By Scott Schrader
Operating a healthcare facility necessitates acquiring medical equipment that costs thousands of dollars—if not tens of thousands or hundreds of thousands. This amount of capital funding is manageable for some, but unattainable for others. Those who fall into the latter category, however, may want to consider leasing their medical equipment.
An alternative to purchasing or traditional financing, equipment leasing is a very attractive option for entities who need medical equipment but can’t afford a large expenditure outright. Below, we have compiled a medical equipment leasing guide, with everything you need to know for your next equipment lease—including why it may be advantageous over an outright capital purchase.
How Does It Work?
Unlike purchasing new or refurbished medical equipment, leasing does not require a capital outlay to gain ownership. Instead, it operates like a rental agreement in which you pay the owner—the lessor—a set amount of money as lease payments for an agreed term—the lease term. During this period, you can use their assets as if they were your own.
How Long Does a Lease Last?
Lease terms will vary depending on which leasing company you choose. They can be anywhere from a couple of months to a couple of years, but will most likely be between three to seven years. This period of time will typically be shorter than the asset’s economic life, allowing the lessor to resell it at the end of the term. At this time, the lessee may also be able to continue making lease payments under a new contract, which may also include an equipment upgrade.
What Types of Leases Are There?
You will encounter two main types of leases: operating leases and capital leases. An operating lease is similar to renting because you can use an asset for a set period of time without actually obtaining ownership. Equipment obtained through an operating lease cannot be listed as capital and must instead be accounted for as a rental expense. This produces two distinct advantages for lessees:
- Equipment is not recorded as an asset or liability.
- Equipment qualifies for tax incentives.
A capital lease, while similar to an operating lease because the lessor retains ownership of the asset, requires the lessee to report it as an asset. This structure allows the healthcare facility to claim the depreciation tax credit on the asset and the interest expense of the lease itself. This lease model also allows the lessee to purchase the equipment at the end of the lease term for fair market value.
How Do I Pay for a Lease?
Leasing will generally not require a down payment, although it varies by supplier. The structure of the pay schedule will be determined by an agreement between the lessor and the lessee, and payments are usually scheduled in a monthly, semi-annual, or annual basis.
Exceptions exist, however. For example, a single lease payment structure requires the lessee to make the full investment upfront. A step lease, on the other hand, begins with a fixed term and monthly payments. After a pre-arranged interval, the lease payments are adjusted to meet budget requirements.
Is There a Minimum Dollar Value on the Medical Equipment I Use?
Even though medical equipment leasing is most often reserved for machinery with a high-dollar value, there are instances—albeit uncommon—in which a lower-costing device needs to be acquired. In such cases, entities can forge smaller lease agreements.
These agreements can be helpful when you need to purchase many of the same items—for instance, transportation carts or hospital beds. Each individual item may not cost a large amount—but if you need 20 or 30 of the same devices, then it will add up to a large dollar request in your budget.
When Should I Consider Leasing Equipment?
The best time to think about leasing medical equipment is when you are preparing your annual capital or operating budget. After all, this is the time of year when you are best positioned to succeed in building an operating or capital lease payment into your budget. Even so, you should already have a good idea of what new or refurbished equipment you want to lease. It will be equally as important to have a specific time frame for the term and the amount of monthly payments for the medical equipment.
What Are the Lessee’s Responsibilities?
There are certain responsibilities you will take on as the lessee. For example, you may have to pay an annual liability insurance. You may also be held accountable for the asset’s maintenance and repair fees during the lease term, as well as any certification expenses. The leasing company will want the equipment returned in good working condition when the contract ends. When the end of the lease is reached, you will have to return the equipment and may incur additional transportation and shipping costs.
What Medical Equipment Can I Lease?
For the most part, almost every type of medical equipment is leasable, including anesthesiology equipment; respiratory devices; cardiology equipment; imaging devices; and general healthcare equipment, such as hospital beds. If a lease option is not offered, however, you may be able to work something out with your leasing company to ensure you have the equipment you need.
You can also configure your equipment with a manufacturer and have the leasing company purchase the equipment that you select. The lease terms can be set up as monthly payments, with the leasing company then providing you with the new equipment. Remember, leasing refurbished equipment is less expensive than leasing new equipment, and it will allow you to acquire more expensive models at a fraction of the cost.
Can I Upgrade the Medical Equipment I Lease?
Depending on the lease structure, equipment upgrades to both hardware and software can be incorporated into the lease payments to ensure you are always employing the latest technologies. This option will appeal to those who need equipment that routinely needs upgrading, such as computers and electronic devices. You should build into your leasing contract the option to upgrade equipment that you do not own so that your equipment can keep up with new clinical needs. After all, physicians will be more apt to refer patients to your facility if you house the latest technologies.
What Happens at the End of the Lease?
You have a couple of options at the end of the lease period, which are determined by your lease structure and terms. For example, you can return the assets when the lease ends and complete the transaction. You may also be able to continue the lease under a new contract that includes upgrades, or purchase the assets outright at fair market value. All of this will be determined in the beginning of the lease term, before the contract is finalized.
Choosing to lease or buy medical equipment comes with its own set of advantages and disadvantages. A major benefit of purchasing the equipment is that it is yours to keep. This will be more relevant if the equipment in question has a long lifespan and is not at risk of becoming obsolete. The most pressing disadvantage, on the other hand, is obsolescence. You will begin a traditional purchase model with a capital dollar expenditure and a negative return, followed by maintenance costs and depreciation down the line.
Moreover, an outright purchase means that an asset’s total return will plateau as maintenance costs rise and depreciation costs continue. A lease will protect you from this because you do not actually own the equipment. In the end, you will also be spared because the lessor assumes the risk of ownership of the medical equipment. Not only will this ensure more free capital and initial cash flow, but you will also see positive returns from the beginning.
Another advantage to leasing is that you are able to upgrade equipment without capital outlay. Like we touched on earlier, leasing also comes with tax benefits. An operating lease, for example, can be omitted from balance sheets, and a capital lease will allow you to claim depreciation tax credit on the assets and the interest expense of the lease.