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February 19, 2007

The ABCs of EMR Financing
By Erik Jensen
For The Record
Vol. 19 No. 4 P. 36

Considering leasing an electronic medical record? This checklist provides decision makers with the facts they need to make an informed choice.

Whether you’re a solo practitioner in a small town or part of a multispecialty physician practice in a big city, chances are you’ve spent some time thinking about transitioning to an electronic medical record (EMR). Does going paperless make sense for your practice? If so, when’s the best time to make the change? How do you begin to choose from all the EMR options available? Perhaps the most worrisome question of all is: How will your practice pay for this technology?

While information about the number of physicians adopting EMR solutions varies greatly—with some reports predicting close to 100% adoption in the next few years and others estimating that adoption rates are at less than 5% for some physicians—there’s no question that the topic warrants some consideration among all physicians.

With President Bush’s mandate that all U.S. citizens have an EMR within the next seven years and his push for the creation of a nationwide network of EMR files, physicians are starting to feel some pressure. However, as revenues diminish and expenses continue to climb due to reimbursement issues, cost becomes a major concern. Even those clamoring for a more efficient, paperless solution that will enable them to provide better patient care may find themselves scratching their head about how to pay for an EMR system.

Lack of funds is one of the most common reasons physicians give for delaying the decision to implement an EMR system. For physicians bound by cash flow restraints, or even those looking for tax benefits and protection from equipment obsolescence, equipment financing may be the answer.

For some, leasing has become the best way to maximize the EMR procurement process, largely because it can be a cost-effective way to obtain the newest technology without a large outlay of cash but with the inherent flexibility of leased equipment.

There are many reasons to implement an EMR system, but ultimately, the value of the technology comes from using it, not owning it. With financing, a medical practice may transfer the risks and uncertainties of ownership to the finance company and concentrate on using the technology as a productive part of business.

Finance Services, Too
Choosing to implement an EMR system and deciding which one is best for your practice is just the beginning. To get the most from a new technology solution, staff members will need to be trained on the system, and you’re likely to need vendor support and services along the way. Training, support, and other services are vitally important to a successful EMR implementation, yet they are some of the most overlooked costs involved with an EMR acquisition.

Often, everything involved in an EMR purchase, from servers and scanners to software and services, can be bundled into one predictable monthly lease payment, making it easy to budget for all costs associated with an EMR acquisition. Via upgrade programs, leasing also protects physicians from technological obsolescence, a concern for anyone investing in technology solutions.

Some other benefits of leasing EMR equipment include the following:

Tax treatment — The Internal Revenue Service does not consider certain leases to be purchases but rather tax-deductible overhead expenses. Therefore, medical practices can deduct the lease payments from income, thus reducing the net cost of the lease.

100% financing — Since a lease often does not require a down payment, it is equivalent to 100% financing. Physicians can conserve the capital that would have been used for a down payment and reinvest it in the business.

Immediate write-off of dollars spent — With leasing, payments are treated as expenses on the income statement, so the technology solution does not have to be depreciated over an extended term.

Flexibility — As physicians’ practices grow and needs change, the leasee may be able to add or upgrade technology at any point during the lease term.

Asset management — A lease provides the use of the technology solution for specific periods of time at fixed payments. The leasing company assumes and manages the risk of technology ownership. At the end of the lease, if the physician elects to return the technology, the leasing company is responsible for the disposition of the asset.

Upgraded technology — An EMR can make physicians’ practices more efficient. Technology solutions that could depreciate quickly should be leased to limit a physician’s risk of getting caught with obsolete equipment. Plus, leases make it easier to upgrade or add technology solutions to meet ever-changing needs.

Speed — Leasing can allow you to respond quickly to new opportunities with minimal documentation and red tape. Many leasing companies approve applications within a few hours.

Improved cash forecasting — When physicians lease, they can accurately forecast the cash requirements for the EMR system since they know the amount and number of lease payments required, and with leases, there are no floating fees.

Flexible end-of-term options — There are typically three flexible options at the end of a term. The leasee can either return the equipment, purchase the equipment from the leasing company, or extend the lease for an additional period of time.

Tax benefits — Leasing companies can pass the tax benefits of ownership on to the physician in the form of lower monthly payments.

Easier financing than loans — With a lease, physicians can avoid requirements like compensating balances, large down payments, client list reviews, and cash flow projections, making the finance process faster and easier.

With Leases, One Size Does Not Fit All
Another benefit of leasing is that there are various leasing products available to meet the needs of physician practices of all types and sizes.

The capital lease, also known as a finance lease, offers the widest flexibility of term length, which can help keep payments low. Capital leases also provide a variety of tax benefits, including the ability to write off depreciation and interest expense for the acquired equipment. With a capital lease, at the end of a leasing period, there are various options for next steps. With EMR technology, the most popular end-of-lease option enables physicians to purchase the equipment for $1.

There are also leases available that can be tailored to fit month-to-month or year-to-year cash flow needs. Custom arrangements can be designed to address requirements such as cash flow, budget, transaction structure, cyclical fluctuations, and more. Some leases even allow leasees to miss one or more payments without penalty.

When to Buy
Although a medical practice owns the EMR system at the end of the $1 purchase option lease, it’s still important to weigh the benefits of purchasing a system outright before making a financial decision. Staff members at a busy medical practice might find it easier to purchase an EMR solution, which can be as simple as choosing the right system and signing a purchase order. Although there are tools available to help physicians navigate the lease process, it does require additional steps, such as finding a finance partner and reviewing a lease contract.

In addition, medical practices with the cash on hand can avoid interest payments by purchasing rather than financing EMR technology. Purchasing an EMR system with cash also leaves credit lines open in case of emergencies.

Taking the Next Step
After identifying an interest in leasing, the next step is choosing a leasing company. During initial meetings, physicians should look for a partner that understands the objectives, is experienced with the needed technology solution, and is committed to the relationship over the long term. Another consideration is the financial strength of the leasing company, as it takes the risk of owning the equipment under consideration.

Many EMR providers partner with a leasing company, making it even easier for physicians to get information about their financing options.

“We understand that physicians are challenged by reimbursement issues and are facing even deeper cuts in the next few years. All expenses are being weighed very carefully, and finances are tight for many doctors these days,” says Kelley Schudy, vice president of sales at Misys. “We want to make it as easy as possible for our customers to obtain the technology they need to make their practices more efficient. By offering flexible financing as part of the sales process, we can help eliminate some of the legwork involved in finding a way to pay for EMR.”

In addition, numerous resources are available that provide more information about leasing or aid physicians in the search for a leasing company. For example, the Equipment Leasing and Finance Association (ELFA), a nonprofit association representing companies involved in the equipment leasing and finance industry, has developed Choose Leasing, available at www.chooseleasing.org.

Choose Leasing answers commonly asked questions about leasing and discusses important points to note before signing a contract. The site also offers a search engine for finding nearby or specialty leasing companies.

Questions to Ask
As with any purchase decision, it’s important to get as much information as possible before making a commitment. To help guide people through the process of leasing, the ELFA has developed the following list of 10 questions to ask before signing a lease.

These questions take into account the before, during, and after stages of a lease and should help provide the information needed to make a sound financial decision. Also, physicians should always talk with a tax advisor before making a decision.

1. How am I planning to use this technology?

2. Does the leasing representative understand my business and how this transaction helps me conduct business?

3. What is the total lease payment and are there any other costs that I could incur before the lease ends?

4. What happens if I want to change this lease or end the lease early?

5. How am I responsible if the equipment is damaged or destroyed?

6. What are my obligations for the equipment (such as insurance, taxes, and maintenance) during the lease?

7. Can I upgrade the technology or add equipment under this lease?

8. What are my options at the end of the lease?

9. What are the procedures I must follow if I choose to return the equipment?

10. Are there any extra costs at the end of the lease?

— Erik Jensen is a senior vice president at Key Equipment Finance (www.kefonline.com) and is in charge of the company’s healthcare finance segment.