Buy, Lease or Make Another Arrangement?

Whether at regularly scheduled intervals, sporadically reached “mileage” milestones or just every so often, every imaging service provider—be it a hospital radiology department, a private practice or a freestanding imaging center—needs to add new imaging equipment or replace existing units. After all, even the most perfectly hewed-to maintenance schedules won’t bestow immortality upon any machine in any modality. And sometimes technology leaps forward or growth happens, necessitating expansion—a good problem to have but still a problem to solve.

Deciding what type, make, model and options to choose is often easier than figuring out how to pay for your selection(s). Should you buy? Lease? Finance through a third-party financial institution? The bigger the layout of dollars, the knottier the tangle of choices—and the trickier the total cost of ownership (TCO) estimation. 

“It’s a bit more complicated than it looks,” says Michael Bohl, MHA, chief operating officer of 15-radiologist Radiology Group in Davenport, Iowa. His affinity for understatement is apparent when he adds that there are “pros, cons and considerations” at seemingly every turn. 

Bullish on Buying

Purchasing imaging equipment offers several benefits over leasing. One of the most significant centers on tax write-offs. Under new tax laws, 100 percent of any equipment expenditure can be written off for tax purposes if the equipment is purchased rather than leased. 

“That is a huge advantage over leasing the equipment, considering the time value of money,” says Steven Wolpow, CPA, managing partner of the New York accounting firm Nussbaum Yates Berg Klein & Wolpow. 

Wolpow, whose firm frequently advises businesses on buy-or-lease decisions, points out that the best equipment prices can usually be negotiated on “a simple outright purchase,” because once the seller has to arrange financing, things get a little more complicated. “There’s a profit motive in seller financing, for instance: more paperwork to deal with, et cetera.”

Jessica Montgomery, MBA, chief operating officer of 42-radiologist Scottsdale Medical Imaging in Arizona, says buying equipment rather than leasing offers tax advantages via depreciation opportunities as well as financial benefits not associated with taxes. “I consider the total TCO of five years, which is the length of time we depreciate equipment,” she explains. “I then compare whether it makes more sense to buy or lease. Usually, for our business, buying is the less expensive way to go.”

Bohl agrees, adding that he is “not a leasing fan” because “in the long run, the only thing it brings to the table is increased costs. Buying allows us to take full advantage of the life cycle of equipment that lasts a long time. It’s the same thing as when you buy a car as compared to leasing it.” 

Bohl adds that, for these reasons alone, if an imaging services provider has available capital for an equipment purchase or can obtain such capital from another source—say, bonds or a bank—purchasing is the best option. 

The Favors of Flexibility 

To be sure, there are drawbacks to outright purchasing any medical equipment, and big-ticket imaging categories are anything but exceptions to that rule. In addition to access to coming up with the capital, the purchasing prospect usually necessitates producing a sizeable initial down payment. So reminds Bruce Zweibel, MD, of Radiology Associates of Florida, a Radiology Partners practice that operates 15 imaging centers in the Sunshine State. 

Purchasing also ties up funds that may be better spent elsewhere, and there may be debt covenants that hamstring imaging providers from making other purchases. Maintenance costs can rise over time, equipment obsolescence could occur before the item has fully depreciated, and changes in reimbursement may render the asset less profitable as the years after purchase go on, Zweibel points out. 

Two years ago, Radiology Associates of Florida entered into an imaging-center operation agreement with Tampa General Hospital and Florida Hospital. The centers are now owned as a joint venture between the partner organizations. 

“We used to buy equipment or finance it as part of a capital lease, but we kind of stubbed our toes on that and prefer the flexibility of leasing,” Zweibel says. “That’s the point to which we are evolving.”

The benefits of arriving at this point, he adds, include significantly lower initial expense and monthly payments spread out over two or three years, as well as flexible payment terms—e.g., no payments for the first six months of a lease, with the payments for those months tacked onto the back end—and the option of a buyout once the lease has expired. 

“The flexibility that comes from leasing instead of buying can be particularly helpful in cases where it could take months to start ramping up patient volumes and seeing cash flow” as a result of usage, Zweibel says. “MRI is a good example,” he adds. 

In fact, that modality may be the ideal example, given the $2 million-plus price tags on new MR units even before suite construction, renovation or service contracts are factored in. 

A Question of Balance 

Victoria Terekhova, vice president of healthcare leasing for Key Equipment Finance in Superior, Colo., which functions as the financing arm for several imaging vendors that don’t have their own financing divisions, amplifies Zweibel’s use of the word “flexibility.” She emphasizes that leasing allows shoppers to structure payments such that they meld with imaging providers’ cash-flow situations, which can rise and recede like ocean tides. 

“Leasing opens doors to bring on new equipment or upgrade while you’re in growth mode,” Terekhova says. “It allows you to adapt to changes in the marketplace, reimbursement or individual facilities’ needs without tapping into your own resources.” 

Meanwhile Wolpow observes that, with certain leases—say, operational leases as opposed to capital ones—lease payments can be tax-deductible as operating expenditures. This can let lessees enjoy a choice of buying the equipment they’ve leased at a fair market value, returning it or renewing the lease for another term. 

There’s a lot to be said for the burden of ownership being on the lessor, Wolpow says, and for “being able to walk away from the equipment at the end of the lease without having to worry about selling it.” 

Conversely, leasing can have a negative impact on imaging providers’ earnings before interest, tax, depreciation and amortization. As Zweibel puts it: “The whole thing is really a matter of balancing one set of advantages and disadvantages against the other—and seeing what’s really most logical in each situation.”

Equipment Life Expectancy 

Whatever the considerations around pros and cons might be, the experts agree that it’s imperative to perform a life-cycle cost analysis looking at all associated equipment expenses, from the beginning of the lease or the date of acquisition to the date the equipment is disposed of. 

“It’s important to understand the magnitude of the investment you’re making in a major piece of equipment,” Wolpow says, “so that you can see the impact it will have on your business.” 

Keep in mind, Montgomery advises, that equipment life cycles often depend on such variables as daily utilization and expected product reliability, which tends to vary by make and model just as cars do. Most original equipment manufacturers (OEMs) say the average equipment life cycle is seven years, Montgomery points out. 

And planning for a seven-year life cycle “is a reasonable approach when determining what will work best for a business in terms of capital-expenditure outlay over the long term,” she says. Using this expectation as a general standard, she suggests, can help many imaging businesses make the buy-or-lease decision while also guiding strategic and tactical adjustments along the way. 

That said, she notes, Scottsdale Medical Imaging is now conducting life-cycle analyses using a five-year formula rather than one based on seven. Montgomery says the move is in keeping with the practice’s goal to pay off its equipment debt as soon as possible and “run at full profit on the equipment for the remainder of the life cycle.” 

Moreover, the costs of (and returns on) service contracts also should be factored into TCO calculations when the lease vs. buy decision is on the table, Montgomery says. Imaging service providers can purchase a service contract through the equipment vendor or a third-party company. 

Bohl says he’s found that some OEMs offer a one-year service agreement at a “fairly aggressive” discount. Likewise, Zweibel says he’s encountered OEMs that may quote a lower monthly service rate to entice imaging service providers into partnering with them on financing.

In general, the greater the detail and the higher the number of contingencies covered, the more expensive the service agreement. So-called “high-level inclusions” can encompass things like uptime guarantees/super-fast repair, full glass coverage on tubes, emergency and weekend/holiday service and more frequent preventive maintenance calls.

“Whatever you do, make sure to look at exactly what’s covered in that service agreement,” Terekhova says. Find out what the service window is, for example, and negotiate how long the acceptable wait time will be if a unit needs to shut down for service. 

“Non-functioning equipment will definitely cost you,” Terekhova says. “What’s the uptime guarantee? What will the additional charges be to get a technician to a remote area to do a repair? What are the miscellaneous costs? Nothing should remain a mystery, or it will be impossible to get an accurate picture of cost to lease versus cost to buy.”

For its part, Scottsdale Medical Imaging leverages a hybrid approach to service contracts that fits well with its practice of purchasing imaging equipment rather than leasing it. Low-tech equipment that traditionally has minimal downtime is not covered by a service contract, Montgomery explains. For this the practice pays for any service calls and parts on an as-needed basis. When it comes to advanced-imaging modalities with lots of technical and mechanical intricacies, though, the practice tends to opt for higher-level service contracts with broad inclusions. 

Partners in Money Management 

The experts cite another common point to remember when evaluating costs en route to deciding whether to lease or buy: Vendors and financing entities can provide valuable input that may swing the pendulum in one direction or the other. Working in tandem with their financing partners, some vendors will generate two proposals. One lays out the cost an imaging service provider will incur if it purchases a particular piece of imaging equipment. The other specifies what the expenditure will be under terms of a lease agreement. 

Whichever payment direction imaging service providers ultimately choose, there’s another determination to make before proceeding to the finish line. That would be deciding whether to arrange financing through the OEM’s financing arm (or the entity that handles its financing, as in the case of Key Equipment Finance) or a third party, like a bank. Montgomery and Bohl report positive experiences with the latter.

“Our experience with lending is that our local bank relationships are strong, and we are able to borrow from them at a less expensive rate than going through the seller,” Montgomery says. “Relationships and the experience your lender has with you are critical determining factors in helping you achieve your business goals from a financial standpoint.”

Still, OEMs and their entities are also willing to be flexible with imaging service provider clients on the rate side. “We have more flexibility on that score,” Terekhova says, “than banks do.” 

Capital Creativity 

Regardless of how imaging service providers pay for their equipment today, change is afoot. New financing options are appearing on the horizon, Terekhova observes. She cites as an example managed solutions agreements (MSAs), which are considered “as-a-service” offerings. Touted as offering additional flexibility to end-users, MSAs typically feature bundled hardware, software services, maintenance services and more, with multiple vendors supplying the products and services offered. They also tend to include other perks, like the ability to upgrade or downgrade equipment or to choose early contract termination at a designated time. 

MSAs are also expected to catch on because they allow imaging service providers to pay for investments in equipment from their operating budgets rather than from their capital budgets. The fire will ignite, according to Terekhova and Wolpow, as lease-accounting changes initiated by the Financial Standards Accounting Board (FASB), a non-governmental accounting oversight organization that maintains accepted accounting rules followed by U.S. businesses, take effect in late 2019. Failure to follow FASB standards puts businesses, including entities that provide imaging services, at risk of being audited by the IRS and incurring fines imposed by the Securities and Exchange Commission.

In keeping with the FASB-initiated lease-accounting changes, most equipment leases, even those considered operating leases, will need to be put on entities’ balance sheets, which will attract attention from CFOs. Consequently, imaging service providers will seek to procure equipment and related services on payment terms that can be viewed as service agreements rather than as loans or traditional leases. 

Moreover, OEMs “are becoming more aggressive” about moving product, Zweibel says. “And in the future, even hospitals that previously bought their equipment may look at alternatives because the radiology department is no longer a cash cow.”

Montgomery says that, as time has passed and reimbursement has continued to decrease, many imaging centers have seen margins shrink. This has led many to keep imaging equipment in use longer than they’d anticipated when they selected, acquired and installed it. 

“In the future, I think our industry is going to need to see more creativity with regard to capital outlays for equipment,” she says. “There may very well be a shift to more leasing models.”