Management Essentials

A Good Time to Upgrade Equipment

By Farrell "Toby" Tyson, M.D., F.A.C.S.

Many ophthalmology practices are unsure how to respond in these volatile economic times. Should they cut back on all their spending and go into hibernation, or should they continue business as usual? The successful practices look at these times as opportunities to increase market share, update infrastructure and streamline. Of these, updating equipment in one's practice can carry the greatest financial burden.

One of the great draws to our profession is the technology. It is constantly moving forward — sometimes by leaps and bounds. This brings excitement to the practice of ophthalmology but also makes it the second most expensive medical practice to equip. Keeping up with technology requires a commitment to excellence and reinvestment in your practice. I have seen several practices that are still using the basic diagnostic equipment that they had in the ’80s. These practices believe that every dollar of revenue should go home as income. In reality, if a portion of total revenue is reinvested back into the practice, a greater return can be seen.

Careful Spending

This can only be done through careful selection and acquisition of capital equipment and improvement. First, the practice needs to decide what equipment, or improvements are beneficial or necessary. Does the item you are considering improve patient flow, patient satisfaction and/or quality of outcomes? Does it reimburse? These are all good questions. The next step is a more detailed financial analysis that looks at the costs of acquisition and return on investment.

A practice can actually benefit from these difficult financial times due to the increased buying power with vendors. Like the automakers, most equipment manufacturers are motivated to move product now. This allows for unprecedented discounts and purchase terms. One should always inquire about demos or refurbished units from the manufacturers. These units allow the vendor to give the lowest price while maintaining a factory warranty. Buying multiple items from one vendor can also help with bulk discounting.

Price Points

Once the sale price has been established, negotiations have just started. The terms of sale now need to be finalized. Many vendors are now allowing for 30/60/90/120 terms of payment, which allow the practice to generate revenue while paying off the asset. Many other financing options are also available such as low or 0% financing. Remember to specify what, if any, future upgrades are included in the purchase price and for what period of time. Many companies can easily throw in software upgrades because the out-of-pocket costs are minimal. Hardware upgrades are usually much more difficult to include in a contract due to their unknown future cost. One way to minimize this risk is to negotiate a pre-determined trade-up price of the asset.

The tax consequences of a purchase must be closely scrutinized, as these may linger for years to come. This tax year, a practice may expense $250,000 of capital assets as a Section 179 deduction instead of depreciating them off over several years. This is currently a 1-year incentive that may revert to only $25,000 next year. To maximize your Section 179 deduction, ensure that the items are true capital assets and not expenses such as disposables, service contracts or training. This adds importance to how your contracts are itemized. Most vendors like to bundle everything into a lump sum. This is where a line-item contract is very beneficial and necessary. Separating your "expensible" items from your capital assets not only allows you to maximize your section 179 deductions, but also minimizes your tangible tax exposure.

Tangible tax in the state of Florida is the gift that keeps on giving to the local coffers. After an asset has been purchased, sales taxes paid, and even when the item is fully depreciated, the local tangible taxes continue to take a yearly percentage of the value of the assets. This is another good reason to ensure assets are clearly separated on any contract. It is also a good reason to trade in old equipment and get it off the books. Otherwise, it will continue to be taxed while sitting in storage.

Improvements to your equipment and facilities help to attract patients and employees. With the downturn in the economy, patients are noticing the cost cutting occurring in all aspects of their consumer life. It is a pleasant surprise to many patients to see their ophthalmic practice striving to be at the forefront of the field. The old saying that "either you're growing or your dying" is truer than ever. OM