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Rent vs. buy equipment: The best procurement strategy for providers of home infusion & respiratory equipment

For most companies, the decision to rent or buy home infusion and respiratory equipment involves a variety of factors. These factors include capitalization, cash flow, equipment utilization and maintenance costs.

If a company were to own all its equipment, it would have:

  • Fixed equipment costs
  • Significant, continuous capital expenditures
  • Fluctuating soft costs, including equipment cleaning, testing, tracking, maintenance and disposal
  • Responsibility for managing regulatory changes and recalls

On the other hand, a company that rented all its equipment would have:

  • Variable equipment costs based on fluctuating utilization
  • No capital expenditures
  • Rental costs as an operating expense that would erode earnings 
  • Consistent soft costs, since routine maintenance is included in rental pricing
  • No responsibility for managing regulatory changes and recalls

Today, companies often find that owning most of their equipment while renting a smaller percentage makes the most business sense, according to Steve Pharr, Director of Biomedical Enterprise Solutions at McKesson. "When companies decide to expand, their first thought is that they'll just buy whatever additional equipment they need," he says. "After some dialogue with us, they realize that supplementing with rentals frees up their capital and puts them in a flexible financial position."

You'll want to consider costs associated with all aspects of equipment ownership, including upfront costs, utilization, maintenance costs and any extras that may arise. You'll also want to consider what the ideal rent/buy mix for your business is.

Consider upfront costs

Jim Milostan, Director of Biomedical Business Development at McKesson, points out that the underlying thought process of deciding to rent or buy is like deciding whether to rent or buy a car. "If you're just going on vacation for a short time, renting a car makes perfect sense. But if you're planning to stay for months or years, buying is the way to go," he says. "The same thought processes apply when considering home infusion and respiratory equipment."

But the nuances of making that decision are considerably more complicated. Milostan suggests taking a deep dive into your business's finances. "Whether to rent or buy comes down to an accounting issue and how you want the expense to hit your books," he says. "Maybe you'd rather have the equipment on your balance sheet and get the depreciation. Maybe you have to wait 12 months for your capital budget to renew, so renting works for now."

Examine your utilization

Another key metric to consider when choosing between purchasing or renting is how efficiently you deploy your equipment. "Home infusion companies have very few places they can save money due to margins, reimbursement and regulation," says Pete Elias, Director of Equipment Management Services at McKesson. "We suggest trying to increase your efficiency because bad utilization is very costly."

In Milostan's experience, home infusion pharmacists tend to overestimate their utilization rate. "They usually overestimate their utilization around 80% because they think that any equipment not on the shelf is being used," he says. "But what about the equipment that's on a delivery truck or in a nurse's trunk? Most people's true utilization rate is significantly lower than they think it is."

McKesson Medical-Surgical's experts recommend a goal of 70% utilization. "For every 10 devices, if you've got seven on patients, the remaining three should be enough to cover you during maintenance, cleaning and the like," says Pharr.

Evaluate maintenance costs

Maintenance is another metric to consider when deciding whether to buy or rent additional home infusion or respiratory equipment.

Routine preventive maintenance is a big-ticket item that requires regular financial outlays, either in the form of building your own infrastructure to service equipment in-house or paying a company to service your equipment. McKesson Medical-Surgical's asset management solution is one example of a service program that will provide maintenance services.

Elias points out that medical equipment must be cleaned between patients. "Most manufacturers don't have between-patient protocols, but accredited home care companies do," he says. "To maintain that referral source, you'll need to test each machine's function and output accuracy after each patient if you own. If you rent, McKesson does that as part of the rental agreement."

Add up extra costs

As with any other major purchase, other costs can add up. Commonly overlooked costs for home infusion equipment include:

  • Storage fees: Where will your equipment be when not in use?
  • Courier/delivery fees: What happens when you need to pick up equipment that is no longer being used? 

"When you own equipment, you own every aspect of it," Elias says. "Literally everything you do with this equipment costs you something."

There are also the opportunity costs associated with making any large purchase. "I always ask customers what other plans they have for their capital budget this year," says Milostan. "For example, compounding pharmacies need to buy hoods, which are both expensive and directly tied to whether a pharmacy is profitable."

And providers that don't keep current with technology may find they face an opportunity cost of a different type: "If you've got older equipment, your census might drop because discharge planners want their patients to use the newest equipment," Elias says. "They think it makes the hospital look good."

Determine your ideal rent/buy mix

Clearly, there is no one-size-fits-all when deciding whether to rent or buy home infusion or respiratory equipment. That complexity means you should seek a trusted expert to help you sift through all the variables that apply to your business.

"Working together with a turn-key company like McKesson gives you a lot of flexibility," says Pharr. "We find that many customers begin with us for generics, biologics or other drugs, then are ready to use us to access devices and other services. Once someone decides they want to have a broader relationship with McKesson, they'll find they get better opportunities in deal construction on equipment."

Elias's and Milostan's division takes a consultative approach. Milostan, in fact, has developed a proprietary spreadsheet tool that allows for a customized analysis of the key issues. "We will run the customer's inventory through the spreadsheet and help them determine the right balance for their business based on their financial and operational picture, including utilization," he says.

The benefit of determining the ideal rent/buy ratio for your business is that you won't tie up capital unnecessarily. Renting supplemental equipment when your census fluctuates helps insulates you from financial turbulence, too: rent additional equipment during periods of expansion, then return them if your census contracts again. If your growth continues into your next period of capital funding, consider buying more equipment to support that sustained growth.

Pharr supports the idea of developing a plan for business growth that leverages rental equipment where necessary. "For smaller businesses, renting lets them grow without fiscal commitment," he says. "But we want to get them to the next stage for greater stability." That might mean proposing stair-stepped growth in equipment ownership over several years, perhaps starting with 25% owned/75% rented and moving up to 75% owned/25% rented in year three, he explains.

Making that transition successfully inevitably involves refining your utilization. "If you can manage your utilization well, there are tremendous benefits to owning equipment, because you're getting the depreciation expense," Milostan says. "The important thing is that you thoroughly understand your options, and we're here to help with that."