Buy, lease, or rent: which way to go under DRGs? Prospective payment is changing the relative advantages and disadvantages of instrument acquistion alternatives

Medical Laboratory Observer,  August, 1984  by J. Lloyd Johnson

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Therefore, it is almost certain that Congress will mandate increases in DRG rates for all hospitals to cover the instrument and equipment component of capital costs. Reimbursement for facility costs may be more hospital-selective, integrated with a modified Certificat of Need process.

What are the implications for reagent rentals and instrument leases? During the remaining time that Medicare's share of capital expenses is reimbursed at cost, the capital cost portion of reagent rental contracts should in theory be covered by payments over and above DRG payments. But such reimbursement will occur only if the capital cost portion of the reagent rental is separated from the operating cost portion.

Granted, a hospital accounting change could accomplish this. Nevertheless, it may be more prudent to rewrite reagent rental agreements and explicity separate capital and operating cost components.

The key long-term question, though, has to do with the rental's operating cost components. They are no longer reimbursed retrospectively; rather, a hospital has to budget for them out of its DRG payments.

What, then, is the true cost of the rental, as opposed to lease or purchase options? An accurate breakdown of maintenance service, reagent, and supply expenses may reveal that the convenience of rentals comes at a fairly high cost.

In the instrument cost analysis cited earlier, the three methods of acquisition were financially equivalent when the hospital's internal rate of return was 16 per cent, on the assumption that the reagents and supplies in the rental would cost $1,500 per month if purchased separately. If the reagents and supplies could be purchased from a reliable source--other than the renting manufacturer--for $1,000, then the convenience of the reagent rental is costing $500 a month or $6,000 annually. This calculation assumes the manufacturer would not demand a higher price for the service contract if his reagents and supplies were not being used.

As for prospective payment's impact on leasing arrangements, we have already noted that two major benefits of leasing will be eliminated: assurance that depreciation costs are fully recovered and that the hospital does not suffer the entire inflation penalty. If the hospital is earmarking instrument leases as operating instead of capital costs, it should reverse this accounting treatment. Otherwise, the hospital will lose some capital cost reimbursement for as long as Medicare continues to pay its share of capital costs separately from DRG rates.

The decision whether to purchase, lease, or rent in this new environment comes down to a comparative cost of money, adjusted for the risk of technological obsolescence. Reagent rentals will still be the most attractive option in certain high-risk circumstances. As long as the investment tax credit is in force, leasing may be a lower-cost source of funding instrument acquisitions than bank borrowing for a purchase, even if the leasing company is borrowing at the same rate.