Analyzing the Cost of Investing in a New Refractive Laser

Financial experts explain the costs involved and how you can get the highest return on your investment.

Once you've considered investing in a new refractive laser system, you'll need to determine the financial impact it will have on your practice. You'll have to assess the fixed and variable costs, and potential revenue and financing options. And you'll need to know whether you'll receive a high return on your investment.

In this article, financial experts explain the costs involved when investing in a laser and the various financing options you have.

Fixed and Variable Costs

Fixed costs are expenses that don't vary. They include the refractive laser equipment and the service contract for the equipment, says William J. Tice, M.B.A., president, Integrity Medical Capital, San Antonio, who's financed approximately 500 lasers including Summit, VISX, WaveLight, IntraLase and Ziemer lasers for medical practices.

Variable costs consist of staff and the expenses associated with running the surgical suite. So you'll need to factor in the staff time required to perform each laser procedure. "As your surgical volume increases, those costs will rise because you'll need more help from your staff to maintain efficiency," says Steven R. Robinson, C.O.E., O.C.S., Advantage Administration, Dallas. (See Figure 1 to compare the variable costs of your current laser to your future laser.)

Other variable expenses include royalty fees. With some wavefront-guided systems, ophthalmologists may pay $250 per procedure. However, the royalty fees for the Allegretto Wave laser are only $150 per procedure, says Cory M. Lessner, M.D., Millennium Laser Eye Centers, Sunrise, Fla. "With a $100 difference in royalty fees per procedure between the wavefront-guided platform and the Allegretto Wave laser, the break-even point is less than 100 eyes a month," he says. "The $10,000 a month savings [$100 for each procedure multiplied by 100 eyes per month] will cover the monthly cost of a new 5-year capital lease (i.e. $1 buyout) for the Allegretto Wave laser."

Staff time is also a variable cost. Christopher P. Born, M.D., Gundersen Lutheran Eye Institute, La Crosse, Wis., says almost 100% of his LASIK procedures performed with his previous laser involved wavefront-guided treatments. "Trouble is wavefront-guided LASIK takes a lot of technician time, which costs money. Even the time required by the physician is increased because of the need to review wavefront data. And you move at a slower pace on the day of surgery," he says. However, when Dr. Born performs procedures using the Wavefront Optimized^TM Allegretto Wave system, he and his technicians spend less than half the time prepping patients on the day of surgery, and the visual outcomes are more accurate than those he achieved with wavefront-guided treatments using his previous laser.

In addition, the Allegretto laser's accuracy leads to fewer enhancements and follow-up visits. And that means physicians can devote more time to general ophthalmology patients, Dr. Born says.

And they can devote more time converting prospective LASIK patients into surgical patients. "One extra hour spent converting one patient could generate a $4,000 to $5,000 return per hour on the time invested," Mr. Tice says.

Enhancement rates also contribute to variable costs. According to Mark E. Kropiewnicki, J.D., LL.M., principal attorney/consultant and vice president/treasurer, The Health Care Group Inc., Plymouth Meeting, Pa., you should ask yourself the following questions: How much does each enhancement cost me when I include staff time, physician time, royalty fees and other costs? And how does the total enhancement cost (cost per enhancement multiplied by the enhancement rate) compare with the lasers I'm considering? Dr. Born says enhancement rates in his practice dropped from 7% to 8% with his old laser to approximately 1% to 2% with the Allegretto Wave system.

Another variable expense is marketing. When estimating expenses, you'll need to consider internal and external marketing strategies. External marketing, which is the most expensive, may include television, radio and billboard advertising. Internal promotion may include posters, brochures, video/DVD loops and your staff touting the benefits of the Wavefront Optimized LASIK procedure. You not only reach your patients through internal marketing but their friends and relatives, too.

"Unfortunately, marketing in many cases becomes a knee-jerk reaction to what the competition is doing," Mr. Robinson says. "Practices often compete with other practices' advertising efforts." Instead, Mr. Robinson suggests you develop a comprehensive marketing plan detailing specifically how much you want to spend and where you want to spend it. "You can do several LASIK procedures and still spend your profit and more in marketing expenses," Mr. Robinson says.

Return on Investment

Your return on investment (ROI) will depend on how much volume you generate. "ROI depends on the physician's individual situation," Mr. Robinson says. "The best way to estimate profit is to prepare a proforma before you ever invest in the laser."

A proforma is a financial estimate of revenue vs. expenses based on previous experience. It will tell you how much of an impact purchasing a laser will have on your practice. It's best to be conservative when estimating the number of cases you expect to treat — otherwise known as a low assumption rate. "I always try to err on the side of caution when making ROI estimates," he says.

Mr. Kropiewnicki agrees that adhering to a low assumption rate is vital when projecting volume and calculating ROI. "Most practices are going to look for a 10% to 12% ROI — maybe," he says, "but this must be at a low assumption rate so they protect themselves from a regrettably unprofitable situation."

Financing Equipment

When it comes to financing equipment, it pays to be a careful shopper because you'll have a number of options from which to choose. You can enter a lease agreement, apply for a bank loan or purchase the equipment outright. If you have a low-volume practice and price is a concern, you can purchase a used laser system. Just make sure you have a warranty and a service contract, Mr. Tice says. "Presuming the manufacturer guarantees the equipment is in great condition, buying a used laser system is a fine way to go."

A lease and a loan are very similar, particularly a capital lease, Mr. Tice says. "A capital lease is handled from an accounting and tax perspective as a purchase. When one factors in the $112,000 [capital section 179] deduction, plus the 20% depreciation on the balance [another $57,000, for example, on a $400,000 purchase], it translates into a $60,000 cash savings at tax time even though you haven't yet paid for the laser."

When you enter into a capital lease agreement, you own the equipment when the lease is paid off, Mr. Kropiewnicki says. "Whether it's worthwhile having the laser at the end of 5 years is another question. That depends on what kind of deals manufacturers have for trade-ins and things like that."

An operating lease is another type of purchasing agreement. When an operating lease expires, you return the equipment. Operating leases that have a fair market value purchase option allow you to purchase the equipment at the fair market value when the term expires. Monthly payments for operating leases that have a fair market value purchase option are lower than those of capital leases, Mr. Tice says. The payments for some leases can include the equipment, the service contract after the warranty expires and license fees. Mr. Tice discourages physicians from looking at 0% interest rates. "It's a blind discount buy-down that the vendor has worked out with the lessor, which is fine, but don't kid yourself into thinking someone wants to lend you money at 0%," he says.

When you examine the various financing options, read the fine print. Because leasing agreements vary and often are difficult to understand, have an attorney, a consultant or an accountant carefully review any financing contract before you sign on the dotted line.

Making the Investment

Investing in a new refractive laser is probably one of the most important decisions you'll ever make as an ophthalmologist. Having the latest technology and knowing how to perform the newest procedures will help build your reputation, your patient base and your practice so you can compete in an increasingly competitive environment.

The key to making the right decision is doing your homework. With the various financial options available, you'll be able to choose the one that's right for you and your practice and receive the highest return on your investment. If you choose the Allegretto Wave excimer laser system, you'll be able to produce better visual outcomes in less time with fewer enhancements — and, ultimately, you'll save money. ■