Options for Equipment Acquisition

Vol. 13 •Issue 3 • Page 79
Options for Equipment Acquisition

How to determine whether buying or leasing major medical equipment is in your lab’s best interest.

Do you prefer buying or leasing major medical equipment? How do you determine which is in the best interest of your laboratory?

What works for one lab doesn’t necessarily work for another; it’s essential, therefore, that administrators carefully consider a variety of factors–beyond the cost of the equipment–before deciding whether to buy or lease.

Although the price of the instrument is a significant consideration, lab managers also need to assess the availability of capital, interest rates at the time of purchase, technological lifespan, the price of consumables and reagents, and the cost effectiveness of buying versus leasing.

Weighing Options

Buying is an option when the capital is readily available, according to Jay Marchwinski, administrative director for Medical Laboratories at the University of Virginia Health System, in Charlottesville.

Lease arrangements have gained popularity over the years because there was a crunch on capital. In an effort to keep current in technology, many lab administrators turned to reagent rental or lease arrangements when capital funds were not available, he says.

“Leasing is always going to be an easier burden on your company’s cash flow, as opposed to a traditional equipment loan,” agrees Jim Ambrose, general manager of Equipment Finance at GE Healthcare Financial Services, headquartered in Chicago.

According to Jay Wilkerson, MT(ASCP), director of Laboratory Services at the Community Hospital of Monterey (CA) Peninsula, the biggest weighing factor affecting his decision to buy or lease is the interest rate. “You have to look at the interest rate and determine the amount of your final payment,” he explains.

Historically, interest rates were much higher, notes Ronald Keelen, MA, MBA, MT(ASCP), DLM, administrative director of Pathology Laboratories at Methodist Dallas (TX) Medical Center. Nowadays, interest rates are more reasonable and there’s more competition among vendors to lower costs so he finds leasing to be a more attractive option.

The technological lifespan of laboratory equipment is another major factor in deciding whether to buy or lease. In years past it wasn’t uncommon for a medical instrument to last anywhere from five to seven years. In today’s market, “we’re lucky if we’re going to get three years out of a piece of equipment because technology is changing rather quickly,” Keelen says. “We’re seeing changes in the way tests are being done in the laboratory and completely different methodologies are being discovered more rapidly.”

“You must have an understanding of how long you intend to utilize the asset,” agrees Ambrose. “If it turns out that it’s an asset that really doesn’t lend itself to technology changes over short periods of time, you may determine that it’s best to own it. Alternatively, the technology may be changing so fast that it doesn’t make sense to own it.”

Another consideration is the cost of reagents and consumables and whether a leasing arrangement binds the lab to purchasing products from the manufacturer holding the lease. Some leasing arrangements are considered a “reagent rental.” With this agreement, the cost of the equipment is embedded in the monthly costs of reagents.

“This is a very common structure to use for lab equipment where reagents are involved,” says Ambrose. “It’s a great value-added contract.”

This agreement may also serve as a way for administrators to avoid the approval process required to purchase equipment. The contract is for the reagents and consumables; the equipment is an added feature.

The other type of leasing arrangement is simply a flat monthly payment that combines principal and interest and deducts from the overall price of the equipment. The lab manager is not tied to a specific vendor for reagents and consumables and may be able to negotiate a lower price for test supplies from another vendor, which is something to consider when calculating the expense of owning or leasing.

Applying Benchmarks

Another factor to consider when deciding whether buying or leasing is the best choice for your organization is knowing how your lab is evaluated, according to Marchwinski. Most hospitals and labs subscribe to some sort of benchmarking system or employ other financial indicators that determine operational performance and profitability in comparison to other laboratories with similar characteristics.

“Every institution tries to come up with a rational and defensible way to make good decisions when it comes to allocating limited resources,” he says.

The University of Virginia utilizes a benchmarking program that creates a cost analysis that evaluates the number of billable tests and how much it costs to perform those tests in relation to actual manpower and the price of reagents and consumables.

After analyzing all these factors and completing a thorough financial comparison, lab managers ultimately need to examine the bottom line and determine which option is more cost effective for their facility before making the decision to buy or lease.

Anyone considering purchasing medical equipment needs to consider all these areas before making the decision, says Ambrose, because every company is in a different situation.

Buying Benefits

One of the benefits to buying as opposed to leasing is that the operational cost per test is less expensive. For example, the University of Virginia Health System leased a device that performed a hemoglobin A1C test that cost more than $2 for each test performed. “Because we were on a lease program and paying more for reagents, our cost per test was much higher,” Marchwinski notes. Once the lease ended, the health system decided to replace the leased instrument by buying a new device that cut the cost per test by more than half.

Buying keeps supply costs at a minimum, adds Wilkerson, because a lab manager can often negotiate a lower cost for reagents and consumables when the supplies are not tied to a vendor lease.

Another advantage to owning rather than leasing: The facility receives the tax depreciation associated with it. The facility can utilize the depreciation benefits to lower the organization’s tax burden, Ambrose says.

Additionally, facilities that are measured on earnings before interest, taxes, depreciation and amortization (EBITDA) are often better off owning equipment rather than leasing.

“If you buy the equipment and have a loan associated with it, the interest expense associated with that loan is lowering your EBITDA,” Ambrose says. “On the other hand, if you leased the equipment, the lease payment is a combination of interest and principal so that is going to lower your EBITDA even further.”

Drawbacks to Buying

On the other hand, depreciation as well as a short technological lifespan for certain instruments can be a drawback to buying.

“In the past, when we had a longer technological life on equipment, it was favorable to purchase a piece of equipment because you could depreciate it over a longer period of time,” says Keelen.

Buyers normally get one-year warranties for parts and labor, so it’s important to consider the additional cost of extending the service contract.

Incentives to Leasing

Under a lease, a service contract can often be negotiated to last for the life of the lease and is included in the monthly payment.

Also, lab managers don’t have to lock into a long contract, Keelen says. Leasing arrangements can range from one to five years. “If we find the technological life is changing rather rapidly we’re going to be looking at a shorter term lease,” he explains. Whereas if “it’s going to be on the market much longer, we’ll be more receptive to extending the lease.”

If technology obsolescence is a concern, leasing may be favored. Lab managers need to assess the value of having the latest technology in their lab. Some organizations may find it economically worthwhile to lease and continue to upgrade to new technology while not getting the tax benefits associated with purchasing capital assets, explains Ambrose.

Drawbacks to Leasing

One of the disadvantages to leasing medical equipment, however, is the effect it has on the operating budget.

When buying equipment, lab managers “can spend less money in their operating budget because they don’t have that monthly lease payment wrapped into it,” says Wilkerson.

Marchwinski agrees, “If you lease an instrument or enter into a reagent rental agreement, the additional cost will show up every month on your financial performance reports.”

Before deciding, lab managers should also figure the overall cost of the lease versus purchase.

“The lease may be X amount of dollars every month, but if you do the math it’s not hard to see that there are additional monies that you’ll pay under a lease as opposed to a purchase,” Wilkerson says.

Another drawback to leasing is that managers may be bound to the vendor extending the lease when purchasing reagents or consumables for that piece of equipment. “You won’t be able to shop around for lower cost suppliers,” Keelen says.

Additionally, nonprofit organizations should note that if leasing equipment from a for-profit company, that device may be subject to taxation. “The vendor is going to pass that onto the consumer,” warns Keelen. “Be aware that you will have some slight increase in cost with a lease due to having to absorb personal property taxes.”

Negotiating the Contract

Before negotiating any contract, it is important to first determine whether the instrument offers methods that meet your quality standards. “We want our pathologists to agree that this instrument is the best choice to meet the needs of our laboratory,” Marchwinski notes.

The next step is to negotiate a fair purchase price for that instrument. There are several purchasing groups and advisory agencies who offer comparison pricing for laboratory instruments.

Among the issues to consider when negotiating the contract is the maintenance and service provisions. Often with a lease, vendors are willing to include service and maintenance; whereas when buying equipment, a one-year warranty is offered. If purchasing equipment, lab managers may want to spend additional money to extend the service contract to ensure that if anything goes wrong the device is covered.

Operational efficiency of the particular instrument being acquired also should be factored into the equation, Keelen adds. Operational efficiency is a statement or guarantee from the manufacturer that the device will meet certain operational standards.

Consumers should try to negotiate a purchasing option that offers them a guaranteed cost per billable test. This eliminates the burden of financial risk on the customer, according to Keelen. Consumers are better able to accurately project their costs throughout the year this way.

Vendors prefer an “efficiency operation” arrangement where they guarantee a percentage of efficiency. For example, the manufacturer may guarantee 90 percent efficiency out of 100 tests. If the lab only reaches 80 percent efficiency, the vendor will rebate the difference in percentages.

When negotiating the contract, you may also want to include a latest technology upgrade provision. This stipulation entitles the buyer to upgrade, whether it is software or hardware, at a lower purchase price as new technology becomes available, Marchwinski adds.

If locked into buying consumables from the vendor supplying the device, lab managers may want to incorporate a provision that locks a set price for consumables.

“If we’re locked into consumables with a company, I like to request a provision that states they won’t increase their costs for supplies for three years,” Marchwinski says.

Lab managers may also want to ensure adequate opportunities for staff to attend technical training on the instrument and ask the vendor to assist in paying for travel and other associated costs.

Other things to consider in a lease contract are device return provisions, duration of the lease, step-up or skip payments and early purchase options. If you finance the purchase of the equipment, also consider the ability to prepay the loan, duration, amortization and, if it’s a floating rate term, the ability to fix the rate.


Although there may not be a straightforward answer as to the best way to acquire medical equipment, each organization needs to analyze the variety of factors involved in the decision-making process and select the method that offers their lab the most benefits.

Nicole Klimas is a staff writer for ADVANCE.

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