News emerged this month, through research undertaken by GE Capital, that European hospitals are looking to leasing to see them through hard times. Brian Cantwell speaks to GE’s head of health care finance team Peter Krause to find out where the opportunities lie
The way hospitals are funded was fundamentally challenged by the effects of the global financial crisis and the measures of austerity implemented by governments across the globe, according to a report put out by the European Association of Hospital Managers and GE Capital.
Europe, traditionally the preserve of public hospital funding systems, has seen hospital administrations under "increased pressure and scrutiny" to save money, according to Heinz Kölking, president of the European Association of Hospital Managers.
"Health and economics, in this sense, form a particularly sensitive combination. Harmonising both in the interest of patients is the task of hospital managers across the world," Kölking writes.
But while there is pressure, from every crisis comes opportunity, argues the report.
To deal with budgeting requirements and a change in budgeting behaviour, asset financing is on the rise across international health care providers in both public and private hospitals.
The way hospital managers spend, from a lot on capital infrastructure purchasing over a short timescale, to leased options providing smaller initial outlays and a long payback period are what Kölking calls "efficiency gains".
What does the research say?
GE’s research, based on anonymous responses from 382 hospital managers across Germany, France, Italy, Japan, Switzerland, Spain, Australia and the UK, found one-third of all public hospitals around the world will look at leasing options the next time they plan to buy equipment, followed by traditional banks (30%) and specialist medical lenders (25%).
GE said 43% of hospitals employed financing tools, such as asset finance, to fund purchases of equipment last year, with seven out of every 10 hospital decision-makers likely to use the same or more financing as the previous year for future investments.
The report said 18% of the managers expected to fund more than 60% of their equipment spending with financial tools.
Among private hospitals, banks appear as the preferred financial partner (42%), followed by specialist lenders (29%) and leasing providers (26%).
Peter Krause, head of GE Capital’s health care financial services team, says hospital managers were remaining open to different funding possibilities.
"It’s very encouraging for lessors that there are bullish hospital managers who are very positive about the future," says Krause. "The macroeconomic environment in Europe is still driven by austerity measures, but it’s good to see positivity because with it comes investment and funding opportunities for all of us.
"Europe is predominantly a public health care driven system, so to see that public hospitals have a very keen interest in leasing solutions is very encouraging, and is a great opportunity in the future.
"When it comes to what type of equipment is going to be funded, it’s interesting that outsourcing will continue to play a big role, and any solution that helps processes is of keen interest to the hospital managers."
Growth of leasing as a service
Underlying the change in opinions of hospital managers about their feelings on funding, which in the face of public funded bodies pulling willingness for infrastructure commitments on an upfront purchasing, came the secondary services that hospital managers were valuing, says Krause.
"Lessees no longer expect leasing rates. They expect a unitary charge that bundles everything together, fixed over a longer period of time – that is a typical lease. It’s a different animal, and the benefits are striking. Managers still have planning security for their budget, but on the other hand if a lessor can structure a management equipment service contract intelligently, it gives managers all the flexibility to swap equipment or to change equipment; to increase if they need more in the future. Managers aren’t limited to what they agree on day one. From that perspective leasing products give security that appeals to hospital managers, but provides the flexibility that managers require."
Exceptions to the rule
The difficulty with an internationally focused report is the prevalence of exceptions or, at the very least, a need for geographical variance; nowhere truer than the system for acquiring medical equipment in France.
"The purchasing process in France is different to the other European countries and that makes it unique," says Krause.
"In France we see a strong rise of purchasing agencies; public hospitals that team up, partnering with a centralised agency that makes acquisitions of equipment on their behalf, which is true for the financing portion too. The third party sources equipment and sources the funding; it happens in a standardised way. Here a loan product sits better, managers are mindful of quotas rather than tailoring a lease, especially an operating lease which is difficult and more complicated to compare to a simple purchase."
Lessors who are specialist in the field will win through, according to Krause, with the pressure on managers to keep processes clean and costs budgeted for, which leans towards an all-in-one packaged product.
"Hospital manager are keen for assets that help them improve their processes, and solutions that are completely outsourced. That means for funders that it’s not just enough to finance a box, you need to look at this holistically," Krause says.
"You need to understand how the box fits into the medical process and what kinds of improvements are being made. If you are a universal lessor you might have challenges understanding the dynamics of the sector. In this industry, health care expertise is a requisite to structure successful transactions in the hospital space. And you see this also in the funding chapter [of the report] where preferred financing providers, specialised medical lenders, are number three: they are in high demand.
"When it comes to outsourcing, you have to realise that the contractual party might not necessarily be the hospital but a third private party in between, and you must understand the contract and payments structure between the hospital and outsourcer."
This is not to say that the health care space isn’t becoming competitive as the leasing option becomes more attractive to hospital managers.
"We see more and more players moving into the health care leasing space," says Krause.
"It’s an interesting sector with fewer default rates than other industries, with interesting technologies.
"Patient demand is going to increase in future with the ageing society. In the future there will only be more demand for proper health care."