Equipped for change

15 Apr 10
Medical technology can make the difference between life and death but with shrinking NHS budgets, finance directors need to find new ways to get hold of capital equipment. David Martin has some ideas
By David Martin

15 April 2010

Medical technology can make the difference between life and death but with shrinking NHS budgets, finance directors need to find new ways to get hold of capital equipment. David Martin has some ideas

The NHS is facing one of its biggest organisational and financial challenges ever. All parties in the election campaign claim they want to protect health. But NHS chief executive David Nicholson has warned finance directors that they have to find £15bn–£20bn in efficiency savings between 2011 and 2014. Managers’ response to this will make all the difference when it comes to maintaining standards.

In common with other health care systems across Europe, the NHS is under pressure to reform. And the passing of the Health Act 2009 last November has given this further impetus. The Act puts particular emphasis on assuring quality accounts, direct payments for health care, a regime for unsustainable NHS providers – and new powers to de-authorise ­foundation trusts.

The steep cuts ahead are equivalent to up to 6% of the current NHS budget. Any trusts failing to produce the savings could face harsh new penalties following a review by the Department of Health. The NHS Confederation has warned that managers will have to make tough decisions on what they can afford to pay for. Otherwise, sweeping cuts will mean waiting lists increase, leading to poorer care and ultimately greater costs. Action is needed now if the health service is to hit its targets with restricted funding.

In June last year, at least 84% of NHS financial directors were ill-prepared for the cost-cutting programme, according to a survey of primary care trust finance directors carried out by consultancy KPMG and information service Dr ­Foster ­Intelligence, a public-private partnership.

So the search is on for ways of making budgets work more effectively. If managers explore all the financing options open to them, they can not only make more ­efficient use of their available capital, but also prepare themselves for the difficult times ahead.

One area coming under scrutiny is ­capital equipment, and how to acquire it more efficiently and effectively. Access to flexible capital is critical to the provision of the latest medical technology and equipment, and any limitation on the ability to invest in it has a large influence on ­efficiency and patient care improvements.

A report from Siemens Financial ­Services shows that £1.85bn of NHS capital is ‘frozen’, meaning that it is locked into outright purchase of medical equipment instead of spreading payments over the lifetime of the assets. This money could be freed using alternative asset-financing techniques, such as leasing and rental, releasing much-needed cash for other efficiency initiatives and, ­ultimately, improving ­patient care.

The Siemens report, the latest in a ­series tracking relative trends in the major European economies, shows that the total annual capital expenditure frozen in the UK health care system has risen by 17% since 2006, from £1.57bn to £1.85bn. Although this rise is lower than in Germany and France, it is higher than for Europe as whole, where there has been a 15% increase. A significant proportion of this capital could be freed if asset-financing techniques were more widely employed.

The gap between investment requirements and affordability is becoming especially acute. While it has never been so important for health care institutions to continue investing in leading-edge equipment and technology, it will become increasingly hard to find the capital to do so. Technology tends to advance in sudden leaps and in some examples can be enhanced or upgraded within 12–18 months. Experts agree that the accelerating pace of change means buying medical technology ­outright is no longer the most financially effective option.

Leasing and hire purchase can help health services afford the most up-to- date equipment and medical technology, as well as rapidly improving efficiency. These are hardly untried financing methods. Leasing is used for a wide variety of capital spending in the private sector – some 90% of the FTSE top 100 UK companies use it, according to a recent survey. But in the public sector it is still ­something of a niche market.

For NHS trusts, the main benefit of leasing is that it is an off-balance sheet solution, which is counted as a revenue expense. Everything from MRI/CT scanners, to defribrillators, IT systems and high-tech diagnostic equipment can be financed in this way, freeing budgets for investment in staff and drugs.

A leasing agreement helps bridge any cash gap – the difference between what health care institutions urgently need and what they can afford within budget. In these circumstances, a third-party financier takes ownership of the required asset and the end-user pays a regular rent to use the asset for a defined period.

Most NHS trusts use short-term operating ­leases, which removes the need to tie up precious working capital in what can be a rapidly depreciating asset. In this model, all the risks lie with the lessor, which will eventually look to sell or dispose of the equipment. Another advantage of this approach is that it allows health care managers to wrap up a range of project costs into one quarterly, or annual, payment structure – not only for the equipment itself but also for software, any maintenance and ­servicing, the potential cost of training (dependent on equipment), and operational costs related to support. Such ­arrangements bring transparency to ­financial planning, by giving a holistic view of cost structures. Net cost savings are made by distributing payments over the lifetime of the asset.

Alternative financing tools such as these can, of course, be used throughout the public sector. Increased pressure for efficiency in the public services means that the number of public sector investors using these forms of financing will continue to grow, and they are already becoming an integral part of successful infrastructure projects.

In these straitened times, finance managers need to explore new approaches and ensure that their capital budgets are working for them in the most efficient way possible.


David Martin is the general manager for public sector UK at Siemens Financial Services

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