Find Out if Your Equipment Purchase Will Pay Off – Before You Buy

by | May 13, 2021

As business owners, ECPs make many financial decisions, yet many of us have had little or no formal business education. Whether starting a new practice or assuming control of an existing one, settling on how to best allocate financial resources is key to success. Some costs associated with running a practice can be adjusted relatively quickly when necessary, such as cost of goods and payroll. Other obligations, like rent and equipment payments, are generally fixed for several years at a time. 

Every practice needs a facility and certain basic equipment, but technology has evolved to give ECPs the opportunity to purchase myriad other instruments, all of which have the potential to either enhance or degrade the bottom line of the business. When adding equipment that is beyond the basics, it’s important to have a business plan in place ensuring that, at a minimum, any equipment beyond the basics will not impact cash flow negatively. Ideally, the new equipment will have a positive effect on cash flow, providing ROI (return on investment). Fortunately, planning and due diligence generally result in favorable ROI for ECPs when equipment purchases are made.  

One of the first considerations when adding equipment is your budget. If the instrument in question would cause your equipment costs to be over-budget or your available cash to dip below your target minimum, proceed with caution or wait for a better opportunity in the future. As we all know better than ever due to recent events, sometimes the unexpected happens, and you can’t plan for everything. It pays to stick to your budget and to have cash reserves.  It’s also important to consider your position in your career path. If you are looking to sell your practice soon, a large equipment purchase may not be a good idea.  

Each time a new piece of equipment is considered, a business plan should be created specifically for that purchase. There are many factors that affect the financial success of each acquisition. The business plan should have accurate numbers where possible and conservative estimates where exact numbers aren’t available. One of the most important factors to research is the anticipated volume of patients that are likely to need or want the service provided by the new technology. 

Determining Potential Volume of Service

  • Make a list of conditions for which the instrument provides proven clinical benefit. Next, identify the diagnostic codes associated with those conditions. Run a query in your EHR to determine the number of patients that currently have those diagnostic codes. This process will give a good estimate of the potential number of patients already in your practice that could benefit from the new technology. 
  • Consider the frequency with which the procedure is generally performed on each patient.  Of course, if the instrument can also be used as a screening device for those who do not already have a billable diagnosis, but are willing to pay out of pocket,  the revenue potential is even greater. (EDGEPro users can use that software for insight into the frequency of these procedure codes by checking the CPT report in EDGEPro.)
  • Investigate industry resources for any data on percentage or number of practices employing the new device and/or number of procedures performed with it.  The sales representative for the instrument should also have some data, albeit it will likely be optimistic rather than conservative.  
  • Talk to other ECPs who are already using the technology and ask them about their experience with patient acceptance.  Is the instrument working out for them financially?

Determine Reimbursement Levels

Once you have a realistic estimate of the number of times you’ll bill patients for the new service, it’s important to find out what your most common third party payors are paying for the associated procedure code. This information is often available just by contacting the payor directly.  Other options are to use a coding and billing reference such as EyeCOR or ask another local ECP who already has the instrument how much insurances are paying.  

A word of caution here – third party payors sometimes reduce the allowable reimbursement for a procedure considerably when they see the utilization numbers climbing rapidly.   OCT technology is a good example of a procedure code that experienced a significant reduction in reimbursement once it became widespread.  If the instrument has potential as a pay-out-of-pocket screening instrument, determine what an appropriate fee would be and add that to your calculations as well. 

Investigate the Financial Details

If the above research indicates that the new technology has the potential to be a financial success in your practice, the next step is to scrutinize the financial details.  To keep your cost to the minimum, investigate any available promotions the manufacturer is offering.  If you are a member of any professional group that negotiates pricing for its members, find out if there is a discounted price available to you.  

Lease or Buy?

Not surprisingly, there is no one-size-fits-all answer to this question. Among the most important factors to consider before making a decision are the useful life of the instrument, the pace at which the technology is changing and your cash flow. Generally, smaller practices and those just starting out benefit from leasing because cash is tight. In addition, lease payments are always a 100% deductible business overhead expense. If you decide to lease, make sure you find out upfront what your obligations are regarding maintenance and repair – some leases are more generous than others in this respect.

Consider the lease-end options before signing a lease. Less expensive fair market value leases allow the lessee to purchase the instrument for fair market value at the end of the lease or continue paying month to month or simply return the instrument at lease end. For higher monthly payments, $1 buyout leases allow the lessee to own the instrument for $1 at the end of the lease. Of course, it usually makes better long-term financial success to buy an instrument outright if the instrument has a long useful life and if cash is plentiful.

When buying an instrument, check if it qualifies for a section 179 tax deduction which would allow you to write off the total amount paid as depreciation in the same year as the purchase. Also investigate section 44 tax credit from the Americans With Disabilities Act, which could allow a tax credit of up to 50% (with a $5000 maximum limit) on the equipment purchased. One thing to remember when you buy an instrument is that you’ll be responsible for maintenance and repair after the warranty period. Lastly, it’s always smart to seek an opinion from your accountant as well when making a lease versus buy decision.

In all cases, consult your tax professional on these important questions.

Hidden Costs

Don’t forget to uncover any hidden costs as well. Among the most common are shipping, networking costs, and service contracts. Factor in supply costs if applicable. If you need to insure the instrument, find out what that will cost. Of course, it’s also important to review and understand the warranty and maintenance options.  

One More Important Question

In addition to all of the facts and figures, there is one more important question to ask yourself.  What is the cost of not adding this instrument to your practice? If your practice is not able to offer a service that is offered in most other local practices, it could affect patient perception or, in some cases, be cause for standard of care concerns. Depending on the scope of practice you aspire to, certain technology may be essential. On the other end of the spectrum, some ECPs prefer to be the first practice in an area to offer new technology. This certainly carries more risk and is easier to justify for practices with multiple doctors, more patients and larger budgets.  

Secondary Expenses: Labor

When calculating ROI, don’t forget the labor cost of training staff to use the instrument and the staff hours spent performing the associated task or procedure. Due to the complex nature of many ophthalmic instruments, your staff may need some dedicated training time to use the new equipment effectively. The representative from the manufacturer and other ECPs who already have trained staff are your best resources regarding the amount of  time necessary for most techs to become proficient. They can also tell you how much time your staff will spend with the average patient who is tested or treated.  

Remember to also include any time necessary for record keeping. The steps necessary to document results can vary widely depending on the instrument in question, the software in use in your practice and your unique processes.   

Secondary Expenses: Marketing

Another cost that may need to be factored in to your ROI calculation is marketing. A carefully planned approach to informing your patients and your community about your new acquisition can increase the volume of cases performed, thereby improving ROI. Especially in those cases where patients are paying out of pocket, it’s important to WOW them with the benefits your new technology can provide. Marketing of some form is necessary in these situations where the fees are not covered by insurance. 

Marketing to your existing patients can be essentially free. Something as simple as point-of-sale literature and signage in your clinic can have a big impact. A page on your website or a couple of sentences added to an appointment reminder are other free ways to pique your patients’ interest. Make sure your staff is well-informed about the benefits of the new instrument so that front desk employees and technicians recommend it without hesitation.   

Of course, if you decide to market to your whole community, there will be an associated cost. Consistently marketing in your community when new technology is added enhances public perception of your practice, however it can be challenging to measure the effect of marketing to the general public.    

Sample ROI Calculation

Let’s walk through an example comparing ROI over 4 years for purchasing versus leasing a $50,000 instrument.  

Reimbursements

Dr. X has determined that the practice could conservatively bill for the procedure code associated with the instrument 40 times per month. The current local reimbursement for that code averages $45.

Pro Tip: If you’re not sure how many times you perform a specific procedure, you can check a report in your analytics software, like the CPT report in EDGEPro, to get a good idea about the frequency.

The other up-front costs

  • $300 for shipping
  • The practice has 3 technicians and it is estimated that each of them will require 4 hours of training.  Their average salary is $20 per hour. (3 x 4 x $20 = $240)
  • Software and IT expense to network the instrument will total $1000.

Ongoing Costs

  • It will cost an additional $50 per year to add the instrument to the practice’s contents insurance.
  • Dr X has allocated an additional $500 per year for marketing.  
  • $450 per year for a service contract.
  • Each time the new procedure is performed, it will consume approximately 15 minutes of staff time to perform the procedure and transfer the data to the practice’s EHR. (.25 x $20 = $5 x 480 pts = $2400)
  • The procedure requires the use of a disposable item that costs $2.  ($2 x 480 pts = $960)

The ROI calculator in Figure 1 below shows an ROI* of 13% over 4 years when purchasing the instrument upfront. If Dr X were to lease the instrument instead, the ROI over 4 years would be 31%, more than twice the ROI achieved with the upfront purchase (figure 2).  Of course, the longer the useful life of the equipment in question, the better the ROI from up-front purchase. However, technology is changing rapidly today, making leasing more attractive in many cases.  Leasing may also help you avoid a large dip in cash reserves of the practice. 

Figure 1: Purchase

Figure 2: Lease

A technologically advanced practice has many benefits.  Being on the cutting edge allows testing and treatment that might otherwise require unnecessary referrals, thereby keeping more of the revenue in-house.  Patient confidence is enhanced when the practice is a technology leader.  ECPs and staff members are proud to participate in caring for patients with the latest equipment and generally look forward to learning something new. 

Nonetheless, medical technology is expensive and a thoughtful approach is necessary when contemplating adding new equipment.  Before committing to the acquisition, create a business plan spanning several years and accounting for all of the associated costs.  Consider the effects on your cash reserves, cash flow and budget.  Talk to peers who already have experience with the instrument.  Finally, consider the options available in acquiring the instrument and maximize your return on investment. 

*ROI: The function being used to calculate this ROI is the Internal Rate of Return, which is a standard investment calculation. If you’d like to know how the math for this works, there’s a good explanation here. It can be calculated automatically by using the IRR function across the net cash flows in your spreadsheet software.

By Ron Meeker, OD

Thoughtful, intentional, methodical approach to achieving your most important goals and dreams. That's the Meeker way.

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By Ron Meeker, OD

Thoughtful, intentional, methodical approach to achieving your most important goals and dreams. That's the Meeker way.
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