The revolution is not proceeding as planned. After more than a decade on the market and despite great improvements in functionality, just 30% of U.S. hospitals have installed PACS, according to Dr. Bruce Reiner, radiology research director at the Baltimore VA Medical Center. More and better financing strategies will be needed to reach the majority of customers, he said.
"Despite many documented operational efficiency gains and productivity gains, large-scale implementation of PACS has really occurred at a much slower rate than initially anticipated. We're still in the 'early adopter' phase," Reiner said during a discussion of alternative PACS financing strategies at this year's Symposium for Computer Applications in Radiology in Philadelphia.
Whether the lag results from the high capital cost of PACS, their enormous infrastructure requirements, the risk of technical obsolescence, or buyer inertia, the low acceptance rates raise some questions, Reiner said. For example, what can vendors do to increase PACS adoption? How can hospitals get the best value for their money?
"In order to enter the majority phase of the marketing cycle, we really need to look at alternative marketing strategies," Reiner said, outlining three broad categories of current financing options: title ownership, leasing, and risk-sharing arrangements.
Ownership can occur though direct purchase, or through a loan that's repaid over a fixed time, typically five years. While ownership is often the cheapest long-term solution, it requires a serious commitment to the technology being sold, as well as large capital expenditures that could preclude other worthy investments by a healthcare facility. Still, it's the acquisition method of choice in today's market, Reiner said.
"Direct purchase is currently the most commonly employed financing strategy. In the government sector it accounts for 100% of all sales, and in non-governmental, between 60% and 100%," he said.
In leasing arrangements, the lessor retains title to the equipment. Operating leases offer the lessee a measure of protection from technological obsolescence by eliminating concerns about the value of the equipment at the end of the lease period. This is an important consideration because the lack of a PACS aftermarket makes it extremely difficult to establish fair market value, Reiner said.
Leasing also frees the lessee from responsibility for removing the equipment when the lease ends, a costly proposition that encourages vendors to create incentives that encourage customers to release equipment on more favorable terms.
"Leasing currently accounts for 5%-30% of PACS implementations," Reiner said. It's gaining popularity in the commercial sector, particularly in small and medium-sized hospitals."
The final category, risk-sharing or "fee-for-use" leases, are typically based on some form of utilization model. Costs might be based on exam volume, image access, or megabytes of storage used. Application service providers, or ASPs, use this type of model, providing data storage, image transfer, and distribution services.
While risk-sharing eliminates the risk of obsolescence and the need for large, up-front capital expenditures, the total cost to the lessee is often difficult to predict. Thus, leasing arrangements may be skewed in favor of the lessor, who wants to ensure an adequate financial return on the equipment in any event.
Although 75% of vendors offer risk-sharing arrangements, just 5% of the PACS market is based on risk-sharing, Reiner said.
"Risk-sharing today is largely restricted to larger hospitals and integrated healthcare delivery networks. Typically they use a model based on usage ... and the ASP model is getting more and more interest in smaller hospitals performing less than 75,000 exams a year," he said.
In an effort to assess the current marketplace, Reiner and colleages polled 10 major PACS vendors, eight of which responded with detailed information about their existing financing options, utilization rates for each option, and methods of determining the fair market value of PACS equipment. They were also asked what critical variables they believed led customers to choose a certain type of financing, who they considered the primary decision-makers, and what was the role of third-party financiers in the purchase process.
The vendors offered a wide selection of lease options, Reiner said. Most options included technology obsolescence protection, combined hardware and software upgrades, multiple-term options, acceptance testing, and on-site service and maintenance. However, the vendors did not incorporate benchmarks, "Which I think are critical in any acceptance testing, whether it be productivity gains or operating efficiency gains," Reiner said.
To varying degrees, vendors do offer the option of changing financing options during the lease term, the ability to upgrade networks, uptime guarantees and workload consultation, he said.
The risk of technical obsolescence is critical in the acquisition of any rapidly evolving technology. PACS vendors have responded with so-called technical refreshment leases, which allow upgrades at the discretion of the customer. Upgrades are typically paid for with higher lease payments or extended lease terms. The customer can purchase the option to perform an upgrade, which is incorporated into the service maintenance contract, Reiner said.
While risk-sharing arrangements comprise just a small portion of the current PACS market, the deals can be structured quite creatively, Reiner said.
"One vendor offers a media conversion program, where payments are tied to the customer's film-based operational costs. Others offer incentive-based arrangements, where payments are based on operational efficiency gains. But really these are difficult for the vendor because they're hard to verify," he said.
Who decides which option is best? "All the vendors agreed that 100% of the time the PACS decision-maker is a high-ranking administrator [such as] a CEO, a CIO, or a CFO," Reiner said.
At the same time, smaller institutions will need to rely on PACS consultants to weed though the options. While consultants now spend much of their time working on RFPs and RFQs, they will increasingly be called on to evaluate complex financing options, Reiner said.
"In conclusion, future finance strategies will probably consist of a change from physical aspects of ownership to more creative financing, more risk sharing, or leasing," he said. "There will be a shift toward small and medium-sized hospitals, and increased opportunities for outsourcing all information services."
By Eric BarnesAuntMinnie.com staff writer
September 19, 2000
Click here to view all active PACS Digital Community discussions
Copyright © 2000 AuntMinnie.com
