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World Leasing Yearbook 1994: United States

Health care reform is finally coming to the United States.

It may not arrive this year and its final form is still unclear, but one thing is certain: The healthcare industry is not waiting for reform to capitalize on the benefits of leasing.

The long-anticipated reform is expected to provide benefits to the leasing industry.  It will be good in the short-term because uncertainty about the final shape of reform will lead health care providers to conserve their capital. That, of course, means that many will opt to lease expensive equipment rather than buy it.

More important, the leasing industry will benefit over the long term because all of the proposed reform options suggest that reduced payments to providers will become the norm. And that, again, means providers will strive to get the most mileage possible out of their available cash. In short, they will lease because, in many cases, they will not be able to afford to buy.

In addition, the U.S. will eventually find a way to provide healthcare to the millions of people who currently have no medical insurance or are underinsured. Naturally, this will mean a huge new demand for equipment which is increasingly likely to be leased.

The case for reform.  Even before assuming office in January 1993, President Bill Clinton promised to make healthcare reform a major agenda item for his Administration.  The impetus for reform was an issue of both cost and accessibility.

With healthcare accounting for 14% of the country's Gross National Product and growing at two to three times the rate of inflation, the US. can no longer afford to sit by and watch healthcare costs spiral out of control.  Indeed, the Congressional Budget Office estimates that healthcare will account for 23.6 percent of Federal Spending by 1998.

Additionally healthcare costs represent an ever-increasing portion of public budgets and contribute significantly to the deficit.  Employee health benefits, which often are at least partially underwritten by employers in the U.S., are hampering the profitability and world competitiveness of U.S. industry.  And the constant cost-shifting that goes on among payers undermines any efforts to control costs.

The hard financial facts are underscored by the human toll, as well.  Today, approximately 35 million Americans -- representing 15 percent of the population -- are uninsured, placing routine, preventive medical care out of their reach and straining the system when emergencies force them to seek medical attention.  Another 50 million Americans remain underinsured.  And for those who do have adequate health insurance, many find that the need to protect their benefits -- along with the common practice by insurance companies of precluding "pre-existing medical conditions" from coverage -- limits their ability to change jobs.

U.S. culture demands that citizens have roughly equal access to medical care, so most Americans are offended that 85 million people -- about a third of the population -- either have no health insurance or are underinsured.

Ultimately, therefore, these people will be covered. And however Americans decide to foot the bill, the impact of a 50% increase in the number of people eligible for medical care will be dramatic. Universal coverage should cause such a marked increase in demand.  However successful the U.S. drive for greater efficiency, the need for new health care facilities, trained people and equipment can only grow.

The issue of access will be handled last, however. Those currently outside the system are mostly the poor, who have less clout than their more affluent fellow citizens who are receiving care but are unhappy about its cost. Plus, as a practical matter, the reformers want to see if they can control costs before adding millions of new people to a system which is already a major contributor to the U.S. budget deficit.

The reform scenario.  Details of the possible reform have been slow to emerge, but discussion seems to center around one common theme, managed care.  Managed care refers to almost any form of health coverage that limits the patient's ability to choose any provider and self-refer throughout the system or providers. In turn, medical providers agree to treat patients for a pre-set, discounted fee.

A reformed healthcare environment is likely to rely upon purchasing cooperatives, comprised of large independent employers and small businesses and individuals who band together for purchasing leverage, to conduct all health care buying.

On the "selling" side will be integrated provider/insurer organizations, including hospitals and physicians, who will compete for business on the basis of price and outcome.  The proposed system is intended to reward the most efficient insurers and providers.

Among the first to feel the impact of reform are likely to be hospitals, which will be prodded to join with physicians and other providers in some form of network that will provide all the services a patient needs for a pre-paid fee.  These networks would then compete against each other in a new, "managed competition" environment.

It is hoped that such a system will provide savings similar to those experienced by states that have tested managed  competition.  Such a system has been used since 1982 in California, where about a third of the population now belongs to HMOs.  Healthcare costs in that state have risen at rates substantially lower than the nation as a whole

Leasing in a reformed environment.  Clearly, healthcare reform will drastically change the way medical care is delivered and paid for in this country.  It is also expected to offer new opportunities, as well as challenges, to the leasing companies that serve the healthcare industry.

Hospitals comprise about 65% of the U.S. leasing market, but have historically been a hard sell because most administrators prefer to buy their equipment outright. According to a recent survey, more than 80 percent of equipment acquisitions by hospitals were purchases.

To those who understand leasing's advantages, the preference for purchasing may seem irrational. Nevertheless, it exists and has been a major marketing challenge for leasing companies who have had to persuade and cajole hospital administrators to do what good sense should have dictated.

Hospitals' new financial pressures may cause many administrators to look at leasing more seriously; many hospitals simply won't be able to afford cash purchases. Nothing focuses a hospital administrator's attention quite so impactfully as a shrinking reimbursement rate.

On the other hand, declining revenues mean that financing will remain a major issue. Because providers anticipate having less cash, more may insist on unconventional terms in their lease agreements. Leases tying the size of payments to the number of procedures actually performed might become popular if, as expected, reform includes includes some use of capitation, the practice of paying a fixed sum to providers for each enrollee.

Lessors can make money on such deals but, of course, they entail more risk. Profitability would depend on having an intimate understanding of both the health care industry and an individual client's business. And since not all lessors have the expertise to acquire that understanding, the number of leasing companies in the field will probably continue to shrink.

Additional opportunities.  Hospitals are not the only healthcare organizations likely to be affected by healthcare reform.  Leasing companies continue to find free-standing medical centers to be highly receptive to leasing, in part because the equipment is so expensive and also because many such centers are professionally managed.

Future growth of free-standing surgical centers is expected to be significant, further increasing the need for new equipment.  One leading healthcare publication, for example, predicts that as many as 80% of current hospital procedures are candidates to move to out-of-hospital treatment sites; specifically, 56 million procedures could move to imaging centers and another 15 million could be managed from surgical centers.

Part of the attractiveness of free-standing surgical centers as a market is due to a recent law that permits their continued ownership by physicians.  In an effort to address conflicts of interest that could lead to excessive billing, regulators and legislators have taken steps to prevent or discourage physicians from referring patients to healthcare organizations which they own.  But because free-standing surgical centers were exempted from the list of prohibited health services, they likely will enjoy continued growth, serving as a fertile market for lessors.

Other developments in new equipment that point to a positive leasing climate include:

Growing information needs.  The technology most likely to be affected by reform is information-related.  Currently, 20% of t he U.S. healthcare dollar is spent on administrative costs; many observers think providers will try to reduce this share with record-keeping systems that promise greater efficiency.  In fact, legislation has been introduced that would compel all physicians billing the federal Medicare program to do so by computer.

When a group of healthcare information specialists was surveyed, about 80% anticipated that investment in information technology would be accelerated by reform.  However, 60% doubted that reform would leave providers with enough money to afford this technology.  So, again, the dollar-stretching advantages of leasing should become increasingly attractive.

Particularly promising seems to be the market for radiology information systems. Substantial latent demand exists because radiology was one of the few hospital submarkets not saturated during the 1980s. This market is so undeveloped, in fact, that most installations will be new. Few older systems exist to be replaced.

According to one forecast, the number of installed radiology information systems could jump from 1,625 in 1992 to 2,620 by 1997, an increase of more than 60%. At that point, virtually every hospital with more than 150 beds would have some sort of system.

The timetable.  How certain is reform?  Even physicians, who have long provided the stiffest resistance to change, are now clamoring for it.  Despite the fact that physicians salaries could be curbed under the new healthcare reform effort, many doctors now believe that healthcare reform is badly needed in this country.  Faced with overwhelming paperwork, second-guessing by insurers trying to contain costs, bad debt from patients without insurance or adequate coverage and increasing malpractice suits, physicians believe the time has come to revamp the American healthcare system.

But clearly, reform will be enacted over a timeline composed of years, not months.  And that means the sophisticated healthcare providers will operate with one eye to the future, but the other firmly trained on their current financial situation.  The leasing company that remains attuned to those two needs is the one that will be in the best position to survive the tumultuous days ahead.

This article was written by Ian J. Berg, President of Copelco Financial Services Group, Inc. and Alan N. Frankel, President of Copelco Healthcare Finance Corporation, 1700 Suckle Highway, Pennsauken, NJ  08110.

Mark E. Dixon