Introduction:
Case Study: Surgical Robot Arms Race
In the greater Seattle-Tacoma area, an arms race continuesbetween hospitals to gather the most modern technology available touse on their patients – currently this arms race’s primary deviceof choice – robotic surgical systems. Why robotic surgical systems?These systems in theory allow surgeons to be more precise inperforming complex surgical procedures on patients. With greaterprecision comes a greater chance of successfully healing thepatient as well as reducing the patient’s possibility forcomplications and recovery time. In addition to these benefits,hospitals through the use of superior technology can serve morepatients and potentially reap greater benefits from insurancecompanies and patients for these advanced medical services.
The price of this superior care though comes at a cost to thepatient (increased charges) as well as purchase costs to thehospital. One of the most popular robotic systems is called daVinci and is manufactured and sold by Intuitive Surgical(http://www.intuitivesurgical.com/). The da Vinci was FDA approvedin July 2000 and can currently perform urologic, gynecologic,colorectal, head and neck, cardiothoracic, and other generalsurgery procedures. As important as the device is the surgeon thatis trained in the use of the system. The more repetitions on therobotic system, the more skillful the surgeon becomes.
Depending on the options that a hospital chooses to purchase,the cost of a da Vinci system can range between 1 million and 3million dollars with the associated sales taxes. As with allsurgical instruments, there are also disposable items needed duringa surgery associated with equipment – specifically the da Vinciwhich must also be purchased. These items range from $1,000 to$3,000. Finally, as with many pieces of sophisticated electronictechnology, it must be maintained. These maintenance costs can beupwards to $200,000 a year. In addition to these specific costs,hospitals must continue to maintain the surgical suites that thisequipment occupies as well as utilize all other supplies that wouldbe used in any surgical setting.
The Deal:
A local hospital in the Puget Sound area faced a dilemma inthe medical arms race. Surrounding hospitals were purchasing andutilizing the da Vinci robot system. Management began to worryabout the erosion of patients that would seek out this moderntechnology over more traditional surgical procedures. To this end,a strategic decision was made to acquire the da Vinci roboticsurgical system. The following data was presented to an analyst inthe Finance Department for review:
Table 1:
Quite often, analysts are provided leasing information by theleasing company. Hospitals may choose to purchase equipmentoutright or acquire equipment using a lease. Leases are generallyconsidered operating or capital leases under current accountingrules. Hospitals may purchase equipment outright if they havesufficient capital (money that can be used to purchase equipment ofsignificant amount – usually greater than $5,000). Otherwise, theymay decide that if the interest rate of payments being charged islower than their internal cost of capital (debt financing, equityfinancing, etc.), they may utilize the lease directly from theequipment seller.
Lease Term:
36 Months
Lease Payment:
$68,742.10
Purchase Price:
$1,900,000.00
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Given the information provided in Table 1:
1. What is the annual rate of interest being charged to thehospital? The total interest paid over the entire term of thelease?
2. Given this rate of interest, give some reasons on why orwhy not the hospital should accept this lease contract. Is this agood deal for the lessee?
3. Why would a hospital care whether it was a capital lease oran operating lease? When would one be an advantage over theother?
