Capital Equipment Purchasing

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When it becomes time to purchase costly equipment for an endoscopy or gastroenterology (GI) unit, the considerations are many. What are the best practices for selecting and purchasing capital equipment for these departments? What options are available for cash-strapped facilities?

Stephanie Mearns, RN, MN, is the vice president of patient care services for Century City Doctors Hospital in Los Angeles, Calif. “These are the items I consider. I think it is safe to say this is what most organizations consider as well.

1. Full review of equipment available
2. Budget dollars available
3. Review of the equipment with the MDs for preference and intended use
4. Upgrade potential as new options/equipment becomes available
5. What are other hospitals in your community using? Do they have any of these pieces of equipment? If so, call them and ask them what their experience is with the equipment from the standpoint of ease of use, durability of equipment, service responsiveness when equipment is out of order, willingness to train staff on the use of the equipment, and physician feedback based on literature or colleagues experience.”

The definition of “capital equipment” differs from facility to facility. “This is organization specific,” she explains. “‘Capital equipment’ is generally determined by cost. It could be as low as any item $500 on up. Depreciation is also considered in capital purchases.”

From the Manufacturer

When planning a project for a gastrointestinal surgery suite at Orlando Regional South Seminole Hospital in Longwood, Fla., Berchtold Corp.’s design objective was to “design and outfit a state-of-the-art GI lab to increase staff efficiency and reduce procedure times; to provide capability to perform upper and lower GI procedures without repositioning the patient; to attract key physicians to the hospital; and to maximize space utilization.”

“Berchtold assisted in space utilization, efficiency, and the latest technologies ... all with a high-technology appearance,” states Ellen H. Luckenbach, MSN, RN, CNOR, nursing operations manager, surgical services and endoscopy.

Best Practices

For best practices, “Do a trial with the video equipment. We recommend a site visit to see and physically move the booms. Boom technology varies greatly, e.g., some booms are much easier to move than others,” says Brian Olson, manager of OR planning and design for Berchtold Corp. For financing, there are the options of purchase, lease, and lease to buy. Capital equipment can include video equipment, including flat panel monitors and booms.

“Healthcare providers should look to a manufacturer with a long-standing, proven track record for equipment technology leadership, performance and durability,” says Wynn Blieberg, vice president of sales and financial services for Olympus America Inc. “In addition, they should have confidence in the manufacturer’s representatives as well as satisfaction with customer service accessibility and reliability. Customers should also consider what other options and services a company can provide to help their department run more efficiently and effectively while maintaining a fiscal eye on the overall operating costs while maintaining maximum flexibility. This will allow them to modify, enhance and expand their equipment requirements as patient flow and corresponding equipment needs change over time.”

When considering the purchase of capital equipment, “a team of physicians, nurses, staff members, vendors, architects, and contractors should meet so that all parties concerns are addressed,” says Harold Koltnow, senior product manager for Skybooms at Skytron. “The equipment providers should act as a resource not only for their own product but work with the users to coordinate the project. Observation of how procedures are currently being done and notation of current problems should be noted and solutions worked into the new plan. A key to this committee approach is to have a strong, knowledgeable project manager to gather all of the input and make sure that the concerns of all are addressed, not just those of the most vocal.

“The equipment should adapt to the way you do procedures at your facility. You should not have to make drastic changes to take advantage of the latest technology. If the sales representative does his or her job correctly and gathers the information, an efficient and flexible equipment plan based on your needs will be offered. Visit several companies or installations and ask other users how they like the equipment selected and why. Also ask what they would do differently, what they would add or what they purchased and feel is unnecessary,” he continues.

“Make sure that the supplier is a specialist in the product and its application. It is always easier to one-stop shop, but using one vendor for all pieces of equipment may not result in the best overall solution. Always consider the total cost of operation of the equipment. A low price may not be the best value if frequent service, costly disposables, or duplication of equipment is necessary due to lack of flexibility, which will contribute to overall cost,” says Koltnow.

“Besides the facility design, you want to consider cost of ownership of your equipment,” agrees Bryant C. Broder, ACSP, a senior product manager for Skytron. “Buying the least expensive piece of equipment may not always be the best option for you, so consider all alternatives with that, what the cost of ownership is going to be, what the repair costs of equipment have been. For GI labs in particular — based on my background in central service and sterilization — make sure you have the appropriate facilities to clean and disinfect equipment being used during procedures that are in the room. The equipment doesn’t have to be in the room, but you [should] have the appropriate facility size-wise and appropriate equipment there to clean and disinfect equipment; that way you do not run into problems of cross-contamination. Along with that goes adequately trained staff, and the cleaning and disinfection practices.”

Defining “Capital” Equipment

“Capital equipment includes, but is not limited to, assets with a large dollar cost amount, typically more than $1,000, such as medical and office equipment, computers, office phone systems, furniture, fixtures and other items of similar nature that have a repeated, extended useful life. These can either be purchased outright for cash or financed over time and depreciated on the customer’s financial statements. These are then classified as assets and are reported on the balance sheet along with the corresponding liability if financed. These items can also be leased, in which case the monthly lease payment would be reflected on the income statement as an operating expense, but would not appear on the balance sheet or as depreciation,” Blieberg explains.

“Most facilities agree that capital equipment is defined as a reusable piece of equipment that has a cost greater than a certain amount, say more than $2,000. Since this equipment is expected to have a long period of service, it is important to be sure the product selected not only meets today’s needs but also has the capability to expand or adapt to future technologies,” Koltnow recommends.

“When I was in the hospital, we always had guidelines for capital equipment, and that could be anything. We used to consider anything over $500 in value could potentially be capitalized, depreciated, whether that be instrumentation or equipment management booms or video and data communication systems,” says Broder.

Because capital equipment depreciates, purchasers need to remember to “buy a high quality boom that will hold up over 15 to 20 years,” Olson says. “Regarding video equipment, they may want to consider leasing as an option that includes automatic upgrades, i.e., as technology changes, the customer would automatically get upgraded to the latest and greatest video equipment.”

Financing Options

“Most companies have (internally) a financing department or they can be handled through a third party. They can have a lease to own. There’s another term called ‘bridge to budget.’ We don’t offer that here at Skytron; we have a third party that we can direct people to go to. I know some of our affiliates do have bridge to budget,” Broder explains.

“You want to look at products that are upgradeable, that have a solid platform, so that you’re not obsoleting your equipment,” adds Broder. “Technical support is key, being able to have 24 hours, seven day a week, 365 days a year, support for equipment, being able to access remotely — depending on your equipment — remote diagnostics, for some video and data communications aspect of the equipment.”

“Olympus — through its captive finance arm, Olympus Financial Services® — offers customers multiple finance options that all can be customized and structured to meet a customer’s particular needs or financial requirements. Olympus finance solutions include traditional lease and loan products, sale-leaseback and turnkey project financing as well as our flagship product, Cost Per Procedure®, the preeminent utilization-based financing solution in the healthcare market for flexible and surgical endoscopy applications,” Blieberg continues.

“Because diagnostic and operational performance is essential, healthcare providers should look to an established manufacturer for leadership and reliability. The most important thing to remember is that the value of the equipment is in its use, not ownership. Flexibility and having the right equipment to meet current physician needs is key,” says Blieberg. “It is critical that healthcare providers are able to maintain equipment and service flexibility at all times, allowing them to most effectively care for their patient base while growing their business and improving their services.

Providers should look for equipment that meets their needs today and over the near term while ensuring they have the ability to replace the depreciable equipment at opportune times in the most cost-effective and fiscally prudent means with new or technologically improved equipment. So again, this is where the equipment’s use and not being locked into ownership are important, as leasing provides a hedge against both depreciation and technology obsolescence. That is where a product like CPP® comes in — no capital investment or down payment, no asset or liability on the balance sheet, no monthly minimums, lower monthly payments than ownership, preserves capital, pay as you go (expenses are matched to your revenue stream) while providing an asset/technology management solution as well as end of term flexibility.”

Stephen A. Goldy, financial services manager at Smith & Nephew Endoscopy, offers several suggestions for when it’s time to purchase equipment for an upgrade. “Doctors and patients both want the best. That costs money, but reimbursement for patient care is tight. New equipment requires training, another potential expense. And today’s insurance processes nearly always guarantee a substantial lag between the time service is rendered and when the bill is paid,” he says — all of which may point to an alternative to outright purchase, such as a loan or a lease.

In contrast to high-tech equipment, he counters, “For assets that you plan to keep for the long-term, such as waiting room seats and office furniture, an outright purchase makes good economic sense.” There are some differences between loans and leases, he adds. “A lease offers a vehicle that enables you to match your expenses to the revenue generated by the equipment. A loan is more economical for financing a long-lived asset that is not expected to face great technological changes. A loan is structured under the assumption that the equipment is kept as long as it lasts. Most of the time, this is not the way 21st century medicine works. For most medical institutions, leases make more economic sense.”

Goldy also defines “capital lease” — “sometimes called a conditional sale or finance lease,” he says. “It makes you the equipment owner when the lease is up. Because it has many of the characteristics of a purchase agreement, it is viewed as a capital expense and must be reported on your institution’s balance sheet. You should consider that when ownership is finally transferred to you, the equipment may likely be obsolete. All other types of leases are operating leases (also called financial or true leases). Such agreements usually transfer only the right to use the equipment for a period of time that is less than the equipment’s physical life. Some are structured to include equipment maintenance services and upgrade privileges. From a financial reporting perspective, an operating lease is one that has the characteristics of a usage agreement and also meets all the criteria established by the Financial Accounting Standards Board (FASB 13). Operating leases allow the facility to treat the lease as an operating expense, thereby freeing up precious capital budget dollars for other purchases. Such a lease is not required to be shown on your institution’s balance sheet (capital leases make you the owner of the equipment so your tax advantage is depreciation and the interest paid during the term). Operating lease payments may be 100 percent deductible depending upon the lease type and your company’s financial structure.”

Some leasing agreements allow healthcare facilities to pay for equipment use based on the number of patients treated each month, Goldy adds. “Others use an upcharge to cover the cost of the equipment when the facility purchases products used with the equipment. Both types of financing programs offer good options for facilities faced with the prospect of a gradual increase in demand for equipment. For example, the facility may need to promote its new capability in order to create a steady demand for the procedure. Agreements structured so that the equipment cost matches the actual number of procedures performed work well to address the cash flow challenges of intermittent reimbursement.”

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