David Martin is often asked by trusts what happens when a lease contract expires. Here, he explains all
An increasing number of medical assets within the NHS are now being leased rather than purchased outright. There are a number of benefits in doing this; spreading the cost over its useful working life rather than upfront in full, rolling in maintenance and other soft costs into the regular fixed payment.
It is beneficial from an accounting perspective too in that payments are recorded as a revenue rather than capital expense, enhance the flexibility of leasing rather than outright purchase.
Finally, the total cost of finance is usually less than the purchase cost. This is because the financier or lessor makes use of a product called an “operating lease” which allows him to take a “residual value” risk position. He will estimate what the asset will be worth at the end of the finance period or lease, typically five years, and then subtract this from the total cost of the finance. So the trust only pays for a proportion of the machine therefore reducing overhead commitments.
But what happens after the NHS has asked for it to be removed? Obviously the financier has to achieve a return if he is to make a fair profit. But what happens to these NHS workhorses once the finance period is finished?
Is it still all in one piece?
First thing is inspection by the original equipment manufacturer or a third party specialist to establish the current state of the asset. This is usually done about six months before the end of the lease. A detailed report is then produced and shared with trust and lessor.
This report is crucial as it enables both parties to ensure that return conditions are being met. This is why impartiality of a third party is important. The cost of this is usually borne by the trust.
The less valuable or technical the asset is – an operating table or slit lamp for example – then the less detailed the report needs to be. Additionally, equipment such as blood analysers can be self certified by some trusts as having been decontaminated, however the asset will still need to be inspected either on site or upon return.
The next step is to do a site inspection – which is paid for by the lessor. This is done for two reasons; health and safety and also to work out how the equipment will be extracted from the building – which when you are talking about MRIs is a crucial consideration. Usually this is carried out by de-installation engineers, specialists in removing medical equipment.
As soon as the lessor receives the inspection report its asset management team begins to investigate disposal routes. This is where the report again becomes highly useful as it is used for the re-marketing. Very rarely is a price given to such assets, it’s up to the potential acquirer to propose this partly based upon the information contained within the report.
There are three principle disposal routes which are usually employed:
Back to the OEM
Via a dealer
Direct to an end user
An increasingly popular disposal route is on specialist websites. One such site is www.dotmed.com (rather like ebay for medical equipment)
The cost of de-installation and removal is usually at the expense of the trust, though occasionally the buyer may pay for this. More often than not the original de-installation engineers who compiled the report will be called back in to do this. At this point, that is just prior to de-installation, a deposit is taken with the balance payable upon delivery.
Working out a price is a complex process. It’s primarily based on the specification of the item in question, the type of software it currently runs and ease of upgrade, the original price and, obviously, current demand. It’s also based as much on the experience of the purchaser as it is on the facts to hand.
The main dealer market is in the USA, which surprises many people. They have more pieces of medical equipment than any other country so the market is just naturally larger. But it goes deeper than that; culturally they are far more accepting of second hand kit; so long as it does the job at a fair price.
No second-hand market within UK
The comparison with the UK could not be starker where there is almost no second hand market. 99.9 per cent of equipment going in to the NHS is brand new. Often, the reason given for this is that, “patients and clinicians demand the latest kit”. But it should be about outcomes.
A recent case in point: a large London hospital currently has a four slice CT. It would rather keep this existing piece of kit than replace it with a second hand 16 slice machine which would be cheaper (the rentals on the lease would be less than the current monthly maintenance cost) because patients and clinicians would not accept the hospital purchasing second hand equipment.
The reasons for this are complex, but part of the problem stems from a lack of coherent strategy when it comes to the management of medical equipment assets. It is another example of inefficient use of capital within the NHS.
David Martin is general manager public sector of Siemens Financial Services.