sales manager, CIT Healthcare.
“The last time this happened (was) 1999- 2001 (and) the market came crashing down and all those deals dried very fast,” Mai says. “You should consider who has been in this business through the good and bad times.”
Changes in the marketplace depend on similar factors year-to-year including politics, the health of existing portfolios and which businesses enter the marketplace, says Jim Freund, director of business development at HELP International (an equipment planning company).
Old vs. New
The main differences between buying used vs. new equipment is that lenders want to know as much as possible about used equipment (including history, warranty specifics, etc.) and that used equipment usually involves a finance term that is three or four years shorter.
There are risks associated with used equipment, Seifert says, “including technology obsolescence, difficulty in sourcing repairs, nebulous warranty programs through third-party resellers and most original manufacturers will not service equipment purchased through resellers.”
A lender will look more closely at a deal that involves used equipment, says Ken Seip, vice president of healthcare finance at CitiCapital.
“A lender just wants to make sure that this is a reputable vendor of used equipment,” Seip says. “They’ll check to see if the price is in line with market value. Because that equipment is its collateral, they want to make sure that the buyer isn’t overpaying what the general market conditions are.”
The Pros and Cons of Leasing
A critical question to ask in the beginning of a finance project, according to Fox, is “do I need a lease or do I need a loan?”
The answer to this question is conditional.
Some points to consider are that leases may have a low monthly payment, but may also include a sizable end-of-term payment or an automatic renewal if the borrower doesn’t notify the lender according to the contract specifications, Fox says.
Some companies offer internally financed leases that can be lower than the acquisition costs that banks or leasing companies offer, Seifert says.
“Leases allow for more flexible methods of acquiring capital equipment that can extend purchasing power, but most leases are written to benefit the seller by bundling in minimum purchases of consumable/disposable devices, repair/service contracts and contractually obligating the buyer to fulfill minimum purchase targets,” Seifert says. “If the buyer does not meet these purchase targets, they are often billed with a shortfall invoice.”
A facility’s lease negotiations should be made by someone who is not only financially inclined, but who is also familiar with the surgical caseload at the facility. The OR director is often a good choice, according to Seifert.
“If the buyer agrees to a lease contract without fully understanding where charges are coming from, then leases can easily be 50 percent more expensive for the term of the contract compared to purchasing equipment outright,” Seifert says.
“The premium comes from many up-charges, surcharges, service fees and extended warranties that some companies write into their leases (or into a monthly payment program) making it hard for even the most astute finance officers to decipher,” he adds. “As a buyer, one should always demand full disclosure of individual consumable/disposable prices, capital equipment discounts, interest rate changes and the value of any extended warranties or service contracts.”
Capital leases are very similar to loans, Mai says, but fair market value (FMV) or operating leases can be expensive if they are not negotiated properly.
Options
Sometimes it’s not obvious how many effective ways there are to finance a piece of equipment, and once a method has been chosen it’s still not always clear how many options are available therein.
First, inquire about all possibilities, research them, ask advice, and then make a decision. This is especially important when embarking on less traditional contracts.
“Surgery center managers should only sign contracts that they understand,” Seifert says. “If they have any doubts, then they should seek assistance from an accountant or financial advisor with skills in leases. Creative leases are only dangerous when the buyer doesn’t understand how the capital equipment they are acquiring is going to be paid for.”
Oftentimes, flexible covenants are available and can be advantageous.
“Flexible covenants are great if an account is just getting started, such as at a new surgery center,” Seifert says. “New facilities can take advantage of deferred payment plans as they ramp up in patient volume. Most facilities grossly overestimate how quickly their new facility will be up and running.”
In terms of down payments, they are almost always necessary. It is worth it, however, to ask if a down payment can be avoided, Seip says.
“Work with a lender who is accustomed to the ASC market and maybe seek a few alternatives so that you don’t hear from just one source,” he says.
Any option that is chosen should free up as much capital as possible for the early days of an ASC, Seip says.
“The cash flow needs of a surgery center during its first year of operations are very important,” he says. “If your financing does not match well with the truly conservative needs of the facility then you are setting yourself up for a challenge.”
Tips
Procrastination should be avoided.
“Not allowing the appropriate time is a big mistake,” Fox says. “This in turn creates a fire drill mentality which results in usually getting financing that’s not necessarily in the best interest of the center.
People tend to rush. You’re in a relationship with your lender for five to seven years so it’s important to try to understand everything you can about that relationship.”
It is important to find a financier who can remain as objective as possible. “Even though all these finance companies have salespeople, the better way is to deal with someone who’s approaching you as a consultant as long as they’re willing to talk about all the options, not just theirs,” Fox says. “Buyer beware when somebody’s only talking about their program.”
Again, prudence is key.
“Understand what you need so that you’re not necessarily a victim of being sold something you don’t need,” Fox says. “Shop around. Sometimes your local bank is the best place and many times it’s not the best place. Don’t be afraid to ask questions. Financing can be complex. You shouldn’t be afraid to ask the lender even if you’re not in the market at that exact moment. Ask, ‘what are some important things consider?’”
It’s better to ask an elementary question early on and risk looking the novice than it is to make a foolish financial decision.
Careful contract research is vital — especially for leases — no matter how busy the decision-maker is with other aspects of the ASC, Seifert says.
“The bottom line (is that) most leases look good at first glance and proposals are written and designed to anchor the buyer with a low fee-peruse or monthly payment,” Seifert says. “Buyers should always scrutinize both options (purchasing outright and leasing) and do a cash flow analysis of their own facility, then acquire enough equipment that can be supported by the future cash flow of the facility.”
Mai’s advice is to read all term sheets closely and then ask questions.
“A term sheet gives the basic terms and conditions of the transaction but it is not all-encompassing,” he says. “You do not want any surprises when you get the final documents.”
It is a good idea to have even more equity available than what seems to be needed, according to Freund.
“Have a monthly cash flow statement prepaid for the first year as part of your projections, get financing done early and don’t wait until the last minute,” Freund says. “Deposits for equipment may be needed — down payments — and the entity may have trouble getting financed and need more time.”
Finding the Right Lender
The experts are adamant that ASC owners and operators should only do business with financiers who are well-versed on the healthcare industry and with ASCs in particular.
This is critical advice, Seip says. “I think it is very important for customers who are doing major financing to work with a firm that is familiar with financing surgery centers,” he says, “for the basic factor that a lender who is accustomed to surgery centers will speak the language of the client and will ask the right questions.”
Mai agrees. “I think it is imperative because if you have a problem with your operations, an experienced healthcare lender’s first option is not to try and get out of the deal with as little losses as possible,” Mai says. “We will work with the borrower to the point of even recommending companies to help bring a solution to them.”
In a new center, it is vital to get a lender involved early, Seip says. But foremost, “make sure that all the partners in the surgery center understand the terms of the loan that was obtained,” he says.
Indeed, a center’s staff can get a great deal by accident, but an advantageous loan is much more often the result of good old-fashioned research and a partnership with a lender who is just as clever as they are ethical.