The Healthcare Industry (ranked 2nd in portfolio performance) comprises approximately 4% of overall equipment financing new volume (1st is transportation at approximately 26%), with an average of 80% of providers using financing as a tool. Taking the most important trends compiled from market data for years 2012-2017 the forecast is looking very bright and I have to say the secondary/refurbished equipment and service companies have reason to be excited.
First let's catch up on some high points of US business economic and healthcare projections. Healthcare started out in Q1 2017 nicely with a 5.5% increase in investment. This slowed to 4% by July 2017, and continued a slow decline through Q4 2017. Though the final numbers aren't in yet, it is expected to see a decrease to 3.5% or more for Q4 2017. 2018 is looking to have a stellar 7%+ increase in investment.
Economic forecasts are pointing mainly to a Goldilocks economy in 2018 with GDP rising to 2.5%, unemployment expected to continue at a natural rate dropping to 3.9%, and inflation rising to 1.9% from 1.7% in 2017. This is close to the core rate and the Feds target rate of 2% which will allow them to raise short term and long term control rates.
The Federal Open Market Committee FOMC, raised the fed funds rate, which controls banks Prime Rate, LIBOR, and other short term interest rates. Always make sure you sign fixed rate documents or have a clear plan with contingency for an adjustable rate option. You should be able to rely on your financing professional to help navigate these waters when applicable.
The healthcare market has seen a pretty sharp increase in accounts due (A/R) because of increased consumer financial responsibility which has caused a steep amount of bad debt from families and has made revenue cycle management an almost impossible task for many providers. Many which have been increasingly using third party billing and management companies. Interestingly, zero to minimal interest rate patient loans, and prepayment programs to help discuss costs upfront and pay prior to procedure, have been created with amazing success in order to try and alleviate some of the financial burden on both the patients as well as the providers.
Now let's get to the whole reason behind the headline.
The refurbished medical equipment market is quite robust and expected to grow sharply from 2016 at an estimated 12.5% compound annual rate and reaching $9.4b by 2019. This makes 2018 look like a very good year for the secondary market. The increase is linked to a better understanding of the DRA (Debt Reduction Act of 2005) and ACA (Affordable Care Act) and their impacts, which weaken some of the new medical equipment markets and conversely will potentially make some of the used equipment out there more desirable.
This brings us to an interesting point. With the exception of large IDN's and the like who rely on OEM captive programs to stay on the forefront of emerging technology (not nearly as many as you would think), we have reached a situation where with refurbished equipment potentially becoming more desirable, providers can upgrade to a more advanced piece of used equipment that has been refurbished to a gold seal standard or the like as opposed to purchasing a lower tier piece of new equipment for roughly the same amount or more. the old saying "form follows function" is becoming a more prevalent mindset as opposed to the "newer is better" mindset.
When coupling this with financing to offset the aforementioned A/R issues providers face, payments will spread out the initial upfront cost of that higher tier used equipment to a minimal amount that will require minimal patient throughput in order to offset and become profitable in most cases within the first couple months. It will also help to provide further stability as the payments are a static monthly payment and can be relied on for financial projections. This will be a huge help to many CFO's and accountants who are already struggling to keep some kind of stability in their financials.
So 2018 is going to bring us a positive outlook as far as equipment investment in the healthcare market however revenue pools and retaining capital are going to be tantamount in order for providers to see true success in the coming years. As important for both suppliers and providers is having a fully competent financing professional that has the ability to creatively use emerging financial technologies and standards in order to provide true value programs and assist providers in doing what providers do best, increase the quality of health for each patient that walks through their doors.