In today’s healthcare industry, increased competition from hospitals and large medical groups is making owners of small medical practices more aware of their spending. This trend is reflected in the shift to leasing equipment. But is it really more cost effective to lease medical equipment than to purchase it?
While leasing medical equipment comes with many advantages, some easily overlooked costs can add up over time. This article will cover the advantages and disadvantages of leasing versus purchasing medical equipment, when buying makes sense, and how to get the best deal when financing purchases.
Advantages of leasing
Lower upfront costs
When purchasing equipment, down payments of as much as 20% of the full cost of the equipment are required. This means you need to have those funds on hand to even afford such an acquisition. Many small practices are simply unable to afford the upfront costs associated with equipment purchases.
Leases, on the other hand, do not usually require a down payment. You can begin using the equipment after your first monthly payment. This makes leasing ideal for small practices just getting started that do not have the cash flow required for purchases.
You can upgrade equipment more frequently
The technology that populates your practice can make a big difference in patient perception. If patients know they can get a procedure done or receive results from a test more quickly somewhere else, they will go there instead. Sometimes all it takes is for equipment to look newer at one practice for a potential patient to choose that one over another.
If the rest of the industry has moved onto a more efficient means of performing specific tasks, then your business could suffer. Since medical device leases come with relatively short terms – typically three to five years, it’s easy to update equipment regularly. Simply sign another lease with a newer model once your current contract is up. This means your office can be filled with the latest equipment.
Low maintenance costs
As the owner of the equipment, the company you are leasing from is incentivized to keep it in good shape so they can continue to lease it out in the future. Because of this, the cost and scheduling of maintenance and repair of leased equipment is often at least partially paid for. Be sure to confirm this in your lease agreement. If not, inquire about maintenance plans.
Disadvantages of leasing
Costs more long-term
When you finance the purchase of medical equipment, with each payment you make, you gain equity. Eventually, you pay off your loan and own the equipment outright. Not only does this increase the value of your practice, but when you eventually sell the equipment, you will get some of your investment back. Leasing, on the other hand, gets you nothing but the use of the equipment for a specified period. You will continue to make monthly payments a long as you use the equipment. This can cost you more long-term.
Since you do not own the medical equipment, there are numerous rules and guidelines you must follow to avoid being levied with fees and penalties. For example, you usually cannot make modifications such as mounting tools onto the device, nor can you make upgrades without consent. Additionally, when it comes time for maintenance or repairs, there are often specific companies you are required to use. This can be a disadvantage if you are unsatisfied with the performance of the company contracted to service your equipment.
Advantages of Buying
Costs less long term
Although down payments are usually required, and monthly payments can be higher than a lease, once the equipment is paid off you no longer have to make monthly payments, which can free-up cash flow to divert to other projects.
It’s yours to sell
You build equity in your practice when you purchase medical equipment. Leases can add value in the short term – having equipment that enables you to provide in-demand procedures or faster service can help you grow your patient base. However, equipment purchases can do this, too. And, unlike leases, they can be sold along with your practice, increasing its value.
You can modify it as you wish
Every office space is unique – as are the preferences of physicians – sometimes, equipment needs to be adapted according to the space or the user. When you own equipment, you are free to modify, update, or repair equipment per your preferences. When you rent, there are restrictions – and failing to adhere to the rental equipment can result in expensive fees. Owning medical equipment saves that extra stress that you just don’t need when you have patients to attend to.
Disadvantages of Buying
Higher upfront costs
As mentioned previously in this article, lenders sometimes offer medical equipment loans with no down payment, but usually, you will need to pay around 20% in upfront costs. This means you need to have that money on hand to make the purchase. If you are interested in purchasing equipment, be sure to shop around for the best offers. Generally, financing offered through the manufacturer is the most expensive. Often you can find better rates with commercial lenders who specialize in serving healthcare professionals – lenders like Hippo Lending.
If you’re interested in learning more about medical equipment loans from Hippo Lensing, click here.
Harder to replace equipment
Purchasing equipment has several long-term advantages, but there are a few disadvantages that come with it as well. For example, if you need to upgrade or replace equipment, you’ll have to sell your old equipment first. This can add time and hassle to a process that would be smooth under a lease.
You are responsible for maintenance
As the owner of the equipment, you are responsible for scheduling and paying for repairs. This is less worrisome while the equipment is still under warranty, but once they expire, it can be costly. There are warranty extension options out there, but you’ll need to devote staff time to managing that.
When leasing works
Leasing primarily works in two situations: first, when a practice is just getting started and has limited cash flow. Second, when a business is large enough that there isn’t significant benefit in the equity provided by medical equipment ownership.
For small startups, the long-term goal should be to purchase equipment, as ownership brings many long-term financial benefits that can help you grow the value of your practice. In the short-term, however, focus should be placed on growing the number of patients. This means providing competitive services that are as good, or better than, the competition. Often, this necessitates leasing equipment.
For hospitals or large medical practice groups, the logistics of maintaining equipment in several locations can be a heavy burden. Often, the value added by the assets is outweighed by the cost of hiring staff or contractors to service equipment, manage loans payment and warranties, and insure the equipment is in compliance. When this is the case, it is advisable to lease equipment.
A third scenario when it’s better to lease is when equipment is prove to mechanical issues, or requires a high-level of maintenance. David Lipps, healthcare attorney, says in an article by Healthcare Finance, “it makes more sense to rent or lease tools like copiers [..] after all, if the machine breaks down, the leasing company provides service.” Certain electronic equipment that won’t hold long-term value, for example, is better off leased.
Legacy devices are another area where leasing may be beneficial. Often, utilizing older model devices that are still able perform the functions you require is a great way to save money. But purchasing such a device is not generally advisable. If saving money is your goal, it’s better to lease older equipment to enjoy low monthly payments. When purchasing equipment, it’s better to go with the newest and best that you can afford, as that will hold better value and cost less in maintenance.
When Purchasing Works
It is true that many businesses that struggle to afford equipment purchases turn to leasing equipment as the only way to fulfill their medical equipment needs. However, in such cases, leasing should ideally be part of a strategy for growing your business until you reach the point that you can afford equipment purchases.
If your practice is well established and you have the funds on hand to pay the down payment, buying is a great way to save long-term while also increasing the value of your business. You should prioritize certain equipment over others. For example, equipment that has a long lifespan and requires minimal maintenance is the best candidate for purchase.
Ideally, you should have a mixture of equipment that you own and equipment that you rent populating your medical or dental practice. The key to making the most of your investment is to run the numbers and determine which option adds more value on a case-by-case basis
Things to consider when deciding whether to buy or rent medical equipment
- How often will you be using the equipment? How many patients will you bill per period on average?
- How much will your payor reimburse you for each procedure that utilizes the device?
- If you are looking into leasing, be sure to check what your maintenance obligations are – different companies have different policies, and whether or not you are responsible for maintenance can tip the balance out of favor for leasing.
- Watch for hidden fees for leasing. Fees such as shipping, networking, and maintenance can add up – this can apply to purchases as well as leases.
How Hippo Can Help
Hippo Lending has helped hundreds of physicians, dentists, nurse practitioners, and other healthcare professionals secure financing for medical equipment purchases. Because we are a small company that specializes in servicing healthcare professionals, we have more flexibility in our funding options than the in-house or contracted lending organizations utilized by medical equipment manufacturers. We work with you to create a customized loan that suits your needs.
To learn more about medical equipment loans from Hippo Lending, click here.