Financing Strategies for Healthcare Technology Equipment

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Financing Strategies for Healthcare Technology
Equipment

• Matthew Dooley
• Winmark Capital

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Questions

• Did you ever imagine 12-18 months ago that our
  economy and credit markets would be in their
  current state?
• How has your organization reacted?
• Can you possibly predict what the economy and
  your business will be like in the next 2-3 years?

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Changing Landscape

• China will be the 1 English speaking nation
• 31 billion searches on Google every month - less
  than 1 billion in 2006
• 4 year tech degree 1/2 of what students learn
  will be outdated by the 3rd year
• Student can expect 3-5 career changes 14 job
  changes by the age of 38
• Top 10 in-demand jobs didnt exist in 2004
• Sony Executive Conference 

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Agenda

• Forces of change drive uncertainty
• Technology acquisition dilemma
• Equipment finance options
• Optimal strategy
• Benefits of a leasing strategy
• Leasing sources / what to look for in a partner
• Accommodating change
• Conclusion

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Forces of Change

• Economy
• Rising borrowing rates, frozen credit markets
• Unemployment and loss of healthcare insurance
• Government Regulations
• What will happen in Washington?
• Reduced payments to hospitals who do not
  successfully implement EHR
• HIPAA, health insurance companies

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Forces of Change (cont'd)

• Organizational Changes
• Growth / Retraction
• Financials
• Declining endowment balances, shrinking balance
  sheets and reduced income
• Medical care and elective surgeries being put off
  (59 of hospitals reported a drop in elective
  surgeries in 08)
• Mergers / Acquisitions
• New services or specializations
• Industry Trends / Competition
• Recruiting / retaining physicians and patients
• Insurance, malpractice reform
• Reimbursements
• Massachusetts
  Hospital Assoc.

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Forces of Change (cont'd)

• Innovation in Technology
• Dependency continues to rise
• Improved patient care and physician demands
• New models are better and cost less
• Rising maintenance costs and increased failure
  rates over time
• Continual software upgrades
• EMR, PACS initiatives

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Technology Dilemma

• Technology equipment acquired today will not
  likely meet needs in the near future
• Better technology at a lower price will be
  introduced - but when?
• When do I make the investment and how do I pay
  for it?

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Acquisition Options

• Ownership Strategy
• Tax Exempt Bonds
• Bank Line / Cash
• Traditional Lease Financing
• Use Model
• True Lease

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Tax Exempt Bonds

• Ownership strategy
• Debt issued to finance special projects
• 2008 - hospitals issued 58.5 billion, 682
  transactions
• Repayment over 20-30 years
• Affordable, costs often fixed, restrictive
  covenants
• Prudent for long-term assets, real estate,
  infrastructure
• Rating agencies maintain negative outlook on
  healthcare
• Weak patient volume and bad debt exposure

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Bank Debt

• Ownership strategy
• Fixed or variable rates
• More flexible but more expensive than bonds
• Optimal for long-term assets
• Pay for 100 of the asset
• Burden of ownership

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Capital Leasing / Loan

• Ownership strategy
• Loan, typically 5-10 year term
• Fixed payment
• Same as bank debt
• Effective for long-term assets, less affected by
  change
• Burden of ownership

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True Lease

• Use / rental strategy
• Lessee gains benefit from use of equipment
• Typical terms are 24-60 months, operating type
  lease
• Lowest overall cost when there is a high
  likelihood that you will want to do something
  different at the end or during the term
• Ability to make changes when business requires it

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True Lease (cont'd)

• Managing obsolescence
• Risk of technology obsolescence transferred to
  the lessor
• Flexibility
• Take advantage of new technologies when the time
  is right
• Budget control
• Predictable payment
• Capital conservation
• Use bank lines, bonds, cash for long-term /
  appreciating assets
• Tax advantages
• Expense payments
• Off balance sheet

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Optimal Strategy

• Type of equipment
• Do I want to own this equipment?
• Why? How certain am I?
• Cost of equipment and maintenance
• Estimated technological life of the equipment
• Next generation will be better and cost less
• Burden of ownership - salvage and disposition
• Move in and out of equipment?

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Optimal Strategy (contd)

• Best use of cash?
• Financial position / credit rating / cash flow
• Cost of capital and access to capital
• ROE and ROI for similar term investments
• Weighted cost of capital (weighted values of the
  cost of debt and return on equity)
• What if I need to make a change?
• Flexible structure?
• How will I dispose of this equipment?
• Am I prepared to take a book loss?

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Finance Partner

• Stability
• Experience
• Ownership (bank, public, private)
• Access to capital / direct
• Make sure the financial commitment is real
• Specialization of assets / industry
• Retain ownership of lease
• Administrative capabilities

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OEM Captive Leasing

• Convenient / low lease appearance
• Teaser rates
• Concerned with selling more services and
  equipment to the hospital
• Typically have a bank / source behind them that
  sells off the lease
• Limits your flexibility by prohibiting you from
  moving to a competitive brand
• Complete control fox in the hen house

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Bank Leasing Company

• Alternative to bank debt for equipment you want
  to own
• Convenient (historical relationship may already
  be in place)
• Do not want the equipment back
• Attractive, longer terms, flexibility less
  important
• Point to point
• Packaged, not customized for the customer or
  equipment

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Independent Lessor

• Brand agnostic
• Allows the ability to move in and out of
  equipment
• May specialize in industry / type of equipment
• Focus on service and administration
• Remove the burden of ownership through expertise
  in equipment disposition
• Lease rates are competitive but may charge a
  premium

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How Winmark Accommodates Change

• Independent of any brand
• do not provide hardware, software or services
• Technology / healthcare equipment focused
• Retain ownership of the leases
• Use own capital
• Experts in administration, equipment disposition
  and overall efficiency
• Customized Leasing Programs

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Conclusion

• Forces of change drive uncertainty and will
  impact healthcare more than ever - impossible to
  know today what your needs will be in the future
• Pressure to reduce healthcare delivery costs will
  continue to increase as will the demand for
  technology
• You likely cannot employ the same technology
  acquisition strategies that you have in the past

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Conclusion (cont'd)

• Understand both IT and financial challenges and
  your options to solve those challenges
• Benefit from the utility of technology, not
  ownership
• Business and technology needs will continue to
  change and evolve implement strategies that
  will offer you the ability to react as quickly
  and efficiently as possible

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Thank you

• Matthew Dooley
• Winmark Capital
• 605 Highway 169 N, Suite 400,  Minneapolis, MN 
  55441  Phone [phone]   Fax (763)
  520-8496 Email mdooley_at_winmarkcorporation.com