Feature / Well equipped

Could leasing and its variant, managed equipment services, provide affordable ways of keeping up with advances in medical equipment, asks Seamus Ward

Medical imaging has been revolutionised over the past 30 years. Where once were simple X-rays, there are now MRI and CT scans. But none of it comes cheap. An MRI machine can cost £900,000 but accommodating it (strengthening floors, for example) takes the total outlay beyond £1m. In an age of austerity how is the NHS to pay for such big ticket items?

According to a Commons public accounts committee report last October, half of the MRI and CT scanners and linear accelerators (or linac for short, used in cancer treatment) in the NHS in England are due to be replaced in the next three years – at a cost of £460m. Add in patient expectations and the QIPP initiative – which by putting service quality and safety, innovation, productivity and prevention centre stage has strengthened the argument for acquiring the latest technology – and NHS trusts could be facing a major headache.

Foundation trusts sitting on substantial surpluses may be less affected, but will also be keen to size up their options and get best value for money. Leasing and managed equipment services (MES) may offer this value but have not really taken off in the NHS. They can be seen as difficult to understand and their uptake has undoubtedly been affected by confusion over balance sheet treatment of the deals.

Finance managers say both procurement routes have advantages and disadvantages. Both are paid from revenue, which can be helpful if capital is restricted; risk of breakdown and replacement is shifted to the provider; leases, which may be for seven years, are sufficiently short to ensure the technology is not overtaken; while MES arrangements, which are typically 15-20 years, often include replacement clauses that ensure the equipment is replaced at the end of its agreed life cycle.

But some trusts have told Healthcare Finance they are wary of entering into either type of deal as they do not wish to be tied into an agreement at a time when the NHS is changing rapidly. Others say they have turned down proposed leases because the net present value as a result of the deal was not acceptable. However, suppliers of both leased equipment and MES say trusts are showing increased interest in their products. A recent Siemens Healthcare survey found the number of NHS leasing tenders rose by 28% (68% in terms of aggregate value).

Siemens Healthcare director of managed services David Cooper says limitations on capital spending, in NHS trusts at least, is firing the increased interest in leasing and MES. Among the benefits of MES, he says, are an agreed schedule for replacing equipment and performance metrics with penalties if the equipment breaks down. The company has14 MES projects, some of which are part of a PFI.

‘An MES partnership sets out a planned approach to equipment provision and affordability. Hospitals know in advance exactly what they need to budget for each year and payment is clearly linked to MES performance that transfers risk away from the hospital,’ he says.

Mr Cooper believes this partnership approach gives access to the latest technology, helping to improve workflow and productivity and enhancing patient care.

Asteral, which has contracts at nine hospitals covering equipment ranging from MRI, CT scanners and linacs to endoscopes, reports that NHS interest in MES is at an all-time high. Commercial director Tim Beechey-Newman says trusts opting for MES can see the whole life cost of equipment, including maintenance and (if included in the arrangement) consumables. He adds that the firm sources from OEMs (original equipment manufacturers), allowing it to buy in bulk and to pass on savings to its clients.

Managed equipment service contracts have VAT advantages – as a trust is buying a service from the provider it can reclaim VAT – but Mr Beechey-Newman insists this should not be the sole motivator for choosing MES. ‘Some trusts talk about buying services rather than goods,’ he says. ‘They see it as the way forward to make them more flexible.’

VAT incentives

Finance managers say VAT benefits are a big attraction for trusts, with some saying the VAT savings consistently outweigh any additional cost of the managed service. Others are more cautious as the reclamation of VAT is not guaranteed. It has to be approved by HMRC and there is always a risk that laws could be changed to prevent such claims in future.

MES deals are treated as on-balance sheet, which could affect foundation trust financial risk ratings (FRRs). The calculation of return on capital employed (part of the financial efficiency metric), which accounts for 20% of the overall FRR calculation, now includes finance leases in its denominator (fixed plus current assets less current liabilities).

Mr Beechey-Newman argues that the impact could be positive or negative but either way it is unlikely to have a material impact on the overall rating.

As MES is on-balance sheet, the assets must be depreciated and will count towards a trust’s prudential borrowing limit (PBL). However, he says that if a trust has cash, they can make a capital contribution so the PBL is not affected.

The charge for interest and depreciation goes below the EBITDA line (earnings before interest, tax, depreciation and amortisation) so will not have an impact on the metrics on achievement of plan and underlying performance, which are EBITDA based.

Conversely, with an operating lease, costs are accounted for above the EBITDA line, potentially affecting the achievement of plan and underlying performance metrics.

However, concerns over how an MES would affect EBITDA prompted at least one trust to pause in the past 12 months before issuing a tender. The trust wanted to ensure the cost improvement plan (CIP) based on the arrival of the new equipment would cover annual operating expenses of about £2m – any shortfall in the CIP would adversely affect EBITDA. The tender was subsequently issued, but a final decision on whether to opt for an MES will depend on whether the cost is less than purchasing the equipment outright.

Siemens’ Mr Cooper says the issue of how trusts account for MES agreements – and its impact on their financial position – is not seen as a barrier by trusts. ‘There was some confusion a few years ago about whether the deals should go on-balance sheet, but the issue seems to be well understood now,’ he says. ‘Today’s managed equipment services are still referred to by some as PFI. MES is not PFI, it is a modern solution to an old problem.’

NHS Supply Chain managing director of business solutions Andy Brown says more trusts have considered MES over the past 12 to 18 months, probably as a result of constraints on capital budgets and the potential to reclaim VAT on service contracts. But he adds: ‘We haven’t seen an awful lot of trusts go on to produce a specification and tender. We’ve held a lot of conversations with trusts about it, but sometimes these confirmed what they were already thinking – that it was not for them. Or perhaps they were swayed by our point of view and decided it was not for them. Our stance is that you should only go into it for the right reasons, understanding all options available.’

Understanding needs

He insists trusts should decide first what they want to achieve with the new equipment and test how each option delivers against those aspirations. As MES deals are generally 10-15 years, trusts must be sure the equipment will suit their needs over that period.

‘That’s not straightforward,’ says Mr Brown. ‘Another reason is the complexity of producing a specification for an MES service. You have to bring together finance, clinicians, medical physics staff and a range of other stakeholders to consider whether MES is the right solution and how it’s going to be delivered. That’s not easy either.’

Louise Hamilton, head of NHS sales and marketing at Singers Healthcare Finance and chair of the Finance and Leasing Association’s NHS Forum, says that while MES deals have a place, trusts need to fully understand the whole-life costs and the length of commitment. Their needs may be met by a well-structured lease agreement, which runs for a significantly shorter period.

She insists leasing is not as complicated as some believe and can provide a flexible solution. For example, one trust needed to replace endoscopes that were up to 19 years old to ensure it would gain JAG accreditation (an Academy of Medical Royal Colleges group that quality assures endoscopy units, training and services) in order to maintain income. It agreed a seven-year deal with Singers and the equipment supplier that benefited all sides.

‘The supplier could see what the trust would spend over the period, which allowed it to offer its best price. The agreed deal replaced all endoscopes seven years old or older on day one; and then each year endoscopes that reach seven years old are replaced. This enabled the trust to run a service with known costs and garner significant income to cover them.’

Traditionally, when capital is tight, trusts sweat their assets, keeping them operational beyond the end of their useful life. Mr Cooper acknowledges trusts can be caught between a rock and a hard place when it comes to capital investment, but insists sweating assets has its own hidden costs and impacts on quality and productivity. ‘MES can give trusts a strategic solution – a revenue solution over the life of the new equipment,’ he adds.

Given the pressing need to replace half the MRI, CT and linac machines within the next three years, the reported rise in interest in leasing and MES is not surprising. Trusts are clearly casting around for options. For those trusts that are unable to use internally generated funds, leasing and MES may offer possible solutions.