Feature / New lease of life

As capital constraints limit trusts’ options for updating medical equipment, a new NHS Supply Chain leasing framework could help. Seamus Ward reports

The NHS leasing market has been in a state of flux, with the demise of the NHS Purchasing and Supply Agency (PASA) and the squeeze on budgets. The introduction of international financial reporting standards (IFRS) has also raised questions over future viability of leases as an alternative source of finance.

But NHS Supply Chain believes it can breathe new life into the leasing market. Supply Chain, the logistics and supply organisation outsourced by the Department of Health to DHL, has taken responsibility for equipment leases and the national framework agreement for leasing from PASA. PASA’s operating lease framework agreement expired in March and Supply Chain has launched a framework agreement that aims to cut down transaction costs and help trusts make better procurement decisions.

Andy Brown, managing director of diagnostics at NHS Supply Chain, says it intends to provide a one-stop shop for medical equipment and leasing is one element of that. Based on the historic information provided by PASA, Supply Chain estimates the health service leasing market to be worth about £500m a year. However, this ranges across several product categories, including vehicles, photocopiers and medical equipment. Supply Chain’s new leasing contract focuses largely on medical equipment worth more than £10,000, though it has also been used to supply a hospital with a temporary kitchen.

Alternative finance

Recognising the NHS’s capital constraints, Mr Brown says it has developed the contract as an alternative form of finance. He says the vast majority of equipment bought by the NHS each year is a replacement for equipment at the end of its working life. The NHS must have a source of finance to procure this equipment. Only a relatively small percentage is new technology, such as the linear accelerators in which some cancer networks are investing.

‘If capital is constrained the equipment has to be provided through a revenue mechanism, be it lease, hire or managed equipment service,’ he says.

‘If a trust has capital and has confidence in a service, it can consider investing in its service by buying an MRI, for example, and to depreciate it over eight to 10 years. If it is less confident, leasing might be an option. It gives a greater degree of flexibility and it may choose to get rid of it if the service changes.’

Leasing offers flexibility where technological developments are rapid. ‘The kit might last 15 years, but changes in technology and clinical practice after seven years could make it less useful. Leasing gives you the flexibility to replace it with something more appropriate. It’s about providing choice at the point where the trust needs to invest,’ Mr Brown adds.

He believes IFRS, which puts many leases on balance sheet, has made little difference to trusts’ attitudes to leasing. They would have to recognise the asset and liabilities, whether in revenue or capital, he insists.

While Supply Chain will not choose the equipment and finance option for a trust, it will give a full evaluation of its options, including capital and leasing costs.

Brown says there is evidence trusts have used leases for the wrong types of equipment. ‘We know of examples where a trust has leased equipment it ought to have capitalised. For example, a trust leased beds – the technology of beds doesn’t move on that quickly.’ Supply Chain’s advice should prevent this happening.

While Mr Brown acknowledges trusts do not have to use the framework, the agreement offers many advantages over running their own procurement. For example, trusts using the framework do not have to issue an Official journal of the European Union advert; Supply Chain will run the entire process.

There are 20 lessors in the framework and more than half provide finance and operating leases. A potential lessee must identify the equipment they want to lease, the capital cost, the desired lease period, terms of payment and the supplier of the equipment. Supply Chain guarantees to get an indicative cost back to the trust within 48 hours. Or it can run a mini-competition based on best and final offers, with all responses within 10 working days.

‘There is value in using us as trusts will save time and money, there is more choice of lessor and their risk is reduced because we do a full evaluation of the procurement,’ Mr Brown says.

As pressure on budgets and performance increases, leasing is sure to be an option many trusts will examine.