Healthcare, in the 25-year period from 2006 to 2030, will be shaped by the interaction of the growing demand for health services by an aging population and the limit on society's resources. This interaction will put a premium on productivity, and productivity gains will be driven by a wide variety of technology applications in the healthcare sector.

According to a study by the Equipment Leasing Association and R.S. Carmichael & Co. titled "Healthcare Equipment Leasing Market Dynamics and Outlook," the critical element in improving healthcare industry productivity and reducing its cost growth is capital investment in productivity-improving technology that will substitute for labor, and that frequently means information technology.

"What went on in corporate American 10 to 15 years ago relating to data management has to go on in healthcare today," says Matt Shieman of Matsco Companies, an Emeryville, Calif.-based healthcare financing company. "The only way healthcare providers are going to get their arms around sustainable business models is to manage data more efficiently. While technology related to medical procedures will continue to grow, the IT side will grow faster for most healthcare providers."

The study reports that the healthcare industry in 2004 represented a $1.8 trillion annual market that accounted for 15.4 percent of total gross domestic product. Healthcare's share of GDP is expected to continue to increase every year to 2014.

J. Knox Singleton, president and CEO of INOVA Heath System, a large integrated healthcare delivery system in the Washington, D.C., region, says healthcare is in a capital expansive mode, with a lot of capital investment happening. "The need for capital financing is going to continue to increase, largely due to an aging, overall plant structure and ever-growing IT investment needs."

Leasing will play a critical role in healthcare providers getting their systems up to speed. "The two most attractive attributes of leasing for healthcare providers is their ability to hedge against obsolescence and hedge utilization risk," Singleton says. "The percentage of capital expenditures in IT is going up for everyone. At the same time, healthcare managers are being struck with the obsolescence factor. They don't want to see 30-year money tied up in 7-year equipment, so IT is the heart of the opportunity for lease financing."

Flexible Financing
The estimated size of the 2005 U.S. healthcare equipment leasing market was at least $7 billion in terms of new volume, according to the study. The market is projected to exceed $8 billion in volume by 2007.

"Equipment leasing continues to represent a fundamental source of capital financing for healthcare providers," says Richard S. Carmichael of White Plains, N.Y.-based R.S. Carmichael & Co. "Healthcare industry conditions such as steady growth, capital budget constraints and rapid technological changes create opportunities for equipment leasing."

Over the past five years, the average annual rate of growth in the healthcare leasing market has been 7 percent, according to the study. But most expect that percentage to increase. "A real opportunity of increased leasing is among physicians and clinics," Singleton says. "The leasing industry has an opportunity with leasing's flexibility of design that most other financing sources don't have."

This structuring flexibility is expected to be one main reason healthcare providers turn to leasing. Providers should watch for new financial products being offered, such as usage based programs, installment leases and irregular payment options based on reimbursement challenges.

"There will be a greater demand from healthcare providers for innovative financial structures in the future," Shieman says. "Many lessors will approach hospitals, physician groups and other private entities with offers of a hybrid financial product, such as a pay-per-procedure or renting a fleet of equipment that every two to three years gets upgraded automatically."

Choosing Leasing Partners
First and foremost, healthcare providers seeking a lessor should look for someone who understands the healthcare market. "Hospital administrators, practice managers, physicians, insurers and manufacturers are all looking for different things," Shieman says. "The critical element to identify is whether the financier has a real understanding of the healthcare market and is able to provide financial solutions to meet the needs of the key stakeholders."

Because efficiencies don't occur immediately, a good financier will understand what the healthcare provider will be dealing with two to three years from now. A financing partner show know healthcare reform issues, understand reimbursement challenges, have a good knowledge base about equipment and think proactively about nontraditional ways of getting things done. "It all comes down to whether or not the financing partner speaks your language," Shieman says.

Michael Fleming is president of the Arlington, Va.-based Equipment Leasing Association. He can be reached at 703/516-8360 or mfleming@elamail.com.