The medical practice space is increasingly competitive. In order to continue giving patients the highest caliber of care, physicians must keep up with developments in technology. This requires expensive equipment upgrades. Financing is often necessary for practices to be able to afford these upgrades, especially for private practice and group practices who have more limited capital than hospitals. The economic challenges that accompany business ownership have contributed to a decrease in physician-owned practices. In 2018, self-employed physicians made up 45.9% of all patient care physicians in the US. This constituted a 7% drop since 2012. However, the highest percentage of physicians still work in small practices with 56.5% of physicians in the country working in practices with 10 or less physicians. As more small medical practices find financing to be the best option for their equipment needs when capital is limited, experts estimate that the equipment leasing market for healthcare will grow “at a CAGR of 6.77% through 2021.” This article will explore the unique aspects of medical equipment in comparison to equipment in other industries, the benefits of medical equipment financing, and tips for getting the most out of your financing arrangement.
WHAT MAKES MEDICAL EQUIPMENT FINANCING DIFFERENT THAN FINANCING IN OTHER INDUSTRIES?
In every industry that uses specialized equipment, you have a competitive edge if you use the most up-to-date technology. This also requires a bigger investment. To complicate matters of maintaining the best equipment in the medical field, there is an extensive process of approval for all medical devices from tongue depressors to x-ray machines and everything in-between. The Food and Drug Administration (FDA) is responsible for approving a variety of products including medical devices and any electronic products that produce radiation. For all new medical devices, 501(k) premarketing submission to the FDA is required to show that the device is safe, that it works, and that there is scientific research backing it. A Premarket Approval (PMA) application is required to enter the market. Equipment is assigned to different classes based on the risk the equipment poses to patients and users.
In addition to a constant approval process, there are some unique considerations that contribute to medical equipment turnover such as rapid technological development as compared to other industries. Some equipment will only last 3 years before becoming obsolete due to technology and safety improvements. One reason there is such a consistent process of trying to make improvements on this equipment is to better accommodate patients. In other industries such as construction or commercial transportation, the equipment almost exclusively affects the operators. In the healthcare industry, using this equipment on patients adds a measure of urgency in making continuous improvements. There is also a matter of safety in that many of these devices such as diagnostic ultrasound machines and wireless infusion pumps store patient health information (PHI) and improving cybersecurity is a constant concern in order to comply with HIPAA patient privacy standards (The Health Insurance Portability and Accountability Act of 1996). With that, medical practices are in an ongoing cycle of upgrading both hardware and the software needed to connect to it.
In short, what makes healthcare equipment different is the high rate of turnover and the mandate to use approved technologies. Physicians who wish to be competitive will need to vigilantly keep up with the life cycle of their equipment and updates with FDA approval.
BENEFITS OF FINANCING MEDICAL EQUIPMENT
Given the circumstances surrounding the life cycle of medical equipment, owner-physicians are turning more frequently to financing options such as leasing or loans. There are many benefits of taking this route, several of which are outlined in this section.
First off, leasing offers flexibility to upgrade equipment frequently as other devices become obsolete or your practice strategy changes. Leases typically last 2 to 6 years and can improve operations in a couple of major ways. First of all, as mentioned above, medical equipment can have an operational life cycle of as little as 3 years. If you have a 3-year lease on a machine, this will allow you to plan to replace it with the upgraded device rather than having to scramble to figure out how to sell an expensive piece of equipment. Secondly, flexibility for operational strategy is pivotal in being able to adjust for organizational growth, part of which includes adding or changing technologies accordingly.
Next, financing will give owner-physicians more control over their capital. Avoiding a big one-time payment will help to stabilize your finances and give you a fixed budget line item every month that is expected and affordable. By doing these smaller payments over an extended amount of time, you can also focus on the other changes that will need to be invested in to make the equipment profitable such as any necessary software updates if the machine is connected to the internet and also personnel training.
Finally, there are usually several options for how you’ll proceed with the equipment at the end of the contract. After the loan has been paid off, you can own the equipment. If the device will be useful for a long time, you can choose to keep it. Taking out an equipment loan is good if you intend to own it eventually. Leasing is a good option if you want flexibility with the item and suspect you will be upgrading in 2 to 5 years. Depending on the contract, you may also be able to own the item after the lease is up or request to extend the contract. As you are setting up the contract, you will want to consider if you eventually hope to own the equipment or if you want flexibility in being able to upgrade within a few years.
TIPS FOR GETTING THE MOST OUT OF YOUR FINANCING OPTIONS
This section will highlight some of the things you want to consider when choosing to go the financing route for your medical equipment. If you’re looking into getting a piece of equipment for the first time, it would be wise to ask a physician you know who is using it what their experience has been. For example, you’ll want to know how complicated or expensive the routine maintenance on the equipment is. This will help give you an idea of if you’ll want to eventually purchase the item or not and also what repair costs and maintenance costs you will be responsible for in a leasing contract.
You can use financing options to purchase anything from exam tables to imaging machines, dental chairs, lab equipment, and more. If you are a small to mid-sized medical practice, specialized medical loans can give you unique loan opportunities. For example, if you’ve more recently started your medical practice and are still paying off medical school debt, loans that are specific to doctors will consider your high earning potential and will be less likely to ding you for your school debt. Equipment financing that is specific to medical equipment will also likely offer a length of repayment that is appropriate for the lifespan of the equipment. For example, if the equipment is likely to be obsolete or break down in 7 years, that’s how long you would want your repayment to last and not longer. Having to replace equipment before the original is paid off is the number one situation you’ll want to avoid when looking into financing. Because of the high rate of turnover, sometimes this can be hard to avoid. It’s important to discuss this risk with your lender and consider contracts that include contract clauses or buyouts that allow for flexibility later on if obsolescence comes into play. One example of this is a fair market lease which defers part of the equipment cost to the end of the lease so you pay a lower monthly cost. At the end of the lease, you can either purchase the equipment at the fair market value, extend the lease, or return the equipment.
While physicians are extremely knowledgeable in their area of expertise, sometimes there is a steep learning curve with the business side of things when deciding to start your own practice. If you’re a new medical practice, draw up a solid business plan outlining start-up costs including necessary assets, real estate, software, an accountant, etc. This will help you to decide how to approach financing and for which costs. If you are an established practice wanting to upgrade, assess the financial health of your business and update your business plan to reflect growth goals, including identifying why you want to make certain equipment upgrades.
While there are many components to being a flourishing medical practice, don’t let equipment costs get in the way of your success. Contact us today and find out how you can get the most out of our financing options for healthcare professionals!
