An HIT Moment with ... is a quick interview with someone we find interesting. Brad Swenson is VP and national healthcare leader for Winthrop Resources Corporation of Minnetonka, MN.
It’s really about the right tool for the right job. I’ve seen a segment of healthcare with a bit of one size fits all mentality – hospitals putting most everything on long-term revenue bonds, regardless of the estimated life or use.
I think especially today, with the uncertainties in the economy — capital markets, healthcare reform, future stages of Meaningful Use — cash preservation is an important part of any strategy. Many hospitals have strained days cash on hand and put themselves in jeopardy of tripping bond or bank covenants.
Finally, let’s not forget one of the most important benefits of technology — enhanced efficiencies. Whether we are talking about healthcare providers or other non-healthcare segments, technology can help us more efficiently deliver care. Adoption of these new technologies cannot be put on the back burner. Healthcare must embrace technologies to more effectively deliver care, as well as improve patient safety and clinical outcomes.
In an age of cloud computing, decreasing hardware costs, and shorter refresh cycles, should hospitals consider buying and maintaining technology as a utility rather than as ongoing individual capital purchases?
Every hospital and project is going to be different. It really depends on how the forces of change’may impact the life of each individual asset.
For example, point-of-care devices in the hospital. I’ve seen a strong majority of hospitals change directions on the types of devices based on clinician preferences, software vendor requirements, network infrastructure challenges, and patient room real estate. Other technologies we are seeing that have a high propensity to change are traditional IT technologies and many clinical or lab technologies that are impacted by the ripple effect. The higher the propensity for change, the more a utility model such as rent, lease or hosting makes sense. These tools provide a great way to create additional agility within a hospital’s overall technology strategy.
A utility model offers some attractive benefits:
- Predictability and consistency of payments — no large capital infusions to catch budgets or the board by surprise.
- Lowering maintenance fees on older equipment.
- The most modern equipment to be on the ground and in use by your staff.
- The benefit of technology comes from its use, not from owning it.
- Technology is a unique asset class that depreciates rapidly and obsolesces quickly, not a type of asset that lends itself to investment / ownership. These types of assets should be leased or rented.
- Predictable end-of-life technology disposition strategy.
What potential accounting benefits lead hospitals them to engage your services?
I’ve never met an IT leader who enjoys going back to the CFO to request dollars for unbudgeted or unplanned items, even if it was caused by unexpected change. Healthcare CFOs are challenged in making ends meet on very thin margins.
They also need to avoid penalties associated with violating bond covenants. To date, many hospitals leverage off balance sheet financing to reclassify the costs as an operating expense since liabilities do not have to be reported because no debt or equity is created. This does not negatively affect their bond covenants.
The key difference is that with an operating lease, the asset stays on the lessor’s balance sheet. The lessee only reports the expense associated with the use of the asset (i.e., the rental payments), not the cost of the asset itself. Another benefit from this type of accounting treatment is creating liquidity while avoiding leverage, thereby improving debt to equity ratios. New proposed accounting changes may negate off balance sheet classification, but for now, it remains a strong benefit.
The accounting benefits are only one of many advantages of utilizing a true leasing strategy. Others include the ability to:
- Lower the financial and technological risk associated with owning assets that rapidly change and are consumed.
- Utilize cash and capital for strategic and organic growth and purchases of long-term assets.
- Maintain or increase competitive advantage.
- Increase patient safety, quality of care, and efficiencies in delivering care.
- Simplify the acquisition, deployment, and management of technology assets.
HITECH incentives are accelerating purchase cycles, but require significant upfront capital investment in hardware and software long before the federal checks will arrive. What programs do you offer to help them meet the federal deadlines while avoiding the capital crunch?
I refer to it as the Financial Road to Meaningful Use. By now, most facilities have an estimate for what their MU incentive will be and when they will receive it. By mirroring this incentive estimate to a lease payment stream for applicable EHR components, a very nice, customized financial strategy can be created.
Many so-called leasing companies are mere brokers who are constricted in any sort of customized financial strategy such as the one just described. This is further complicated when a change event appears in the healthcare provider organization and their agility is negated — think home mortgages.
Ultimately, the common wisdom of “use the right tool for the right job” applies. Hospital CFOs have multiple financial tools to utilize. Most simply, long-term assets should employ financial tools that give up flexibility for low-cost, long-term commitments. Technologies that a provider organization has identified as susceptible to change should utilize shorter-term, more flexible financial strategies.
The consumer housing market changed after the financial crisis, causing many people to question the traditional wisdom of buying vs. renting an asset whose value won’t necessarily increase. Are there lessons learned for the technology market?
I think one needs to consider the overall dynamics of the current environment, which is highlighted by the fact that things are changing more quickly and the outlook is shorter and more fluid. The lesson for me is twofold. In the past, one just assumed that buying was the end-all, but I believe you always run the numbers, especially in today’s environment. And secondly, there should be some value placed on flexibility. Even though it is subjective, it should be represented in the numbers.