Manufacturers, hospitals cooperate on imaging equipment acquisition - diagnostic imaging equipment manufacturers establish consultative relationships with hospitals

Healthcare Financial Management, Oct, 1993 by Michael Sullivan

COST CONTROL

In the past, some diagnostic imaging equipment manufacturers offered "boiler plate" financing strategies to healthcare organizations. Today, however, many employ representatives with backgrounds in finance and train them to work with hospitals to develop financing strategies appropriate for the organization. This consultive relationship allows equipment manufacturers to create customized financing plans to fit a hospital's individual needs. For example, radiologists and financial managers can now work with manufacturers' representatives to determine which imaging equipment would be the most appropriate and cost-effective for a particular hospital. Manufacturers' representatives also may consult with the hospital's strategic planners to determine the most appropriate piece of equipment to buy and to arrange financing.

Increased competition, declining profit margins, limited access to capital, and greater government constraints on reimbursement have made it more difficult for hospitals to acquire capital equipment. As a result, some equipment manufacturers are adding personnel to their financial staffs or, in some cases, developing in-house financial departments with the goal of creating consultative relationships with hospitals. Through collaborative relationships with hospitals, the manufacturers are able to offer innovative equipment financing plans that can help conserve a hospital's cash reserves, enhance its operating margin, and improve its financial ratios.

With further changes expected in Medicare capital pass-through rules, reimbursement levels, and overall health care costs, it is likely that such manufacturer-hospital financial relationships may become even more common capital equipment acquisition instruments, as vital for the manufacturer as for the hospital.

Historical perspective

The working relationship between manufacturers and hospitals has changed significantly over the past decade. Before the implementation of the Prospective Payment System (PPS) in 1983, for example, imaging equipment manufacturers offered serviceable equipment designed for specialized applications. But PPS changed the market. Purchasing decisions that were once driven almost exclusively by physicians expanded to include the views of hospital administrators, whose opinions regarding the necessity of new equipment often differed from those of clinicians.

In the diagnostic imaging field, for example, radiologists typically decided to purchase equipment based on its perceived clinical utility. But as formerly generous cost-plus reimbursements diminished after PPS implementation, the radiology department became a cost center rather than a revenue producer. As a result, proposed diagnostic imaging equipment acquisitions were subjected to increasing scrutiny. Many cash-poor hospitals had to defer the purchase of new imaging equipment and thus lost outpatient market share to diagnostic imaging centers with the latest technology.

Even as the inpatient population census declined, however, the cost of caring for inpatients continued to increase. Moreover, bond ratings dropped and debt became both more difficult and costly to acquire, adding to the reluctance to make major equipment purchase commitments on the basis of physician recommendations alone. Financing also became a more problematic issue as financial managers searched for ways to conserve cash and strengthen their balance sheets.

Many hospital executives realized that the decline in inpatient days made it essential to increase outpatient revenue, including that generated by diagnostic imaging services. But to attract outpatient referrals, they had to find the resources to offer a competitive array of newer imaging technologies. The expense incurred in buying state-of-the-art equipment could be partly offset by attracting more inpatients due to the hospital's growing referral base and the hospital's enhanced reputation for providing quality patient care.

Caught between the imperative to acquire costly new equipment at a time when balance sheets were softening, hospitals became more aggressive in evaluating essential needs and negotiating favorable financing terms.

To optimize the use of available funds, hospitals began to institute strategic planning and other financial management techniques. In some cases, that meant that capital acquisitions were limited to those that would contribute most directly to achieving the hospital's mission. Capital budgeting, and capital equipment rationing techniques, became a commonplace for most hospitals.

Manufacturer response

In response to growing capital purchasing restrictions, some manufacturers expanded the role of their representatives. They hired consultants with expertise in equipment financing and offered their services to hospital financial managers and physicians. Once retained by a hospital, a manufacturer's consultant initially reviews the hospital's patient demographics and usage patterns and discusses them with the hospital's strategic planner and financial manager. Procedural volume and patient mix projections are constructed using local, regional, and national epidemiologic and demographic data. These projections can be used to predict cash flows. The quality of the data provided based on demand projections will affect the accuracy of hospital cash flow projections--a major factor in acquisition decisions.