growing at a slower rate than the health care sector as a whole,
but there are still strong grounds for hope for the future, reports
Katherine Gregory.
Low risk does not always mean high growth, particularly where
governments are concerned, and health care equipment financing is
by no means an exception.
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While overall health care spending grew by over 20 percent on
average across Europe in 2007, medical equipment leasing grew by
just 6.4 percent over the same period. This is despite the fact
lessors in this context are financing assets for use by an almost
risk free public sector. Furthermore, leasing as a proportion of
health care equipment financing is currently not at a sufficient
level to meet the growing demand in health care equipment
spending.
As a recent study by Siemens Financial Services shows, the value
of capital that is frozen or inefficiently financed in the health
care equipment sector across Europe has risen from €11 billion in
2006 to €13.1 billion in 2007 – an increase of 18 per cent. Frozen
capital refers to capital funding not appropriate for the purposes
it is being applied to, and not delivering enough return on
investment.
One of the reasons for this somewhat sorry state of affairs
across Europe is that, in some countries, health care leasing is
just too complicated.
One senior lessor comments: “In Germany this has always been the
case because of specific funding requirements which has convoluted
the German market – one needs to know whether the hospital you are
lending to will have the funds to pay back. We still consider them
to be quite quasi-public from an underwriting point of view.”
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By GlobalDataAnother problem has been that most health care assets are leased
on lengthy terms. Jeremy Knight, UK country manager at GE Health
care Financial Services, says: “In the past the NHS has had a long
life cycle of health care equipment of eight to 10 years, and
sometimes 10-15 years. The financing required for these long-term
arrangements was one of the downfalls of the leasing market.”
However, while this, as well as other factors, including the
unwillingness of at least one government in Europe – the UK – to
guarantee they will support foundations hospitals in the
eventuality they become insolvent – has inhibited health care
equipment leasing, there is still some hope on the horizon.
Knight remarks that increasingly “customers require shorter
lifetimes and need to renew their equipment”, a move which will
give hope to lessors bogged down by a shortage of liquidity, a need
for improved cash flows, and long leases.
New opportunities
In tandem with this development, new opportunities are arising.
Bundled leasing, which includes maintenance and services, renewal,
turn-key solutions, refinancing, asset remarketing and a range of
other options depending on the asset, is now an essential product
in the health care equipment leasing market, not least as it helps
alleviate the obsolescence risk.
Nonetheless, depending on the structure of different countries’
markets, bundling is not always possible. Also, leasing in the
health care sector is generally being looked upon increasingly
favourably. A study conducted by PwC and Health care Financial
Management Association found 84 percent of hospital chief financial
officers are having difficulty funding capital expenditures because
of technology obsolescence.
Leasing on the other hand allows lessees to constantly upgrade
their equipment and have maintenance and renewal services built
into the contract to ensure a more efficient life cycle of
technological equipment.
“The last few years has seen a sea-change in attitude towards
asset acquisition in the health care sector,” says David Martin,
general manager public sector at Siemens Financial Services.
“Financial tools such as leasing are now viewed as far more
efficient to manage costs and keep ahead of the medical technology
curve as the traditional route of purchasing assets outright.”
Meanwhile, as reported earlier, health care financing grew by
just over 6 per cent last year, although in previous years growth
has been much sharper. Since 2000, medical equipment leasing has
grown by 15 percent year-on-year and constitutes between one and
five percent of the European movables market. There are also other
reasons for optimism. According to the recent Siemens report, over
€1 trillion will be dedicated to European health care provisions
over the next 20 years.
Furthermore, 75 percent of health care expenditure in Europe
comes from public budgets, according to research published this
year by Deloitte titled, Why is the Central European health
care industry so interesting?
Also, as the health care markets shifts increasingly into the
hands of the private sector, then a different approach to asset
finance is beginning to emerge. Whether, however, this will mean
health care leasing will become a riskier business, with less
government intervention in cases of default, is yet to be seen.
Though of course, with lower risks come higher margins. More can
be made these days from health care equipment financing, although
in the CEE markets, as is discussed later on in this special
report, there exists little appetite for dipping toes into this
complex funding area.
