In the April 14, 2003 issue of Fortune magazine, medical products and equipment was ranked number three in a list of the fastest growing economic segments. (They projected 15.5.% growth in 2003.) Good news for leasing? Healthcare often has been cited as a "bright spot" for lessors. But will that translate to new business for all lessors? According to the companies already in the business, anyone wishing to jump into the healthcare pond better do their homework.

"Last year was tough for the leasing industry, but healthcare was contrary to that," says Rick Wolfert at GE Healthcare Financial Services, which is approaching an enviable 30% growth this year already. "But, it is a special niche that runs on its own drivers."

John Everets, HPSC, Inc. says, "Healthcare is not something you can enter tomorrow morning. It takes a great deal of specialized knowledge. Underwriting the credits is different from an industrial credit or general business credit."

"A lender in that market," adds Rich Miller, DVI Financial Services, "needs to understand numerous aspects: government regulation, reimbursement and technology. It's complex."

With healthcare being 14-15% of the national's GDP, however, some companies will not be deterred. A recent Equipment Leasing Association and R.S. Carmichael & Co. joint study on the healthcare market shows that new medical equipment leases totaled $5.8 billion last year, a figure expected to grow at an annual rate of 8.5% to $7.4 billion in 2005. (Visit www.elaonline.com/ELAStore for a copy of the study.)

But, a growing market does not means it is a good market for everyone, says our sources. They predict mistakes will be made.

"This is a marketplace that's going to be viable in terms of growth for a long time," adds Everets. "But, whether it's viable credit-wise is a different story. Many people who try to finance in this market just don't understand it."

One look at troubled and bankrupt healthcare financial companies such as National Century Financial, accused of over-funding clients, and HCA, once a poster child for scandal but now toeing the line, also should make people cautious. Overall, corporate governance is under the microscope and anyone wishing to enter the healthcare financing market can learn valuable lessons in those scenarios.

Over the last 15 years, equipment needs have changed, market players have shifted, and new needs for healthcare, overall, have emerged.

"These are challenging credits. Equipment is being invaded by technology and today's residual value may not be there tomorrow," says HPSC's Everets, who has been involved in the healthcare leasing market for 27 years.

Andy Little of Fleetwood Industries says, "When I started at Copelco we were doing large ticket items in the hospital marketplace financing CTs and MRIs. But, today's market is much more focused on doctor's offices, imaging centers and other out-patient facilities." Little says that 99% of their business is in the physician marketplace and imaging centers.

"Hospitals seem to get most of their funds from equipment pools, local banks and bond issues. They are not turning to the marketplace for funding," says Little. "There are fewer hospitals to serve now and they aren't acquiring as much."

A growing trend of hospital consolidation and growth in out-patient facilities has changed the market, but lessors now serving healthcare financing needs say the biggest change is in the equipment itself and the regulations healthcare providers must deal with.

Miller says, "Healthcare is highly regulated from a state and federal government standpoint. For instance, to open a center you may need to apply for a certificate of needs.

Additionally, healthcare residual-setting takes on new meaning.

"Interestingly, obsolescence in healthcare is driven by the practitioners and patients," says Wolfert. "They request upgrades in order to maintain their franchise positions and market share. They see something in an ad and want it."

Upgrades also are quite different from most equipment types. "We call these "~forklift upgrades'," he adds. "You have to take the old equipment out and bring in a whole new piece of equipment. It's not just a software upgrade."

Technology changes aren't all medical devices, either.

"Computer systems are big",says Miller. Security and privacy issues are beginning to change the IT needs of healthcare providers.

New HIPPA regulations will help make IT investment in healthcare to grow to $24 billion this year, adds GE's Wolfert. "It will be like a Y2K scenario. Not only do healthcare providers want increased productivity but will now need to meet privacy regulations."

Says DVI's Miller, "For instance, now to get a prescription, a pharmacy needs special equipment for customers to sign so you can't see who else signed to get a prescription before them. When you go to a doctor's office, now they don't call your name, they call a number. A lot of new laws are causing people to upgrade technology for privacy reasons."

Privacy aside, other productivity needs are arising from digitizing delivery systems to bedside information gathering and sharing.

Needing equipment, however, isn't the same as being able to pay for it. The reimbursement issue alone is a topic to give any lessor heartburn.

"Reimbursement varies on a state by state basis and different insurance companies reimburse differently," Miller says. "Ten years ago, reimbursement on an MRI was $1,000. Now, it's $400. How are your lessees going to pay you?"

The government, ever the wild card, can pull a lot of "surprises," agrees Everets. "They are trying to rein costs in. And, that's the revenue stream we are financing. Ultimately you have healthcare needing more equipment more and insurance trying to pay less."

Yet, between the healthcare providers and the government, are providers of equipment and technology who like to sell their products. What is a lessor to do?

"Get a full understanding of regulatory issues that come with healthcare, including reimbursement," says Miller. "Get a good handle on the technology. Every manufacturer is different. Some have a "~continual' model where they upgrade their models ongoingly. But, some manufacturers come out with new technology that is not "~upgradeable'."

The bottom line is it all comes down to people. "To be successful," says Wolfert. "You need make an investment in people who understand the healthcare industry and its unique drivers. It also helps to have experienced people who have gone through some of the healthcare market changes."

Even with all the knowledge in the world about how to participate in this market, will the healthcare leasing market remain bright? Everets believes there will be less leasing and more financings.

"Leasing is attractive and it isn't. Businesses will have an increased section 179 deduction, which will drive many away from leasing," he says.

But some believe there may be more leasing.

"Most healthcare providers don't have cash to buy equipment," Miller says. "A lot of providers are looking to finance over time. So we see a combination of both leasing and financings. They only can take on a certain amount of debt."

The healthcare market, overall, is clearly poised to be one of the larger markets to serve as the population ages and we all live longer. Even economic downturns don't seem to greatly affect this market.

"The economic downturn didn't really slow things down," says Little. "Doctors keep acquiring equipment because they need it. Also, they are seeing their reimbursements shrinking so they see an opportunity to become more full service. Why send someone away for imaging and ultrasounds when they can do it right there?"

With all this new "need," one would expect heady competition among lessors. But, according to our sources, competition isn't a big issue.

"Companies move in and out of the marketplace. We haven't seen anyone new coming in making a big splash," says Little. "Basically, it is a lot of the same players under different names. People come into the industry and get acquired."

DVI's Miller adds, "In healthcare, small ticket and medium ticket varies. A lot of players want to get into small ticket because of its credit scoring nature and its tie to vendor programs. Larger ticket items require more structured finance and therefore you need to understand the industry better for residual setting." That may be one reason why competition remains fairly flat.

"There has been a lot of "~spin' that healthcare is the place to be," adds Wolfert. "But you better have a well-developed strategy, and you have to have the expertise and talent to execute that strategy.

"There are a lot of companies that look from time to time to get involved in healthcare. Some stay for long haul and other dabble," says Miller. And, from the lessors we spoke to, dabbling isn't profitable.