In Uncertain Times, Healthcare Sector Financing Becomes an Art Form

by Susan Carol May/June 2010
For equipment leasing and finance executives searching for a remedy to the ills of the current market, the federal government’s mandate 
for the nation’s healthcare industry to update medical records systems is creating a potential multi-billion-dollar cure. This is especially 
true for banks and captives with internal funding sources, strong vendor relationships and deep market knowledge.

While a number of finance providers have left the healthcare finance sector, competition is heating up among those that remain, according to speakers at the Equipment Leasing and Finance Association (ELFA) conference on the topic in March, which attracted 100 attendees.

Executives lamented, however, that it is a complicated industry, especially with all of the uncertainty surrounding how the federal healthcare legislation will ultimately play out. The unprecedented “great recession” has had a big impact, as well, reducing equipment demand by as much as 50% last year, according to Peter S. Myhre, senior vice president of healthcare financial services, at Wells Fargo Bank in Minneapolis.

Many in attendance agreed the market as a whole, or as they knew it, will not return until reimbursement rates are set under the new federal plan. Myhre also suggested that a “new normal” would include some of the vestiges of this recession.

Brian Phelps, vice president of vendor finance group, at US Bank Equipment Finance, said business in the healthcare sector remains solid, but his company has noticed that decisions to lease or finance equipment at hospitals are now being made by administrators at higher levels and take longer, or capital projects are on hold altogether. Both Phelps and John Korte, director of sales, spoke of the need to dig deeper with due diligence to consider how the facilities are organized, where the equipment is located, the potential for errors or omissions and probability of lawsuits, future regulations on use of equipment and certification of users. They also think funders should be more cognizant of the impact of political changes.

John Beville, senior vice president of sales in equipment finance and leasing at SunTrust in Atlanta, said the biggest immediate opportunity is in the systems that medical providers need as soon as possible. At the same time, however, systematic acquisitions need to be made not just to tap federal stimulus funding, but to improve and extend remote care, work more efficiently and collaborate with an increasing number of medical providers throughout geographical regions and beyond.

Chief hospital administrators at this summit said they are seeking the stimulus funding to install the electronic healthcare record (EHR) systems referenced earlier, that will meet “meaningful use” criteria. Fortunately, they appear receptive to various financing options. If such systems are not installed by 2015, hospitals will be penalized with reduced Medicare and Medicaid reimbursements. Already faced with declining margins and revenues due to the economy and competition from entrepreneurial stand-alone medical centers, they say the financial stimulus funds are welcome.

Ted Drake, senior vice president and general manager of healthcare at Siemens Financial Services, Inc. (SFS), said healthcare financing executives haven’t “cracked the code” on electronic health records. He explained financial experts need to be able to assure themselves that the hospitals or medical providers will be able to fully meet the requirements for stimulus funding. Without such assurance, he said, one is limited to clients that already have the cash flow to cover debt. In addition, “meaningful use” is still being defined. As it is currently written, Drake said, it appears to be an all-or-nothing proposition. “My sense now is that it will probably be modified to consider funding while progress is made toward the requirements,” he added.

Nevertheless, EHR financing presents tremendous market opportunities for those who can structure transactions appropriately. It is estimated that only 20% of doctor groups and 10% of hospitals have electronic record systems in place, according to Todd Underwood, global marketing director of healthcare, of De Lage Landen in Wayne, PA.

Furthermore, Steve Riggs, De Lage Landen global healthcare president, said EHR is a $32 billion market globally and a top-growth initiative for his company. The key to success, he says, is in negotiating vendor partnership contracts that benefit both parties, while addressing the underlying complexities of financing software and managed service agreements. “This is not your typical vendor finance opportunity,” Riggs explained. “There is a high soft cost component and minimal hard collateral.”

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