Financing

Other People's Money

Why financing HME makes sense, where to get it, and how to use it.

A key element to strategic success is logistics. You must secure the required resources to ensure you come out on top. For HME providers, a key logisticalresource is the enhanced business services available to them.

Between narrowing margins and continually slashing of Medicare funding, providers face one sad fact: money is tight. And that’s not a good thing when providers are oftentimes trading in exceptionally expensive medical equipment. Fortunately, they have an important resource at their disposal: financing that is tailored to the homecare market. Financing protects providers from the pitfall of killing their cash flow because they had to devote their capital to purchasing medical equipment.

“The DME business kind of inherently creates a cash-flow problem for the provider, and that stems primarily from the need for equipment,” says Jason Smith, vice president, Finance Capital, which supports several manufacturers of DME by offering financing services that the manufacturers use to help providers purchase their equipment. “The way for a provider to make money is to put patients on equipment and then turn around and bill for its use.”

However, the process of providing DME essentially requires that the provider purchase anywhere from several thousand of dollars’ to a million dollars’ worth of equipment, and spend the next period of months provisioning that DME to patients and processing the billing for Medicare, Medicaid or private insurance. That billing process can take anywhere from 90 days to see funding come back on a claim, if the provider is good, to more than 120 plus days, Smith says.

Moreover, simply purchasing equipment does not ensure it will be rented. After a provider devotes capital to obtaining DME, it could take anywhere from a day to a year before that DME is rented out. As with any other business endeavor, no investment can guarantee an instant return.

“The process requires the provider to shell out a lot of money prior to making any money on the equipment that they’ve put on patients,” Smith explains. “So it just creates a cash flow crunch for them.”

Financing DME purchases, on the other hand, lets providers acquire home medical equipment while matching the reimbursement terms for the equipment to the financing terms, thus allowing the equipment to pay for itself, Smith says.

Financing Trends

In the world of financing, there are essentially two types of lessees, Smith says: Those who require leasing, because they have cash-flow constraints or lack the money to purchase equipment; and then there are those who chase the benefits of leasing. For example, leasing provides tax benefits, as well as increased cash-flow and cash-management benefits.

So, the ebb and flow between the lessees who need financing or want financing is always changing based on the strength of the economy. When it comes to the HME industries financing needs, what providers need credit often depends on the type of DME they are offering, due to the purchase costs and funding aspects of one category compared to another, Smith says.

“In terms of changes [in HME financing], it depends on the business segment,” he explains. “CPAP has stayed very strong. Oxygen seems to have slowed down a little bit, and I think that has to do with the proverbial question mark about oxygen with regard to what’s Congress going to do? There’s a big unknown so it seems to me there are a lot more providers buying as-needed rather than in volume. So we’re seeing smaller orders on the oxygen side. … So, to say financing has gone down or gone up is a little hard, because it seems like it has shifted a little bit.

“If you look at leasing across the board as an industry, and then specifically look at medical equipment, I think the overall requirement for funding has gone down,” he continues. “The thing to realize about the leasing industry however is that there has been a tremendous amount of equipment leasing companies that have gone out of business in the last year to year and a half. So our volume has actually increased in the last year.”

So, while overall volume has gone down in financing as a whole and financing specifically for medical equipment, trying to pin that down to any one trend or category of DME is difficult.

How Financing DME Works

Generally, in the HME industry, there are lenders that typically only with manufacturers, and then there are vendors that offer financing services directly to HME providers.

Financing companies such as Finance Capital generally do not work directly with providers, but instead work with the manufacturers of medical equipment to help them create financing programs they can offer directly to their customers. This is key, because the financing packages that are created from these joint efforts are tailored to HMEs’ needs.

“What we do is match closely the reimbursement term for the equipment to its lease term,” Smith explains. “Then obviously, anything can be shorter. Take CPAP, for example. That’s a roughly 14 months, on average, reimbursement period. So we try and keep CPAPs to a 12- to 15-month finance term. Oxygen, on the other hand, because it’s 36 months, ranges from 12 months to 36 months in the finance term.”

If the lease terms were to go beyond the reimbursement term, then the equipment is no longer generating income, thus putting the provider in a precarious position.

Another reason that financing companies typically avoid working directly with providers is that they prefer to devote their resources to working with the vendors that they serve as customers. This is because lenders have finite capital resources, and the last thing they want to do is lend out a large enough sum to a business that is not one of their “regular customer” that then precludes them from subsequently lending to one of their regular vendors. So HME financing companies try to be loyal to the manufacturers they serve.

For providers that are seeking financing, in most cases, the best direction to seek financial help is through their manufacturers. The reason for this is that many manufacturers offer subsidized financing programs, because of the close relationships they have fostered with their financing partners. “Probably the most popular one out there is a 12-month, 0-percent interest program,” Smith says.

“We try to look for manufacturers that are offering the 0 percent interest deals, and usually almost all of them have some kind of short-term, 12-month, no-interest deals,” says Sam Jarczynski, president of RX Stat Inc., a home respiratory pharmacy and home respiratory provider founded in 1993 and operating in the Tampa and St. Petersburg, Fla. area. Basically you’re spending their money.

“The rates for financing have gone up tremendously, so we try to do it as cheap as possible,” he continues. “We have a bank line of credit for the shorter-term stuff, but for the larger equipment purchases, we try to do everyone on a 12-month, no interest, or longer, if we can. Some of the manufacturers will go longer than 12 months.”

The types of equipment RX Stat finances include oxygen concentrators, CPAPs and Bi-PAPs and portable oxygen concentrators.

Also, working with financing company that is directly involved in the industry, and perhaps especially those that have forged alliances with major manufacturers, means a provider is working with a business that has a stake in the marketplace. Working with a non-HME-specific lender does open up the possibility of working with a company that is offering financing terms that are either not right forthe industry, or perhaps unscrupulous.

“We have seen many times over the years where XYZ Leasing Company finances oxygen equipment for 60 months,” Smith says. “The longer the term the more points or profit a leasing company can pack into a finance agreement. That’s really unfair to thecustomer, and it doesn’t make good business sense.

“Or they’ll put in some language that makes the provider have what’s called a ‘fair market value end of term,’” he continues. “All the leases that we write, at the end of the lease the customer ends the equipment automatically; it’s called the dollar buy-out. [An unscrupulous] leasing company will have the lease pay out in full, and at the end of term it will go back to the customer and say, ‘The fair market value of this equipment is 20 percent, you owe use another 20grand,’ if it’s a $100,000 transaction.”

“Almost all the financing in our industry isstructured for a dollar buy-out, because they know the equipment is in patients’ homes, and is under a capped rental program,”Jarczynski adds.

Another good source of HME-specific financing are the buying groups and member services organizations, which have worked similar deals with financing providers, Jarczynski says.

“Shop around because if you belong to some of these buying groups they often time have relationships with lenders that give you better financing deals than you would find on your own,” he says. “VGM Financial Services is a huge resource. They’re kind of like their own leasing lender and have incredibly competitive rates.”

Credit is King

Another paramount, real-world consideration for HMEs seeking to finance their DME purchases is to take care of their credit. This is particularly important for all providers, from large regional players to “mom and pop” shops.

“If a provider isn’t making all that much money, but is paying its bills on time, that by far and away will be the most beneficial thing to them,” Smith says. “Putting your bills fist is ultra-important whether you’re buying a house, a car or DME. Maintaining your personal credit report; maintaining your business credit report through Dun& Bradstreet is important.”

For smaller providers, Smith advises them to use financing and not to view it as unneeded or something only used when they are in serious need of cash. Rather, they should see financing as a tool.

“Financing doesn’t have to be based on need,” he says. “It can be based on benefits. If a mom and pop provider can buy $10,000 worth of medical equipment on a 12 month, 0 percent financing contract, they could take the $10,000 they would have written a check for, leave it in a checking account at .0025 percent, make their monthly payment, and they’ll actually make money above what they would have made if they had just writtena check.”

So, whether the provider wants to leave the money in the account, invest it in other assets, such as new staff, or advertising, or put it in some other form of investment account, the bottom line is that they wouldn’t have been able to make those investments had they not leveraged the financing available to them.

“In order to make profit as Medicare continues to cut reimbursement, you have to buy your products at the best possible price,” Jarczynski says. “Then, to maximize your cash flow, if you can do 12 months no interest, it’s not costing you to borrow the money, so your profitability is going to be a little bit better, and its going to increase your cash flow, because you’re not paying down the debt as much and you’re not paying for the money.”

Bottom line, Smith says, “You’re getting use of someone else’s money for free, and any time you can do that, you’re going to be far better off.”

This article originally appeared in the March 2010 issue of HME Business.

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