Financing high-tech: You can afford it after all

Chandrasekhar Varma, MD, an Escondido, Calif., endocrinologist, last year figured it was time to replace his billing system and install electronic medical records software. One problem: the price tag for the necessary software and hardware ran $60,000. "I didn't have $60,000 lying around," he said.

Rather than cancel his plans, Dr. Varma did what many physicians do when they buy technology: He sought financing.

Generally, physicians can seek a lease-to-own arrangement or a straight loan from a lease company or a bank, or go with a subscription pricing model arrangement through the technology vendor.

Under the terms of a lease-to-own or bank-financing arrangement, the lender forks over the full purchase price to the seller. A doctor then must make monthly payments to the lender over an agreed-upon period, which typically ranges from three to five years. The lender owns the goods until the physician pays off the loan plus a dollar buyout payment, at which time the physician owns the goods.

"It's like buying a car. When you buy a car you can pay cash or have a lease company [or bank] finance it for you," said Frank Rhie, MD, founder and chief medical officer of Alteer Corp., a Irvine, Calif.-based company that sells financial and clinical software to physicians. Although in many ways, it's more like owning a condominium. Whether or not your loan is paid off, you still have to pay a monthly maintenance fee to cover technical support and software updates.

With subscription pricing or pay-to-use, also known as an application service provider model, the physician never owns the software and data are stored outside his or her office. The advantages of subscription pricing are that users don't incur large costs upfront, don't obligate themselves to pay off a large debt, don't have to worry about technology support and automatically have access to the latest software version because the system is housed and maintained offsite by the vendor.

"Subscription is usually cheaper if you don't use it for more than three to five years," Dr. Rhie said. "But if you use it [for longer than that] subscription is more expensive at the end."

Several health care companies that offer subscription pricing as an option, including Alteer, require a multiyear commitment from users, he said.

Whichever option is best will depend on your finances, cash flow and other factors, including your creditworthiness and whether you are new to practice or close to retirement, according to experts.

Mix and match

Financing software and hardware purchase is not an either/or proposition. A physician can use a combination of financing methods.

That's what Dr. Varma did in March 2003, when he bought practice management, electronic medical records and document management software packages from Alteer.

The software cost his two-doctor practice $30,000. Another $30,000 was needed to pay for new computers because the computers running his previous billing system were inadequate for the new software.

To finance the purchase, he went to his bank and signed a three-year lease-to-own agreement for the software, Dr Varma said. He also took out a three-year loan from the bank to buy the hardware -- a server, computers and monitors.

Leasing the software appealed to him because it didn't require him to make a large investment upfront, and he will own the software after three years, he said. Every month, he pays the bank $1,200 for the hardware loan and $900 for the software lease.

He was not interested in subscription pricing because he is committed to using the system he bought for the long term. The transition to electronic records requires a heavy investment of time and money, and makes it impractical to change vendors every few years, he said.

"The only way you would come ahead with subscription is if you wanted to change systems," Dr. Varma said.

The $30,000 he borrowed to buy the software does not include the $450 he pays monthly to Alteer for support and maintenance, he said.

In the case of the hardware, it was "significantly less expensive" to borrow and buy the equipment outright rather than lease it, he said. "We could go to different suppliers ourselves and get a better price."

Even if he had $60,000 in the bank, he still would have borrowed money rather than use his savings or free cash flow to finance his purchases, Dr. Varma said.

"Interest rates are so low, and I think I could do much better with $60,000."

Leasing companies

Banks aren't the only option for financing. Many physicians use lease companies. Many vendors refer physicians to preferred lease companies, though they will work with any company a doctor brings into the deal. Lease companies are similar to banks in that they lend money or provide financing with a dollar buyout.

"They really are financing [companies] even though they are called lease [companies]," said Anna Sudduth Fink, a certified public accountant and health care consultant at Ellis & Associates, Baltimore. Under the law, lease companies must characterize the financing they provide as a lease, she said.

Fink recommends to her clients that they borrow from a bank rather than a lease company whenever possible.

"If I have a client -- and most doctors are going to be this kind of client -- who has fairly good credit background, then most banks will lend for a good 3% to 6% cheaper than most leasing companies will," she said. "So it's a much better deal to go to a bank directly if you have the creditworthiness to do so."

Bank financing involves more paperwork while leasing involves minimal paperwork and is quicker, she said. "So, if you want convenience you get a lease."

Convenience -- and better terms -- led three-doctor MyKidzDoc in Pembroke Pines, Fla., to borrow $75,000 from a lease company instead of a bank to buy a system from NextGen Healthcare Information Systems Inc.

Pediatrician Kenneth Cohen, MD, approached his bank about a loan but stopped the application process when it became clear that the bank was not going to match the 6% finance charge the lease company had offered, he said. Plus, the bank loan process was more cumbersome.

"We couldn't afford to pay [out of pocket] because we were a new practice and it was easier to pay over time," Dr. Cohen said.

Under a four-year lease, MyKidzDoc pays $2,300 monthly to the lease company, he said. He pays an additional $600 a month to NextGen for support.

Separately, the pediatric group paid $15,000 in cash to buy a server and four computers. "We looked into leasing, but at the time the practice was self-sustaining, and we had the capital available. So why pay the finance charges?" Dr. Cohen said.

He would have considered getting the subscription pricing model had it been available as an option from NextGen when he bought the system, he said.

Subscription pricing

Some experts say subscription pricing makes more sense for young physicians who don't have the money or credit to get a loan, although some doctors closer to retirement have found the option beneficial when they only plan on using the software for three to five years.

In 2001, for example, James Hartley, MD, a family physician in Andover, Kan., selected the subscription model partly because he and his practice partner were both in their late 50s and thinking about the end of their careers. Last year they added a third doctor. They plan to hire a fourth, then sell the practice to their younger colleagues.

"We were getting closer to retirement and did not know exactly how all of it would work out and how stable our practice would be," Dr. Hartley said.

"When you look at that from a business standpoint, you certainly don't want to shell out and have a huge debt that you can't recover from for several years."

To buy billing and EMR software from Physician Micro Systems Inc., the two partners would have had to borrow $61,000 from a bank, compared with paying $750 a month per physician under the subscription model, Dr. Hartley said.

"If we had to do it over again ... and were 20 years younger, we might have done something different," he said. "This was a good fit for us for where we were at that time."