Vendor Health IT Loans -- A Viable Financing Solution for Hospitals?

by Protima Advani

Ever since former President George W. Bush put forth a goal for every American to have an electronic health record by 2013, hospitals and health systems across the country have spent millions of dollars purchasing a variety of EHR applications.

What's Happened Until Now

Although the inpatient EHR journey is nowhere near completion, the relaxation of the Stark laws in 2006 has fueled investment in IT, as hospitals began offering subsidized EHRs to community physicians. Almost every hospital seemed to be moving full steam ahead to achieve its digital ambition until the economic downturn of 2008 forced most hospitals to cut back on all capital expenditures and, in many cases, delay previously approved health IT implementations. 

Current Events

In the midst, President Obama signed into law the American Recovery and Reinvestment Act, allocating more than $19 billion to accelerate the adoption of EHR technologies and facilitating nationwide health information exchanges to improve the quality and coordination of care among health care providers, thereby reducing medical errors and duplicative care. Most of the funds -- approximately $17 billion -- will be made available to hospitals and physicians as Medicare and Medicaid incentives for meaningful use of health IT. The remainder of the funding, approximately $2 billion, will be available through competitive grants and loans to support the development of health IT standards, build the infrastructure for health information exchanges, as well as to enhance patient privacy and information security guidelines

Present Realities vs. Future Goods

Needless to say, the president's stimulus bill has outlined ambitious goals for health IT. With a short window -- commencing in 2011 -- to demonstrate meaningful use to collect the Medicare and Medicaid incentives, hospitals will have to speed up EHR implementation across the next two years. Unfortunately, the current economic crisis has hit hospitals hard. Faced with declining margins, hospitals don't have the cash they need now to purchase and implement the necessary health IT technologies that will allow them to collect the incentive payments later. Worse yet, incentive payouts to hospitals pale in comparison with the total cost of implementing the entire suite of EHR technologies, and savings resulting from these investments -- such as reduction in duplicative tests, improved care quality, etc. -- will be realized by the payers, not the hospitals themselves.

Despite the misaligned timing and unfavorable equation between investors (hospitals) and beneficiaries (payers), hospitals and health systems are focused on meeting the mandates laid out in the stimulus bill. Faced with razor-thin margins and limited access to capital, hospitals are prioritizing IT investments over all other capital requirements during this financial downturn. That said, with a slow economic recovery ahead, operating margins may be inadequate to fund the necessary IT investments and hospitals

Financial Hurdles

Unlike clinical technologies that often are leased to avoid purchasing new equipment that soon becomes obsolete, IT has never been a good candidate for leasing. Most hospitals extend the life of their information systems beyond depreciation, making leasing a less economically favorable option. Similarly, bonds are reserved for large construction projects and are not available for financing health IT. Absent viable alternatives for financing IT investments, hospitals may have to rely on their states to secure grants from the Office of the National Coordinator for Health IT and subsequently offer them as low-interest loans to health care providers.

Vendor-Sponsored Financing

Recognizing this capital crunch, a couple of health IT vendors have announced available financing to assist hospitals with EHR implementations.

In April 2009, IBM's Global Financing Division announced $2 billion available in the form of bridge loans for financing high-infrastructure technology projects, including health IT, broadband networks for rural communities and smart electric grids. These funds will be made available in the form of low-interest loans with deferred payment options, allowing institutions to align their payment schedules throughout the course of the project's anticipated benefits. That said, this financing is available only to entities considering technology projects that have a majority portion of IBM hardware, software and technology services components. Financing also can be applied to non-IBM technology as part of a larger IBM solution.

In contrast, GE's commitment of $2 billion is targeted purely at health care -- with most of the funds available for health IT purchases and rural health projects. GE's health IT loans available for hospitals and physicians will carry no interest until the institution begins collecting the Medicare and Medicaid incentives for demonstrating meaningful use. While the definition and certification criteria associated with meaningful use still remain elusive, GE guarantees that its EHRs will meet the government's requirements, regardless of the final details. Similar to IBM's financing contingencies, GE's loans are available only to hospitals and physicians purchasing GE's EHR solutions.

Only time will tell whether such an offering is attractive enough to generate interest from hospitals and physicians; it remains to be seen if this arrangement can truly be a win-win for both health care providers and their vendors alike or whether it will be a failed attempt by the vendor community to expand their clientele and guarantee themselves some of the forthcoming incentive payments.


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