Non-Capital Equipment Programs

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.

Want to talk more, contact me over linkedin, https://www.linkedin.com/in/alhardy or send an email to gsawriter@gmail.com