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April 5, 2019updated 22 Mar 2019 3:04pm

Medical technology: a cleaner bill of health?

By Christopher Marchant

The healthcare sector is constantly at the forefront of technological development, dependent on the latest innovations in improving and saving lives. Leasing can be an effective resource for providers when maximising their cost-efficiency and, ultimately, their effectiveness. Christopher Marchant speaks to market experts about its continuing potential.

With equipment such as an MRI machine costing anywhere between £150,000 and £3m-plus, leasing is an obvious pathway to ensure these technological developments can be accessed as widely as possible.

“First of all a leasing company really needs to understand what the customer issue is, and what the real needs are from a hospital or healthcare perspective. The technology and the resulting expenses in healthcare will surely grow, and there will be more requests for finance activities and investment as a result,” says Thorsten Arp, healthcare lead at Société Générale EF.

Chris Wilkinson, head of sales for healthcare and public sector at Siemens Financial Services in the UK, notes that what particular pieces of medical equipment that can be most ideal for leasing is an ever changing process. “For instance, blood-analysis equipment, one of the larger estates of equipment utilised by the National Health Service (NHS) in terms of volume, currently tends to be funded via rental contracts,” he explains. “However, this may well change as amendments to the IFRS accounting standards could cause these contracts to be reviewed.”

In another instance, Dasos Kirtsides, head of healthcare at Shawbrook Bank, identifies an emerging market in proton beam therapy, a form of cancer treatment in which high-energy beams target diseased tissue. Wilkinson raises the increasing need for MRI and CT scanners in veterinary care, while dentistry is an established sector that could also see further potential for asset finance.

An area in which there is a commonality of interest across the leasing professionals LL speaks to is diagnostics, and the expensive resources necessary for this critical task of identifying specific illnesses and physical ailments at the earliest possible opportunity.

“There is an enormous amount of business to be done in diagnostics, as evidenced across the London and South East region [of the UK]. Demand is driven by the pursuit of better patient treatment and care by making sure you have the right equipment to detect any health problems in the first instance,” says Moazil Miah, corporate development director at Lombard.

Ariane Govignon, global head of the healthcare market at BNP Paribas, details specific diagnostics equipment. “There are now wearable devices that can monitor chronic conditions remotely, and also keep track of patient’s general health state, potentially providing a heads-up on ailments,” she says.

“As the technology is changing quickly and the budget of healthcare professionals remains under pressure, a good solution for them is to choose a renting or leasing solution.”

As in diagnostics and across healthcare, leasing also prevents obsolescence of equipment, with hospitals and clinics able to replace equipment at the end of a lease rather than be burdened with items that may quickly become outdated. “We can see products that stay at the cutting edge for just 18-24 months before an improved model is rolled out,” notes Govignon.

A debate that has raged for decades in both the US and Europe is over how healthcare should be approached, something that has historically boiled down to whether patient care should be provided through private health services or government-run hospitals and clinics.

For Miah, this is an outdated binary. “The public-versus-private debate was once like a sibling rivalry, but should now be considered as long gone,” he says. “The two arms have got to coexist. The public sector is busting at the seams, so you need a private sector to support and vice versa.”

In few places is this debate more pronounced than in the UK, between a perennially stretched NHS and privately run alternatives such as Bupa. The NHS product in particular can provide ample opportunity for leasing, with 29% of the organisation’s MRI equipment over 10 years old.

With private hospitals and service providers, there must be a consideration of ‘permitted indebtedness’. “Within the financial packages that a lot of the mid-sized to large corporate operators have, there is still a limited amount of permitted indebtedness to allow those businesses to go down the leasing route. As an industry, we just need to be more visible, we need to join the dots a little bit more,” says Miah.

However, at present Lombard does not provide healthcare leasing directly to the NHS. Miah explains: “There are a specific set of hurdles that you have to go through that currently make it more challenging. However things are changing, and there is every chance to work more directly with the NHS in the future.”

The NHS treats around 1 million patients every 36 hours, while carrying an annual budget of £125bn, meaning such a behemoth cannot be overlooked when leasing healthcare equipment in the UK. Through its interlinking of the public and private sectors, it means that the needs of the general public are also incorporated by Lombard’s approach.

“We have found a half-way house that works quite well for us, in that the private operators that we are playing ball with will have NHS contracts. Inevitably we are serving that section indirectly through those intermediaries,” says Miah.

Echoing Miah’s understanding of the beneficial role that leasing can play for the NHS, Wilkinson adds: “Both public and private sector hospitals engage with leasing as a means of attaining new equipment without impacting cash flow. For the NHS, leasing can help trusts manage already strained budgets while addressing increasing patient demand. The financial losses suffered by NHS trusts are likely to restrict capital investments, meaning they are exploring other funding options, like leasing, to maintain a consistent level of patient care.”

These quandaries of leasing for the public or private sectors are by no means limited to the UK. Increasingly, in recent years, public hospitals across Europe have also been more likely to court financing options in light of increasing budget constraints.

Arp notes: “In different markets there is a separate frame for the finance. Today, public hospitals trying to summarise their investment needs issue one big tender process where financing is also requested. They are using synergies by combining the investment needs for a big package.

“Private organisations were continually interested in finance solutions because they always had the full course to optimise their situation, their operating expense and to reduce capital investments; therefore, they were already much more open to using leasing solutions.”

Outside the public-versus-private debate, conversations within leasing on the dominant forms of product to maximise provision to the healthcare sector can take ascendancy. This is for good reason, with Siemens Financial Services estimating the volume of capital finance that could be “unlocked” from key equipment and applied to urgent operating finance requirements could be $1.9bn (£1.4bn) in the UK alone.

In terms of the specific products, Wilkinson says: “Operating leases, whereby experienced lessors manage the residual value positions of assets, will continue to be popular. Financial services providers that have an in-depth understanding of healthcare technology and its applications across the sector are vital to providing this financing solution.

“Similarly, financing agreements are increasingly being set up where payments are predicated on the expected healthcare benefits, or ‘outcomes’, that the technology makes possible, known as pay for outcomes. Savings or gains from access to the technology are used to fund monthly payments, making the technology financially sustainable for the healthcare organisation.”

While physical equipment is at the core of healthcare leasing, a relatively untapped market revolves around the expensive process of getting items patented and regulated. This may soon change, however, as Miah notes: “Lombard has a very unique product in this marketplace called intellectual property funding, which is part of our technology services mandate.

“This is a move that makes a lot of sense for us. Much of the kit that is being used by the private sector will be run or supplemented by intellectual property in the form of proprietary software that they have developed. Many of these things are ultimately delivered by the intellectual capital of the investment that they are making, which could be a very appropriate fit for finance.”

In contrast, Arp says: “If you’re discussing healthcare leasing or equipment leasing in healthcare, a point for discussion is always variable payments. That was already being raised one or two years ago; now, with the increased availability of data and connected systems, there is greater opportunity to analyse the behaviour of a user for the equipment. With this in mind, leasing companies can create much more flexible solutions.

“Finance companies have not taken any volume risk previously, but I think, based on data, there is also a shift here. If you have the data, you do not need any discount from the medical supplier – you can manage a volume risk on your own.”

At Shawbrook, the leasing products it offers intertwine with its future strategy. “As a company there is a wish to go both broader and deeper into the market,” says Kirtsides. “This means taking leasing products into new sub-sectors, working with suppliers and vendors on tailored funding programmes for their clients, and expanding our range of funding solutions to address requirements beyond asset acquisition. This includes the significant capital outlay associated with operating a care services business.”

The benefits of leasing for the healthcare sector can be approached from numerous different angles. In 2018, Shawbrook Bank increased new lending by 25% in the area, and increased headcount in the team by 50%. Leasing companies focused on the healthcare sector in the UK and Europe are often experiencing similar levels of growth.

Outlining the mutual advantages of healthcare leasing for BNP Paribas, Govignon says: “Firstly, leasing gives the hospitals and clinics the ability to spread costs and budget more effectively with predictable, manageable costs. More resources can therefore be spent on improvements in other critical areas. There is also a greater flexibility thanks to a variety of finance options; assets can either be purchased over time, or simply rented for a desired period.

“Furthermore, maintenance costs and other value-added services can be included in a repayment plan. There is also the area of tax efficiency: rental payments count as a business expense for healthcare providers in the UK and France.”

Wilkinson advocates a solutions-based approach, explaining: “An individual healthcare organisation’s precise circumstances, both technological and financial, can be taken into account to create tailored value partnerships. This approach reflects the developing trend in healthcare towards outcomes based medicine, expanding access to precision medicine, transforming care delivery and improving patient experiences, all enabled through digitalised healthcare technology.”

According to Arp, the medical device market is worth $400bn worldwide. It is undoubtedly a phenomenally large sector, and one that Société Générale has no intention of approaching alone. “The leasing industry is always having to invest and to develop different financial products,” he notes. “We also have to explore ways of finding solutions together with both a supplier and with the hospital.”

The need for collaboration is echoed by Miah. He says: “One of the things we particularly pride ourselves on is going to the marketplace as one to provide funding solutions – whether that be RBS or NatWest and Lombard or any of the other bank of brands we work in collaboration with.

“As an asset funder, the marketplace around us is changing. What was previously primary for us in terms of funding hard pieces of steel and kit is becoming more fluid, both in terms of potential partnerships and the types of knowledge based assets we may be funding.”

In the words of Govignon: “Technology moves fast in the medical world.” There will always be potential for leasing in the healthcare sector due to the expense of the equipment needed to keep people healthy.

The constant demand and pressures of healthcare companies to meet their targets will always offer both public and private practices motivation to procure equipment without potentially flatlining in the process. As equipment improves and longevity increases across the Western world, this fundamental equation cannot and will not change.

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