Acquiring Big-Ticket Ophthalmic Equipment

To purchase or lease? Several options are available.

Ophthalmologists seeking to improve their practice and achieve superior outcomes with the help of advanced technology have never had more choices available to them. In recent years, the pace of innovation in ophthalmic technology has been rapidly accelerating, with exciting new diagnostic instruments and surgical equipment being introduced at a stunning rate.

Ophthalmologists with a “techie” orientation have every reason to feel like kids in a candy store these days—with such notable recent advances as OCT, femtosecond lasers for both refractive and cataract surgery, state-of-the-art phaco machines and intraoperative wavefront aberrometers. However, this “candy” often carries big-ticket price tags. The challenge, then, is for practices to acquire those technologies that most contribute to better patient care, improve staff productivity and that can also justify their cost.

Here, we will explore the financial strategies that practices can use to acquire high-priced instruments and equipment. Clearly, the outlays required to bring this equipment into a practice necessitate a certain level of patient volume. Practices with lower volume can have access to lasers and phaco machines on an as-needed basis, but those types of arrangements were covered in the September 2010 issue of Ophthalmology Management and are not the subject of this article.

Financing New Equipment: Four Ways to Go

Mark Kropiewnicki, principal consultant of the Health Care Group in Plymouth Meeting, Pa., advises ophthalmology practices on financial management. He notes that there are basically four ways to acquire big-ticket ophthalmic equipment.

■ For a solo or small practice, the simplest and cleanest way is to pay cash and essentially take a pay cut for the year in which the equipment is purchased. The advantages of paying cash are that there are no interest charges and, assuming that the equipment improves practice efficiency and productivity, the payback on the investment begins almost immediately.

With this scenario, you can depreciate the equipment on a yearly basis or write off the entire purchase in one year under a federal tax law called Section 179. There is a formula to use for calculating Section 179 writeoffs but any purchases up to $500,000 immediately qualify for one-year writeoff and purchases above that figure may also qualify under a bonus formula.

■ Take a bank loan to pay for the equipment and finance the purchase that way. “Usually, you would want to take a five-year loan that would match up with a five-to-six-year depreciation schedule for the equipment,” says Mr. Kropiewnicki. “That way, you can match your cash outflow to the depreciation. Which makes the financing terms more manageable. If the interest rate is a normal prime plus one percent, you would be paying about 4.25% interest on the purchase, with the interest being tax deductible.”

Again, with the bank loan scenario, you can write off the entire cost of the equipment in one year under Section 179.

■ Finance the purchase with a capital lease. This is essentially a way to pay off a piece of equipment over a specified time period and own it at the end of that time with the payment of one more dollar. Just as with the outright cash purchase and the bank loan methods of acquiring equipment, Section 179 also applies to acquisition via a capital lease.

With a capital lease, as with a bank loan, you are paying principal and interest, with the interest being tax deductible. One disadvantage of a capital lease can be added hidden charges, such as maintenance, costs for any upgrades and insurance, which then become part of the monthly payment and can make a capital lease more expensive than a bank loan.

Before agreeing to a capital lease, the practice should be clear what specific charges are being included in the monthly payments.

■ Finance the purchase with an operating lease. Mr. Kropiewnicki explains that an operating lease is almost the same as a long-term rental. Acquiring equipment under an operating lease arrangement does not qualify for Section 179 tax treatment.

“If the piece of equipment is valued at $100,000 new, you may be able to lease it for five years for a total of $90,000 plus interest payments and then return it to the leasing company. The leasing company then has a five-year-old piece of equipment with a residual value of, say, $10,000,” says Mr. Kropiewnicki. “The residual value is an estimate of what that piece of equipment will be worth at the end of the lease. So both the practice and the leasing company must have a good idea of how quickly a specific piece of equipment obsolesces because the residual value can be very low if the equipment obsolesces.”

For example, a laser may become obsolete in a few years, whereas outfitting a lane with slit lamp, phoropter and examination chair carries almost no risk of obsolescence, as that type of equipment can easily last for 20 years or more.

Mr. Kropiewnicki advises that, with equipment that may obsolesce quickly, a three-year operating lease may be preferable to a five-year lease, even if carries a higher cost.

Estimating Payback

Mr. Kropiewnicki cautions that a major aspect of acquiring higher-priced equipment is making an accurate estimate of how and when the equipment will begin contributing additional profits to the practice. With some types of highly sophisticated ophthalmic equipment, making this estimate can be difficult, as such factors as “click fees,” software upgrades, possible maintenance charges and changes in reimbursement under specific procedure codes (as recently witnessed with reduced OCT payments) can all come into play to negate the accuracy of any pre-acquisition estimate.

“The easiest calculation is when you are replacing an existing piece of equipment with something intended to take its place,” he notes. “When you are acquiring replacement equipment, you know pretty much how much it will be used and its importance to the practice. You expect the new piece of equipment will enhance efficiency and productivity above what the old equipment was providing, so it is fairly simple to estimate the payback on this new acquisition.”

Where it gets tricky, Mr. Kropiewnicki asserts, is when you are bringing an entirely new piece of equipment into the practice.

“That's where you have to make an estimate based on some variables that may or may not play out in the real world,” he says.

These types of estimates require more research and planning, especially with such new acquisitions as a femtosecond laser for LASIK or an ORange intraoperative wavefront aberrometer for cataract surgery. These are the types of advanced equipment that, with some practices, require an additional payment (and possibly an additional decision) from the patient. If the practice chooses to include a femtosecond-created flap or an ORange measurement in the standard procedure fee, then the practice must use the equipment to achieve cost-saving efficiencies and/or market it as a way to attract additional patients.

Help for Estimating Payback

In attempting to estimate time-to-payback for an expensive type of equipment that will be totally new to the practice, there are several ways to make a so-called “ballpark” estimate.

One way is to ask the manufacturer what levels of efficiencies users are achieving when they add this piece of equipment to their practice. Clearly, the manufacturer will want to put these efficiencies in the best possible light—but you can also ask for names of other (non-competing) practices that have acquired this particular piece of equipment and contact these practices to obtain their views.

Let's say that you gather information that indicates that adding a femtosecond laser for refractive procedures can be expected to attract an additional 50% in refractive volume. Having this figure, it becomes a relatively easy exercise to estimate whether the addition of a femtosecond laser is going to pay for itself in a reasonable time.

Similarly, you may learn that adding an interoperative wavefront aberrometer usually reduces enhancements after cataract surgery by 80%. If you have a generally good idea of what enhancements are costing the practice in staff time and extra patient visits, you can figure if acquiring an intraoperative wavefront aberrometer is worth the cost. And don't forget that hitting the target with cataract surgery patients the first time is probably also going to pay off in increased referrals. That can be another justification for adding this piece of equipment.

Another Element in Figuring Value

Many “experts” advocate leasing big-ticket equipment as opposed to an outright purchase. However, if your practice is set up as a so-called “pass-through” entity, such as an S Corporation, professional LLC or partnership, one advantage of owning equipment is that you can donate it to a charity or an educational institution once you are finished with it—and receive a personal tax deduction. This also applies to sole proprietors who file a Schedule C with their federal tax return.

The only requirement here, Mr. Kropiewnicki cautions, is to get a reputable appraisal you can submit to the IRS to document the deduction. An equipment donation will also generate positive mention and enhance the reputation of your practice in the community.

Big Tickets Get Even Bigger

In recent years, almost all ophthalmology practices have found that to stay current and competitive they had to acquire an OCT diagnostic instrument. Refractive practices have had to offer femtosecond laser-created LASIK flaps to attract patients.

It is almost certain that this trend toward advanced technology will continue. The price of adding this new technology will become more and more of a consideration, especially if the improvement in patient outcomes is only slightly incremental rather than truly significant. Yet, as Mr. Kropiewnicki asks: “What do you do if the competition has something newer?” If you plan on staying competitive, it will be critical to know your options and choose the most advantageous method of acquiring new equipment. OM