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Capital Strategy Insights: Reimagining The Process #006


#006 Asset Value Contribution to Lifecycle – Part 5: Asset in Negative Equity

First, let me wish all of you readers a happy and prosperous 2022!  Here’s to excellent patient care with financial efficiency.

In Post #004 I identified that if an asset does not have sufficient equity to cover the costs of decommissioning and retiring that piece of equipment, the asset in a state of negative equity (“upside down”). In post #005 I answered the question of “how to avoid negative equity?” with the answer being “to find it” by looking at asset value and end of life costs (aka decommissioning costs). This analysis leads to a determination as to whether the subject asset(s) are in negative equity or not (I also hinted we would look at replacing an asset in positive equity; we’re not going there yet).

So, the analysis shows the asset is in negative equity. Now, what to do about it?

This becomes tricky as the device is not going to get more valuable over time (at least until it becomes a museum relic), and the costs of decommissioning are not going down, so the negative equity will continue to worsen the longer you own the device.  Factor in the ongoing maintenance, repairability issues, repair costs, potential reliability issues impacting patient care delivery and revenue streams, and potential regulatory issues (shout-out to Biomed) and you have significant and increasing carrying costs (I’m sure you readers could fill another post with costs you have experienced – feel free to let me know).

Those providers with sufficient resources can stop the bleeding with an emergency purchase. Your negotiation leverage is not at its zenith at this point, so you will likely leave money on the table, but you can make the buy.

Those providers without sufficient resources will be forced to get creative.  They will buy refurbished, used (not refurbished), rent, lease (operational or capital), hire mobile services (if appropriate or available), or use some other tactics to obtain the needed asset.

If the healthcare organization elects to wait to replace the unit under typical/scheduled circumstances when the budgeted funds are available and the due diligence is complete, they will likely develop better terms for purchase.  Of course, the negative equity will still add costs to the replacement event and fortune must be with them that the unit remains operational.

So, the short answer to “what to do about it?” is to take the path of replacement that is consistent with the available funds measured against the risks of accumulating decommissioning costs and ongoing functionality of the device.  The same analysis that determined the subject asset was in negative equity can guide your replacement planning tactics, helping you to balance these considerations.

This post was more detail on the impact of negative equity on the replacement of the asset.  As I said before: “When the asset goes into negative equity you lose leverage in the replacement event and are generally forced to get the best deal you can to stop the bleeding.”  For the next post, we’ll move on (really, that’s the plan) to replacing the asset that is in positive equity, moving from reactionary tactical replacement to strategic capital planning.