Technology strategy and the balance sheet 3 points to consider: what are your strategic objectives for your technologies? How are you managing them? And how are you funding them? You should have a ready answer for all these questions

Healthcare Financial Management, May, 2005 by David J. Waldron

* Evolving IT and medical technologies that are critical to execution of the strategic business plan (and that will be supported by life-cycle management programs discussed earlier) are funded with operating leases. This approach replaces the traditional reliance on long-term bonds with a pool of operating lease capital--an approach with several additional new benefits for the institution beyond the immediate off-balance-sheet accounting treatment benefit.

Strategic Use of Operating Leases

Operating leases are a taxable source of funds with an inherent cost of capital that is usually more expensive than tax- exempt debt. However, the difference in cost of funds is more than offset by the residual investment held by the lessor and the opportunity cost of not using an operating lease to facilitate technology investments and to drive technology life- cycle management programs.

Already some early-adopter not-for-profit hospitals have acquired the use of equipment by means of operating leases. Typically, these situations have been opportunistic uses of operating leases as a capital tool. Examples include urgent asset acquisition that is outside the capital expense budget and year-end offers from technology vendors that are simply too good to pass up.

If operating leases are to become a stable element of the capital structure in a "balanced" balance sheet, such opportunistic approaches are no longer adequate. Instead, a committed strategic leasing line of credit should be arranged that the hospital can incorporate into its strategic capital planning process and can then rely on as an additional source of capital.

Benefits from strategic operating lease lines of credit include:

* The opportunity to drive technology life-cycle management programs specific to selected, critical service lines. In this way, it is possible to execute five- or 10-year strategic plans knowing that the required capital is committed and ready for use year after year for each service line.

* The ability to upgrade, refresh, or replace any technology item in the lease line at any time when it makes good business sense to do so.

* The ability to make operating lease payments from cash flow generated from ongoing operations. Utilization of critical service-line technologies identified for reinvestment by the technology life-cycle management team can help generate cash flow for ROI and lease service.

* The ability to manage the transition from a traditional balance sheet to a "balanced" balance sheet using financial engineering such as sale and leaseback arrangements

A New Approach to ROI

One management benefit that accrues from an operating lease program is a new approach to ROI analysis--one that is based on monthly cash flow rather than cost of capital. Here's a look at the distinctions between the two approaches.

Under the traditional cost-of-capital approach, the internal rate of return investment model looks at the following cash outflows:

* Capital outlay day one

* Cost of capital

* Operating costs