A
pithy pitch flawed by pitfalls
Non-Capital equipment purchases
bundled with supply quotas are a problem.
Finance departments may not know that some of these agreements are
capital leases. Second, the cost of the debt
can be far more than a healthcare facility’s borrowing rate or a lease through a
finance company.
Non-capital equipment programs,
no-cap as they are sometimes called, are equipment purchases or rentals tied to
quotas written into a supply contract. Vendors
offer healthcare customers non-capital programs to help with their own sales
and to fill a need for cash-strapped customers.
Anything from glaucoma removal kits to catheters have been used to get
needed equipment. Just because each
party gets what it wants does not mean that each party wins. In general, there are a couple of different
versions of non-capital programs. One
results in a lease; the other results in a straight rental.
Vendor marketing may package
the program with branding that appears lightweight and easy to carry; however,
if a finance fee is added to each unit of purchase, and ownership transfers to
the buyer upon meeting a quota, the non-capital purchase
is actually a capital lease. And yes, some
hospitals get audited annually without a finding even though the lease liabilities
aren’t captured in financial reporting. Also,
these types of transactions can circumvent the equipment acquisition processes
as written in the Environment of Care and never get caught in The Joint
Commission surveys.
No findings on an audit, no
findings from The Joint Commission, so, what’s the problem, Al? The problem is…
there are these vendor letters that float from
department to department, looking to be managed by someone. There can be dozens even for 250-500 bed
hospitals. Accounts payable doesn’t want
these letters. The letters are not
invoices. Credit memo
isn’t written in any of the text.
Clinical departments send the letters off to contract managers because
the letters don’t have anything to do with patient care. Contract coordinators call finance and the
circle starts over. The vendors that
send the letters do not expect any action on the part of the buyer. So, people just stop bothering.
Those letters are notices of balances
on debts though the vendor is not requesting money. The letters are a reminder that those debts
have a bite when the buyer just stops bothering. Don’t meet the quota over a given period – Accounts
Payable will get an actual invoice. Move
to another vendor before the debt is paid in full – Accounts Payable gets an
invoice. One response I hear often goes
something like this explanation, Oh! When we get one, we don’t
know what it’s for. So, we send the letters
to purchasing. When they figure it out, they blame the account executive and negotiate
out of the bill. We have that sort of market power. Just hold that thought for one paragraph and a
double-space.
The Asset Ledger Manager may
never know the equipment exits let alone track the capital lease or bring the
equipment onto the asset ledger. Even if
he or she becomes aware, tracking is a pain.
Payments toward the lease fluctuate because the fixed finance charges
are tied to supply orders. Purchasing
Departments order supplies based on demand and demand fluctuates over
time. Monthly finance charges may add up
to $2,500 one month, $1,750 the next, $3,000 the month that follows. Thus,
the statement looks nothing like an amortization schedule. Tracking all those letters for all those
assets can take up most of a person’s time. That
is an added expense.
Now, let’s go back those pithy negotiation
tactics to get out debt. Normally, with
these types of non-capital programs, the buyer never sees a tax bill. Early terminate and take possession of the
equipment, the tax men cometh, city and county property taxes. Depending on what transfers and the quantity,
the tax men could put a dent in the hospital savings from the negotiations. After the tax men leave, the insurance man
shows up.
Recapping the non-capital
program resulting in a capital lease: the lease is not visible because it is
part of a supply contract. Not meeting quotas
for one reason or the other results in a bill for the debt owed on the capital.
It is nearly impossible to accurately project
when the lease will be paid in full.
Negotiating out of early termination result in tax and insurance issues.
Cost is an issue for both types
of non-capital programs. In both cases,
understanding the payout over the term specific to the equipment is
important. Rental programs tend to be the
far worst proposal. Rental programs take
ownership off the table if the buyer does not lose the asset. Rental programs can still have taxes. Rental programs tend to be easier
to track because there are usually purchase orders and matching invoices. Yet, I have seen rental costs over the term
of a supply agreement equivalent to 145% over the purchase price. Upon renewal, the buyer has basically the
same units plus a few upgrades. Supply agreements containing supply cabinets can have fall into this category.
Non-Capital Purchase programs
can be helpful for getting needed equipment.
Meeting each challenge requires knowing where to look in a supply
contract, how to approach alternative financing , and great understanding of
the asset life-cycle.
