Financing PACS in New Ways

In a report prepared by the Healthcare Financial Management Association in partnership with GE Healthcare Financial Services and PricewaterhouseCoopers released last year, 72 percent of hospital CFOs anticipated increases in capital expenditures over the next five years, with not-for-profit hospitals more likely to increase their capital budgets than their for-profit counterparts. At the same time, 61 percent of the CFOs in the sample revealed they were planning to purchase major IT systems over that same time span.

Picture archiving and communications systems are no longer considered superfluous - nor just the need of large, academic facilities or mega-large imaging centers - as their capabilities have increased to place them in a key role to high-quality patient care for nearly any size facility and an enterprise essential. Several driving forces have contributed to this paradigm shift, including the need for increased efficiency for the ever-dwindling number of radiologists, HIPAA regulations that require long-term archiving and disaster recovery plans, the distances between institutions within a healthcare system and the want for more interactive, faster conferencing with specialists that necessitate the sharing of digital images. So then the question remains - how to finance these essential components to the entire healthcare enterprise.

Traditional models of funding capital expenditures through fundraising, borrowing the money or issuing tax-exempt bonds have now been joined by new approaches that have been designed to reduce the financial burden of implementing PACS when institutions lack up-front resources.

Philips Medical Systems, for example, has adopted a menu-like approach to these issues tailored to the hospital's ability to pay, intended to facilitate long-term relationships including financing through their capital leasing programs, or traditional purchase configurations.

Their latest offering includes an ASP (application service provider) model where they charge a specific price per imaging study, based on a five-year contract. Christopher Click, Philips' director of radiology IT, explains that in this model, they calculate the value of the offering solution, divide it by the number of months in the contract time and then scale the payment based on the customer's means. This approach supports either a "back-end" load so that the payments are smaller as the contract begins, and then grow as the contract matures, or conversely, a "front-end" load if the hospital has capital available, with gradual reduction in payments as the contract matures.

GE Commercial Finance Healthcare Financial Services (Chicago) has developed an innovative product for the 75 to 80 percent of healthcare facilities that qualify as 501(c)(3) not-for-profit institutions.

Besides providing traditional loans in the purchase of equipment and systems, Deborah McLennan, market development manager in this division of GE, describes TECn which stands for Tax-Exempt Capital to the nth Power as an alternative to hospitals that usually would issue tax-exempt bonds for their capital expenditures. This program provides the same benefits in terms of interest rates and length of financing term, but is less expensive and less time-consuming than the traditional methods required in the issuing of tax-exempt bonds because GE provides in-house underwriting and the hospital is not required to pay numerous fees typical from a third-party bond underwriter.

In their traditional lease financing model, GE suggests that hospitals are generally better served by eventually owning their IT system, because removing these types of infrastructure components can prove burdensome.

Siemens Medical Solutions provides a number of financing options for PACS as well. Working from an assumed cost of $10 to $15 per sheet of film, Henri "Rik" Primo, director of marketing and strategic relationships, explains that an operational lease that is based on that same expense per study, will eventually return the investment.

For example, with an operational lease based on 100,000 procedures and one film per study, it would cost $1.5 million in film costs. Applying those expenses to a PACS purchase or lease would provide a fairly robust system, and a PACS costing $3 million would be very large. One caveat to this approach is that institutions should include the cost for upgrading hardware and software to maintain a system that is current. Generally, if an institution sets aside an extra 15 to 20 percent of costs towards upgrades and expansion, Primo believes that will adequately cover those expenses.


PACS for rural communities

BRIT Systems has provided PACS to institutions on a price-per-study basis, which may cost more in the long run, but avoids up-front capital expenditure and produces corollary benefits to the healthcare system, such as automatic technology refreshes. Michelle Fisher, president, explains that when the vendor is in charge of the system, they must utilize the latest technologic advances to maintain their competitiveness and reduce their overhead. For example, when they stored images over the past several years, they used optical platters. But now, with spinning disk technology, they can store more compactly and provide faster access to the images. Since that media is less expensive, they will automatically upgrade and provide improvement to their service.

One further issue to consider when providing cost-justification for PACS installations is to consider which expenses are attached to the PACS itself, and which expenses are associated with infrastructure. If a hospital needs to update their network to run a PACS, is that an infrastructure cost or a PACS cost?




Edward L. Brown, MD, and his business partner Craig T. Folse, MD, formed the Brown-Folse Radiology Group in Rayville, La., to provide PACS capabilities from BRIT Systems to 12 rural hospitals in their state to replace their usual method of operating as "circuit riders" to all of the institutions to read studies every 24 hours. Their model requires that each individual hospital own a stand-alone server with archives for seven years of storage space and an updated system that can connect to the primary network.

The individual hospitals auto-route their images to the central server which is located in New Orleans, Brown explains.  "That server's function is to serve as a repository for the second copy of the exam, and then we tape backup our central server so that we have three copies, one at the hospital, one on our server in the RAID active format, and then a tape backup that is stored offsite."

Because they realized that the hospitals would not have the resources to purchase their own infrastructure items plus cover the $400,000 to $500,000 required for the central server, Brown and his partner financed that equipment themselves as their contribution to the network.

Now that it has "gone live," the hospitals pay a small amount per study to cover ongoing expenses of running the system, Brown explains.  They will be upgrading to T1 lines, with anticipated costs of $50,000 per year, the storage space with associated costs of $35,000 per year, and maintenance of the system that is projected to run $50,000 to $60,000 per year and they purchased a voice recognition system as well. The radiologist reading fees are a separate expense, and the fee per study is minimal to cover operational expenses, not capital expenditures for the central server.

In a similar model, Total Radiology Solutions (TRS) of West Monroe, La., was formed by a group of nine radiologists and a business manager, using BRIT Systems to provide PACS for several hospitals in their area.

Bob Mirabito, president and CEO and managing partner of this enterprise, explains that their business model, which the 10 of them funded through applications to banks, cover capital expenditures that provide the backbone and storage components to the network plus working capital.

"We package everything as a bundle. With a fee per study, they have a platform to read and dictate the studies, images that are stored for five years to which they have unlimited access, and we administer the IDs and passwords," says Mirabito. The final component they provide is a physician trainer to educate the referring physician community about the network functionality.


Conclusion

Given the fact that most hospitals no longer view PACS as a want, but a need, CFOs must seek the most advantageous financing approach to their particular circumstances. The vendors stand poised to provide a number of funding alternatives to meet their customers' requirements.