Sound financial management underlies the health and well-being of every long-term post-acute care (LTPAC) facility. Yet, the coronavirus (COVID-19) has made it more challenging than ever for skilled nursing facility accountants and other financial healthcare professionals to meet current obligations and ensure adequate cash flow for the months ahead. While many LTPAC organizations have received stimulus funds and may not currently face cash flow issues, those monies won’t last forever, so it pays to plan ahead and consider practical accounting strategies that can help ensure long-term financial viability.
One such strategy is leasing—and that applies to just about everything a LTPAC facility touches—from office equipment to software, data services, medical/clinical equipment, specialized resident furniture and accessories…even the building(s) in which they operate and the land upon which they sit.
When it comes to leasing, two of the most commonly used types are operating leases and finance leases. With an operating lease, an asset is rented for a set period of time, and each month’s leasing fee is deducted as a regular business expense. It’s important to note that under new the FASB standard (Topic 842), operating leases for private companies that are greater than 12 months (software leases excluded—see more below) will be recorded on the balance sheet beginning in calendar year 2022, and expenses will be treated as interest and amortization.
With a finance lease, the asset is treated for tax purposes as though it has been purchased. Lease payments then are written off as business expenses.
So, could leasing make financial sense for your LTPAC organization? To answer that, let’s look at some of the benefits and costs of purchase/ownership versus leasing.
Purchase/Ownership Benefits for Healthcare Equipment and Facilities
If you purchase something outright – again, whether it’s equipment, software, real estate or anything else – you own it. That means the transaction can be recorded as a capital expenditure, which is less complex than having to record an additional interest payment each month on top of monthly depreciation.
When you purchase to own, you needn’t worry about future payments unless they are repairs, which (hopefully) would occur in future years.
If your LTPAC organization has a poor credit history, buying to own something will be less expensive in total than, say, a lease-to-own scenario.
Purchasing/owning generally is less expensive in the long run. Typically, such an expense would hit financials in the form of depreciation if the purchase is capitalized.
For equipment purchases, parts can be upgraded over time to extend the useful life without having to purchase brand-new equipment.
Resale values potentially could be a benefit, depending on several factors (e.g., condition, relevance/viability of the associated technology).
Purchasing something outright almost always nets a higher up-front cost.
When you buy something for your LTPAC organization, you’re committing to using that asset (and if applicable, its associated technology) over a fairly long-term period. If technology improves substantially every few years, your investment could be outdated, which, in turn, could negatively impact your return on investment.
If your facility is on the small end, leasing represents a smaller financial hit that includes the benefit of tax-deductible monthly payments as opposed to full cash disbursement with annual depreciation deductions.
Leasing Benefits for Healthcare Equipment and Facilities
Throughout the COVID-19 pandemic, occupancy rates have been low, and high resident turnover associated could make short-term leasing/renting of certain equipment attractive (depending partly on the length of the lease).
Leasing equipment generally nets a lower up-front cost. Yes, you’re paying interest, but again, it nets a lower cash disbursement on the front end.
A contract for lease to own (for any assets that may apply) could be beneficial if it carries a low interest rate, and if your facility needs to conserve cash on the front end.
Leasing is a sound strategy for filling an immediate need. You’ll have to do your due diligence, but oftentimes people spend more time and effort shopping around for an outright purchase before committing. In acute-care settings, some residents may require the use of specialized clinical equipment, which your facility may not have. If that’s the case, leasing could be the ideal way to serve that resident’s needs without having to make a special purchase—particularly if the resident transitions out of the facility after a relatively short period of time.
In terms of software and office and clinical equipment, leasing enables your facility to try out new technology before committing to a big purchase. If you find you like it, you’ll be better informed when the lease termination nears. Note, however, that software leases are NOT included in the new leasing standards, so operating leases can continue to simply be recorded as monthly expense items (this applies to all intangible assets).
Depending on the agreement, a lease could cover costs related to maintenance and repairs.
Additionally, many providers of commercial assets used in LTPAC facilities allow upgrades to newer versions once the lease term ends.
Your LTPAC facility’s credit history will impact the lease rate. If the facility maintains excellent credit, that could be a benefit. However, if credit issues exist, it’s a potential cost that should be considered up front.
Regular lease payments make it necessary to sustain adequate cash flow in order to ensure that payments are made in a timely manner.
Many lease contracts have built-in fees, interest expenses and penalties for late payment which create additional costs and could impact your facility’s credit. If your facility hasn’t historically had a well-functioning cash management system (and payables don’t get paid timely as a result), fees could quickly add up and put a big dent in your cash flow.
Maintenance and modifications may or may not be allowed with the leasing/rental company if the terms of the lease don’t explicitly spell that out. Again, that could necessitate additional costs (anticipated or otherwise), and depending on the lease, it could violate the terms of the contract.
Many leases don’t allow for repairs and/or maintenance to be performed by outside companies. If assets need attention, you could be stuck waiting for the leasing company to work your facility into its schedule—and that could potentially mean long wait times, lost productivity and profitability and negative resident and organizational outcomes.
Is Purchasing or Leasing Right for Your LTPAC Facility?
It’s a difficult question, and the answer depends on several factors. Cash flow is a significant consideration, as is the expected length of use, potential resale value and all the associated tax implications.
In the end, making the right call depends largely on your LTPAC’s financial position, as well as the short- and long-term needs of your resident population. And with any financial decision, it’s important to do your due diligence up front. You’ll want to ensure that whatever assets you utilize (whether purchased or leased) fit your LTPAC facility’s needs, are of high quality, utilize the latest technologies and systems, integrate efficiently into your workflows and represent a sound investment.
Do you have questions about purchasing versus leasing for your long-term post-acute care organization, or other accounting challenges? Call Richter’s healthcare accounting professionals at 866-806-0799 to schedule a free consultation.
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