Independent research shows that Siemens Financial Services (Siemens) occupies a market share of 27% in the asset finance in the public sector - making it one of the leading providers of leasing in the sector.

The statistics published by asset finance online marketing services provider Digital Networks Limited (DNL) were taken from an end-of-year report on the asset financing market, and were based on a combination of publicly available data from the Official Journal of the European Union (OJEU) and proprietary financial data from public sector advisors.

David Shone, Director of DNL, added, "Since we first started our independent analysis of the public sector asset finance market, Siemens has steadily risen up the rankings and is now firmly top of the table of UK lessors. The sector is very competitive and as the demand for alternative finance has grown, there have been many new market entrants over the last couple of years. But it seems that track-record and niche specialism instil the greatest confidence in the public sector."

Siemens Financial Services includes 45% of NHS Trusts and over 160 local authorities amongst its clients. In February this year, Siemens announced the formation of a new business division, Siemens Healthcare Finance, focused solely on addressing the highly specialist financial needs of the UK healthcare market.

As Payment by Results beds in, Louise Hamilton looks at how adopting alternative financial strategies can aid the uptake of new technology.

By Louise Hamilton, head of medical for Siemens Financial Services.

In the words of its creator Bob Dredge, Payment by Results (PbR) “underpins the whole raft of reforms which the government is bringing to the NHS”. These reforms impact on every aspect of the health service, fundamentally changing the way that funds flow through the NHS so that hospitals are paid for what they do, or don’t, deliver.

In essence, these reforms transform the way hospitals are funded, making them more akin to private companies at the same time as creating a patient-centric NHS. The aim is to encourage the NHS to embrace private healthcare sector tools and practices to better manage costs and resources. As the CEO of Rotherham Hospital recently pointed out, there is a huge latent entrepreneurialism in the NHS which, through PbR, will be renewed and lead to new and different ways of providing an effective service.

Since April 2005 PbR has covered elective procedures for a broad range of specialities and in the 2005-06 financial year, about 25% of hospital income is expected to come via PbR. This is predicted to rise to about 70% in 2006-07, when the system will be extended to cover non-elective activity, outpatient appointments, A&E departments and adult critical care services.

For some trusts, the reforms have come at a high price. Concerns have been raised by the British Medical Association’s Consultants Committee about a number of trusts in ‘financial crisis’ due to funding shortfalls. There was also widespread critical coverage about poor financial management in some NHS trusts, resulting in a £250m deficit at the end of the 2004-05 financial year.

Part of the problem may be that reactive decisions have been made to reduce or close services in response to immediate cash shortages with little consideration of the long-term consequences for patient services. These short-term solutions work against the very ethos of Payment by Results and pose a threat to patient care and healthcare jobs, as well as stifling the uptake of new technology. Siemens Financial Services CEO Jonathan Andrew says: “Without the flexible financing of their technology infrastructure, how can trusts cope with flexible funding?”

In its report Early lessons from payment by results, the Audit Commission declared that PbR is exacerbating the financial crisis and is, in fact, restricting patient choice. But this need not be the case if new, smarter, more creative financing options are explored which will encourage the continued flow and uptake of innovation and new technology into the NHS.

In many ways the reforms can create greater freedom for primary care trusts (PCTs) and hospitals to choose the best way to deliver services that respond to patients’ choices. But it needs a radical overhaul of the way PCTs and hospitals approach financial planning. Shrewd financial management and the use of alternative forms of finance will play an important role in ensuring PbR targets are met.

Leasing medical equipment

Commercial organisations take a very simple approach to the acquisition of assets. They use capital for assets that appreciate and alternative finance such as leasing for those that depreciate, whether it’s for a car or a photocopier. In hospitals, there can be huge benefits in procuring hi-tech, capital-intensive equipment using leasing. Currently the average age of equipment in the NHS is 14 years. Yet increasingly trusts are utilising assets that are high-tech and depreciate quickly. When an item of capital equipment, say a CT scanner, is purchased from capital budget, the government makes an asset charge against it and a depreciation allowance is made on the balance sheet. However, the speed at which technology is changing and developing means the equipment is superceded very quickly, generally within three years.

With the advent of PbR, leasing comes even more into its own as a way of acquiring equipment while spreading costs. The equipment can literally pay for itself through income derived from service provision. It provides a hedge against inflation because lease payments are fixed and locked in for the term of the contract. The fixed monthly payments allow you to accurately forecast budgets now and in the future, leading to better measurability and control.

One of the main advantages of leasing is that leasing charges are a revenue item, outside the NHS capital accounting requirements, so they can be charged directly to revenue budgets. This avoids the need to negotiate for a portion of the limited capital budget and the imposition of heavy capital charges (purchased assets). Furthermore, the asset does not appear on the balance sheet. Lease contracts for equipment generally run for between five and seven years. After a period of say five years, the trust can upgrade, add on or extend.

Tech refresh

With PbR, it has become vitally important for hospitals to be able to predict costs in order to meet targets. It is therefore just as important to have the technological infrastructure in place so that these costs can be measured. Measurability and the accuracy of patient records are fundamental to ensure that hospitals can claim the money for the service or procedure provided. Tailored leasing products such as tech refresh are particularly suitable for IT systems because they provide the ability to upgrade and swap out of assets during the period of the lease in order to take advantage of technological developments.

Operating lease

An operating lease is an ideal solution for hospital equipment where it is anticipated that it will not be kept for the duration of its useful life. If the asset is assessed to have a resale value at the end of the lease period, the rental amount is reduced. The resale value is termed a ‘residual value’ and at the end of the lease the equipment may be returned so that it can be sold in order to realise a profit. As the finance company is assuming the risk in the asset, it is shown on their – rather than the trust’s – balance sheet.

Managed services

While the debate between price versus value continues, ‘added-value’ managed services contracts that not only cover the equipment itself but also include maintenance, training and upgrades are seen as providing many advantages. Managed service agreements can be taken out on a cost per use basis – which means calculating the ‘per patient’ cost is simple, minimising administrative time, reducing costing errors and providing far greater measurability and financial control. While it is a radically different approach to financial planning, it aligns well with the requirements of PbR.

The costs of the variables needed to deliver a service can all be encompassed within one managed service agreement. This principle can be applied to many disciplines, from a total bed management agreement to imaging services through to sterilisation services. Careful analysis of treatment levels can help to work out an agreed number of procedures to be performed under the contract. A cost per treatment service agreement enables the true cost of delivering that service to be measured and resources to be better managed. This is essential under the new PbR tariffs. More and more hospitals are entering into longer term managed service agreements, across many disciplines, to benefit from this approach.

Taking on these and other financial models commonly in use in the commercial sector will help trusts to control costs, manage efficiencies and make better investments. Developing a proactive, holistic approach to the procurement of medical technology and services will help hospitals meet the demands of the new reforms.

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