Healthcare providers, particularly those with a large mix of Medicare related transactions, could be in for a cash and profit squeeze. Refinancing existing medical and office equipment leases can be a way to ease the pressure. According to AMA President Jeremy Lazarus, 45% of physicians in the American Medical Association plan to decrease or stop the acceptance of new Medicare beneficiaries if Congress does not act to stop a 5% decrease in Medicare payments.



These payment reductions have gone into effect this year. According to Lazerus, "Over the next nine years, Medicare will cut physician payments 37%, unless Congress acts before January 1, 2007", adding, "at the same time, the cost of caring for those patients will increase 22%, and that math just doesn't add up". The cuts, which would reduce payments by $2.8 billion over five years, are included in a 2006 deficit reduction package.

Because of the cuts, providers will need to become more operationally and financially efficient. One way to offset the decreased cash flow is to refinance equipment. Many providers are making very large monthly payments because they have opted to execute four or even three year leases. There are now medical equipment financing options available that can spread those payments out over a 96 month period. For example, a physician needed $500,000 of equipment to start his practice and signed a 48 lease. Payments on the lease, assuming an 8% interest rate, would be approximately $12,200 per month. If that equipment were refinanced at the beginning of year two, the balance would be approximately $380,000. Refinancing that balance over 96 months would result in payments of $5,400 per month, a cash savings of $6,800 per month or $81,600 per year.

Along with the equipment refinancing application, the provider must typically submit financial statements for the past two or three years (preferably audited) or federal tax returns. Personal financial statements of the principals must also be provided since personal guarantees will likely be required. There must be a track record of profitability and sound management. Underwriters will also need payoff letters for existing leases in order to determine if a refinancing makes sense. For example, if the lease calls for substantial prepayment penalties, it could diminish the value of the transaction.

With the help of an experienced leasing consultant, the provider should carefully review the equipment being used to determine if he is a good candidate for long term refinancing. For that matter, even buying new equipment for longer amortizations might make sense. If the medical equipment is likely to withstand an onslaught of technical advances, a refinancing could be the ticket to helping offset the specter of Medicare payment deductions.