financial foundations

Capital Equipment Purchasing

How do you determine whether a purchase is necessary?

DAVID MILLS, O.D., M.B.A.

Purchasing new equipment expands and enhances the services you provide. Typically, these purchases, which are categorized as long-term expenditures as the purchased assets have a much longer useful life, require larger sums of monies than typical short-term expenditures.

Here, I explain what to evaluate to determine whether the purchase is necessary.

True cost of ownership

Identify all associated costs, not just the monthly payment you will owe, including increased staffing costs if it requires you to expand staff number or hours as well as any local property or sales tax you may owe on the purchase. In addition, you may need to increase your business insurance coverage, though typically by a small amount. Add these together on an annualized basis.

Projected revenue stream

To determine if the proposed equipment purchase is a financial match for your practice:

1. Decide how many patients per month will utilize the instrumentation. To do this, query the number of patients whose primary or secondary diagnosis are eligible for testing using your new equipment. This can be done quickly if you utilize EHR.

2. Review patient care protocols to determine how many times per year each patient will utilize the new technology. The addition of the new equipment may allow you to manage the care of your patients for a longer period without referral to another provider.

3. Examine the average reimbursement per test for all the insurance programs you accept. This is done by multiplying the average reimbursement by the number of tests performed on an annualized basis.

While a calculation of the number of patients needed to equalize the monthly lease payment is often used, this approach is too simplistic as it typically disregards the additional costs of ownership and overstates expected projected revenues.

Payback period

This determines the amount of time it takes for the revenue stream to payback the cost of ownership, which is considered outflows of cash. The revenue streams are considered inflows of cash.

Typically, in the first few years, the outflows will be greater than the inflows. The payback period is the time it takes for the inflows to equal the outflow.

Exceptions to the rule

In order to deliver the accepted “standard of care” to your patients, certain equipment and instrumentation must be purchased, regardless of projected revenue streams and associated costs.

Also, some equipment purchases, such as automated refractors, produce no additional revenue streams. Rather, the incorporation of these technologies into the practice enhances your patient care as well as allow you to work in a much more efficient manner.

In the highly competitive health care market, patients expect their care to be delivered in state of the art manner. Patients equate the use of technology as a commitment by the practice to deliver the best possible care, so consider the impact it will have on your patients’ perception of your practice. OM

DR. MILLS PRACTICES AT OCEAN STATE EYE CARE IN WARWICK, R.I., AND HOLDS A M.B.A. FROM PROVIDENCE COLLEGE. E-MAIL HIM AT MILLSD@NECO.EDU, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.