Lending may have taken the backburner in the current economic climate, but that may not be the case in the long run. Dean foresees the big picture of financing to improve in the next five years, but there are clearly still challenges ahead.

"There are indications that financing will ease, but the high rate of defaults caused by the economy and by the DRA will continue to cause skepticism in new financing," says Detwiler.


New rules for leasing

Hospitals and imaging centers have their own capital troubles to worry about. Leasing has become particularly more attractive in recent years because certain leases can provide hospitals and imaging centers a cushion from assumed debt and it can also keep their lines of credit from getting tied up. This is called an operating lease, and its magic lies in the fact that it is not reported on the capital budget and instead can be fully expensed on the operating budget. Detwiler says this may be changing in the near future.

The Financial Accounting Standards Board (FASB) is a non-profit organization dedicated to developing universal accounting principles in the U.S. and beyond. The operating lease has come under fire by the FASB because of rampant debt-reporting abuses by companies like ENRON and Global Crossing, which appeared to be financially healthy on their balance sheets, but were struggling to survive in reality. Lo and behold, operating leases, also known as "off balance-sheet financing," helped these companies hide signs of impending collapse. Current rules, written under FAS 13, may be revised to do away with the operating lease altogether.

"As the Financial Accounting Standards Board adopts new international rules to supercede FAS 13, the nature of the lease will change," says Detwiler. "The operating lease will cease to exist and lessees will be forced to capitalize equipment leases. This will cause a good deal of stress in that market segment as lessees have to report leases on their balance sheets as debt."

Operating versus fully-financed

There are currently two main categories of leases: the operating lease and the fully financed lease. The differences are subtle, but the long-range implications are not. With the operating lease, the leasing company retains ownership of the purchased equipment and they depreciate the equipment while the lessee expenses the lease payments. For a five-year operating lease, a hospital would end up paying 70 or 80 percent of the value of the equipment - plus interest - over the course of the lease and then they would have the option of buying-out the equipment at fair market value. With a fully-financed, or fully paid out lease - and it should be noted that there is little difference between a loan from a bank and a finance lease from a leasing company - a hospital is going to have to report the lease as debt on the capital budget and they'll be paying for 100 percent of the value of the equipment with interest over the course of the lease, terminating in what's called a one dollar buyout.

More Industry Reports