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Dr. X-Ray: Does it make financial sense in your practice? (Proceedings)

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Aug 01, 2008

Three factors are essential to the practice of quality medicine and surgery:

  • A doctor with a high level of knowledge and skills in veterinary medicine
  • An appropriate range of high-quality equipment for both diagnostics and treatment
  • An appropriate range of safe and effective therapeutic agents

If any one of these factors is missing or of substandard quality, patient care will suffer.

In this seminar, the second factor, equipment (specifically digital radiography) will be discussed. Unfortunately, equipment usually can't be purchased JUST because it contributes to high-quality care. It must also pay for itself. There isn't any question that digital radiography contributes to high quality care. There also isn't any question that, on the surface, it costs more. However, because the technology is different, there are cost savings from the change that will offset the additional equipment costs. All of these factors must be included in the analysis to determine if this new technology is right for your practice.

As with any equipment purchase, it is first necessary to understand what the goal of the acquisition is in YOUR practice. Will the new equipment improve patient care? For example, the purchase of digital radiography may allow for more accurate diagnoses. Will the new equipment lower the operating costs related to the provision of services? The use of digital radiography may improve staff efficiency and lower staff costs because there are less retakes necessary and no time is needed to develop the radiographs. Will the new equipment increase revenues? Client perception of the digital technology plus better quality images may let you charge more than for conventional radiographs. Often, more than one of these goals is met with the acquisition of a single piece of equipment.

There are many considerations, financial and managerial, associated with planning and implementing the purchase of new equipment. The decision to purchase some capital assets may be an easy oneā€”for example, it may be clear that the practice needs a new anesthetic machine and even though this is a long term asset, its cost is not too great and the practice already uses this type of equipment daily therefore the decision is clear cut. The purchase of more expensive assets and those not previously used in the practice, however, requires more planning and forethought than does the purchase of equipment or supplies with a much shorter life.

There are a number of capital budgeting techniques that are extremely useful in analyzing the purchase of new equipment. These techniques can be used in contemplating the purchase of just one asset or in comparing the benefits of two different purchases (for example, computed radiography vs CCD digital systems.)

As with any analysis, good data is critical to good results. A number of variables will be used in these calculations such as the cost of the equipment, the additional annual costs associated with the asset (such as a service contract or supplies), the expected cost savings to be obtained from usage or the anticipated increase in revenues. If these items are not accurately estimated, the results of the acquisition analysis may be erroneous. For example, cost of equipment does not just include the sticker price. Other components of cost include tax, installation, training, and interest costs if the asset is financed.

Some of the more commonly used financial techniques are payback period analysis, net present value calculations, and breakeven analysis.

The payback period is the number of years necessary to breakeven on the purchase of the asset. After this point, the practice will start to realize a profit on the acquisition assuming the figures used in the analysis are accurate and reality conforms to the assumptions made in the analysis.

The payback period is calculated as:
Total purchase price

Annual net income (i.e. revenue minus operating costs for a year)

The payback period is not the only tool that should be used in analyzing an asset purchase. Acquisitions with the shortest payback period may not be the ones that are ultimately the most profitable to the practice. It is also important to remember that the time value of money has not been factored into this calculation.

Net present value (NPV) analysis estimates the total cash outflows involved with the purchase of an asset compared to the total inflows. A positive outcome equals a profitable purchase. NPV analysis also incorporates the time value of money into the calculations.