Capital funding: The case for equipment investment

NHS organisations face a bleak future in terms of funding for capital medical equipment. Increasing demand − especially for diagnostic tests − is coinciding with a prolonged period of little growth in overall health spending.

The challenge for the NHS and for individual organisations is to use what money it has wisely while also ensuring it makes best use of the equipment it has - and to put in place plans for replacement. But how can that be achieved and is there a better way of doing it?

‘Quite a lot of what is wrong in the system is wrong at the trust end, rather than around the availability of capital’

Nick Rose, head of the independent trust financing facility at the Department of Health, says there is money available but trusts do not always seek it or make rational funding decisions.

Part of this may be a concern about financing costs but his department can provide funding at rates reflecting what the government can borrow at − currently just a little above 1.5 per cent over 10 years.

And he adds that trusts do get funding for replacement equipment through the prices paid for services by commissioners, which include an element to cover depreciation.

Capital myths

However, this money does sometimes get spent on other things - leaving trusts without the funds to buy equipment in good time. And, even if trusts do put aside money for replacement, it may not stretch to technological advances that push up the price of replacement kit, and additional equipment driven by increasing demand.

“Quite a lot of what I think is wrong in the system is wrong at the trust end, rather than around the availability of capital,” Mr Rose says. “There’s a myth that capital is not available.”

But there are drivers in the system that can influence trusts’ decisions on investment - one of which is Monitor’s system of ratings based on trusts’ debt and liquidity. That can affect their willingness to invest as they may want to keep money in the bank to boost their liquidity.

Tim Barker, head of contracting and procurement at Derby Hospitals Foundation Trust, thinks meeting the liquidity requirements will mainly be an issue for financially challenged trusts but points out many other foundation trusts do have cash reserves which could have been spent on equipment which would drive efficiencies.

However, Monitor’s requirement can also lead to perverse incentives: Mr Rose was approached by a well performing trust that was keen to borrow money for equipment but seemed a little vague on details.

Borrowing additional money for any designated purpose would not harm its rating for debt - already at the lowest possible - but would allow its cash holdings to increase and therefore boost the part of its ratings linked to liquidity.

‘The increasing age of the installed base of imaging equipment in the NHS is a continuing source of concern’

These factors may mean that trusts are not yet taking the decisions they need to about spending on capital equipment. But Andy Brown, managing director of NHS Supply Chain, says the NHS faces a “financial bubble” as more and more capital equipment requires replacement.

He says competing demands for investment have resulted in much equipment being used for longer than manufacturers’ recommendations.

“The NHS has had a prevailing method for capital equipment − run it as long as possible until it is fully depreciated and is obsolete. There has never been a proper asset management strategy or asset management discipline,” Mr Brown says.

A National Audit Office report in 2011 looked at high value capital equipment and found there was a need to spend £450m over three years on MRIs, CT scanners and linear accelerators alone. “That amount of money has not been spent. In my view the situation has got worse,” he says.

“What we are building up is an increased risk of failure, increased risk of down time and higher maintenance costs.”

That is a view backed up by the Association of Healthcare Technology Providers for Imaging, Radiotherapy and Care (AXrEM), which represents suppliers of this equipment in the UK.

“The increasing age of the installed base of imaging equipment in the NHS is a continuing source of concern for AXrEM members,” says Charles McCaffrey, the association’s chair.

Purchasing drop-off

The association recently looked at the investment in this equipment by the NHS between 2010-2012. “The impact of this change was most pronounced in a step reduction in the number of high-end scanners purchased from 2010 to 2011, with 2012 flat compared to 2011,” he says.

Between 2010 and 2011 the number of CT scanners purchased dropped by 40 per cent, while MRI sales declined by 33 per cent. Sales of digital x-ray rooms − which perform the bulk of a radiology department’s workload − dropped by more than half in 2011-2012.

But the problem is not just the cost of running older equipment, it is the lost opportunity to provide better healthcare and for organisations to benefit from increased productivity. Mr Brown terms this healthcare utility.

Erika Denton, national clinical director for diagnostics, NHS England, believes that new imaging equipment can offer many benefits. “Imaging is integral to more than 95 per cent of patient pathways,” she says.

“Quite often there are savings to be made by purchasing new equipment because it can make work flow quicker.”

‘Asset management is not just about buying equipment − it is about using it to meet the needs of the NHS to improve care for patients’

Scans that might have taken 10 minutes on old equipment can be done in three, she says, and newer CT scanners involve a lower radiation dose for the patient. Business cases for investments need to reflect these benefits, which are at the heart of what the NHS does.

“Lack of investment denies radiology departments the advantages of the higher throughput, increased image quality and lower patient radiation exposures provided by new state of the art equipment,” says Mr McCaffrey. His members welcome initiatives to address this, and support a more structured and timely approach, he adds.

“If we compare other asset-rich industries or companies − such as rail or oil and gas − there is a huge capital investment in order to fulfil their objectives as a company,” says Mr Brown.

“In these companies, if they did not keep on investing in their infrastructure they would be uncompetitive. The NHS does not look at its assets like that.”

Examples include ageing LINAC machines that may not deliver so precisely targeted radiation to patients - potentially affecting patient outcomes and also length of stay, he says.

Another aspect is that older equipment does not have the capacity to share information with other hospitals systems - it is analogue rather than digital. As healthcare becomes more information based, this will become more of a hindrance.

“Ageing equipment probably has more patient safety risks built into it. It is unquantifiable,” Mr Brown says. “Asset management is not just about buying equipment − it is about using it to meet the needs of the NHS to improve care for patients.”

But no trust has the money available to buy all the equipment it would like or which would offer patient benefits of efficiency savings. The NHS probably spends about £500m a year replacing capital equipment but also has to bear considerable maintenance costs; finding additional money upfront will be a challenge.

Leasing and managed equipment

Much replacement will be straight capital purchases but trusts also turn to leasing and managed equipment services as alternative methods of funding. These can reduce capital outlay and offer trusts some certainty around future costs. But the effective cost of capital within them can be quite high.

Managed equipment schemes often offer other benefits. Derby Hospitals Foundation Trust is looking at one that would cover equipment, consumables and maintenance. “It’s a relationship approach working with a single provider and sharing the risks,” says Mr Barker.

Senior procurement manager Daniel Davis says it is about improving efficiency and workflow. Moving to digital technology will have an impact on workflow. “I don’t think that is unique to Derby - it is really a matter for the NHS as a whole to improve efficiency.”

As part of this scheme, there would be opportunities for “equipment refresh” with replacements provided through the contractor, ensuring the hospital does not have to think about additional capital.

“It means we can plan better. If we see an increase in direct access to imaging, for example,” says Mr Davis. “They can access equipment quicker than we can find it ourselves.”

‘When applied incorrectly or inappropriately, the introduction of a third party to manage equipment procurement and maintenance of a whole estate can add a layer of bureaucracy and cost to procurement’

Mr Rose also suggests that managed services are popular because, if they count as operating leases, they keep the costs off balance sheets. They may also be driven by the VAT situation − trusts can currently reclaim VAT on them − but may not be cheaper overall.

And even if the VAT reclamation benefits the organisation, it does not benefit the public purse overall as that money will be lost to the Treasury.

Mr Barker suggests the attraction of managed services can be around how they help organisations cope with technological change as much as the VAT position. But he adds greater clarity from NHS England on how it views vehicles such as managed services for accounting purposes would be useful.

However, AXrEM is cautious about managed schemes for both equipment and maintenance. When they are used appropriately, there are benefits, says Mr McCaffrey.

“When applied incorrectly or inappropriately, the introduction of a third party to manage equipment procurement and maintenance of a whole estate can add a layer of bureaucracy and cost to procurement and reduce the quality of support to end users and patients,” he says.

Inadequate support

In some cases, the support offered has been inadequate and has led to “assets being sweated beyond their useful lifetime; low cost, inferior quality and sometimes inappropriate replacement equipment being procured; limited end user involvement in replacement equipment choice; and trusts experiencing more downtime while the third party argues with the original equipment manufacturer”.

But is there a way to combine some of the cost effectiveness of government-backed funding with the advantages of leasing or managed equipment schemes? Is there a way trusts could be helped to get equipment they need − and which would deliver benefits to patients − without having to meet the full cost upfront?

Mr Brown suggests a rental model where the equipment is owned by a separate body − he calls it an asset holding company − and rented to trusts with maintenance included in the cost. This would mean they could pay the costs out of revenue, rather than having to meet the asset costs out of capital.

‘Any alternative funding methods and asset management methodologies must be procured using transparent, open and fair competition to drive best value for money for NHS trusts’

It could also tie them into regular replacement − ensuring they are replacing equipment in line with manufacturers’ recommendations, and avoiding increasing maintenance costs and declining healthcare utility. If rental costs rose with older equipment − being used beyond manufacturers’ recommendations − then replacement would make financial sense for the trust.

A key question would be how to finance the setting up of such a company. A big bang approach would be costly but Mr Brown suggests there could be a “softer” establishment, which would only cost in the tens of millions but would start to create a cash flow for the company.

Commissioners and regulators could play a role in this − for example, by specifying minimum standards they would expect to see for equipment or, in extreme cases, decommissioning services where equipment was just not up to scratch.

Economies of scale

There are also potentially economies of scale; any such asset holding company would be a big player that could negotiate with manufacturers and offer some certainty about volumes and timings of purchases, which could drive down prices.

Mr McCaffrey adds: “Any alternative funding methods and asset management methodologies must embrace innovation and be procured using transparent, open and fair competition to drive best value for money for NHS trusts and derive the maximum benefit for staff and patients.”

But, more generally, what other steps could the NHS take to improve its asset management? Mr Rose suggests part of it could involve a wider perspective when major purchases are considered. Major investment would need to be supported by commissioners and reflect their plans for the future.

‘Trusts that are financially challenged can be in a vicious circle of not making the money that would allow them to invest in equipment that would be more efficient and save them money’

Trusts also ought to think laterally − are they trying to provide something already provided or planned by the next door trust and is it really necessary to have two in the local health economy? Could some sort of joint working provide better access at a lower overall cost for the organisations?

Mr Rose would also like to see trusts being more rigorous in their decisions on what to invest in − it should not be about who shouts loudest within the organisation but about need, and over specification of equipment should be scrutinised and avoided if inappropriate.

For Mr Barker, the future should involve greater collaboration between organisations to help them get better deals on equipment. He points out that having decisions driven by finance alone can sometimes result in the wrong decisions being made - for example, when new equipment brings other benefits.

Trusts that are financially challenged can be in a vicious circle of not making the money that would allow them to invest in equipment that would be more efficient and save them money. But he feels few NHS organisations have got to the point of having a really strategic approach from equipment procurement through to disposal, though this is common in the private sector.

Mr Davis identifies part of the issue as not having the expertise and capacity in the NHS to tackle this, and NHS organisations tending to reinvent the wheel. And, ultimately, the NHS works in a different way to private sector organisations.

“The private sector is not constrained by EU procurement rules in the way that the public sector is,” he says. “They can source things where they like and get the best value.”