Horse owners, especially those who compete at high levels, are generally well-informed about newly available diagnostic tests and equipment. They expect their veterinarians to have access to these tools for their mounts. Technology can be quite expensive, and because it changes rapidly, equipment often becomes outdated before its useful life has been expended. Practices in competitive marketplaces often feel compelled to be the first to have the latest developments in order to rise to the top with clients. Even in more rural areas, clients increasingly expect all veterinarians to offer digital radiography and ultrasound. These expectations can be a financial challenge for some small or solo practices.
So how can you decide whether you should buy that new piece of equipment?
A thoughtful analysis is necessary so that you don’t make a purchase that you later regret.
Along with the price of the equipment, you need to consider time and wages for staff training, the need for any additional staff, any needed consumable supplies, the need for space in your facility, equipment maintenance, software upgrades, and interest costs if the purchase is financed. There are also non-financial factors to think through, including what types of cases will benefit from the new technology, how you will educate clients and market your new service, whether all of your doctors will feel comfortable using the equipment, and how you will share it if multiple doctors want to use it.
Step 1: Analysis
An educated purchase decision is based on whether the equipment is logical for the practice, the patients that the practice serves, and is fiscally responsible. In order to make a good decision, you need to conduct a break-even analysis.
The first step is to determine your fixed costs. The fixed cost of a piece of equipment will not change based on the number of procedures you perform, but the more procedures you perform, the more the fixed cost per procedure declines. Therefore, the goal is to have enough volume to lower the average fixed cost to an affordable number.
Second, the variable costs must be determined. Variable costs typically remain the same per procedure, but the total fluctuates in direct proportion to changes in volume. An example of a variable cost is a disposable supply used in a procedure, such as an extra corporeal shock wave probe, which has a certain number of shocks to deliver, after which it must be replaced. With a digital radiology unit, a technician typically is needed to hold the imaging plate for each image capture so the variable cost would be the technician’s cost per minute times the average number of minutes per image. The more procedures you perform, the more variable costs you incur.
The total cost per procedure can be calculated by adding the fixed cost per procedure to the variable cost. As the number of procedures goes up, the total cost of a procedure will go down.
Step 2: How Many Uses
It’s important to have an accurate forecast of the expected number of equipment uses. The vets who will perform the procedure with the equipment or utilizing the technology can generally provide an estimated volume that they expect to perform each month. This volume will often vary with the season. Because the number of times the equipment is used is critical for the financial solvency of the purchase, it is important to be conservative with the estimates.
Sometimes when you have high-quality diagnostic equipment you gain the opportunity to perform additional ancillary services on patients as treatment for the condition diagnosed. Because of the convenience for the client, who might have already hauled her horse to the clinic where such services are available in order to get the diagnosis, it is very common for these treatment services to be requested of the diagnosing veterinarian. These additional revenues can increase the profitability of a purchase considerably. However, it is crucial not to make excessively optimistic forecasts, especially if you include expectations that local veterinarians will refer their patients for diagnosis on your equipment. Because of the potential loss of ancillary service revenue, those referrals often do not materialize.
Dr. Angie Yates is a solo equine practitioner in the Midwest who concentrates her practice in sports medicine and lameness. She leased diagnostic equipment for her practice in 2017, hoping to help her clients as well as allow local practices to have access to this technology for diagnosing complex lameness, as it was not otherwise available for a significant distance.
While she utilized the equipment regularly for her own clients with great success, the volume of use proved to be insufficient to offset the cost. She found that, contrary to her prediction, her colleagues did not send many of their patients for scans.
Yates suggested that veterinarians should “be careful of the mindset of ‘build it and they will come.’ The most successful place for equipment of this nature is likely a referral practice that is already drawing cases from surrounding practices. Before signing a contract, it is prudent to have an attorney review it and to be sure you have enough cases within your own practice to break even on your new diagnostic tool.”
Step 3: Cost Per Use
It can be very helpful to investigate the cost per use (CPU) with different volumes of use to determine your break-even point. This will tell you the necessary number of uses each month to avoid the need to use existing profit to pay for your purchase. A new piece of equipment should be a new source of profit, not cannibalize existing earnings.
When determining these figures, remember to include any costs for a maintenance contract, marketing, and technician time for set-up, acquisition of images, archiving of results and pack-up. These calculations will help you decide what price you will charge for each use of the new equipment. (See Table 1.)
In Table 1, the newly purchased digital radiology unit will cost $50,000 and will be financed at 6% over 60 months, with a monthly payment of $967. This practice utilizes a technician to set up the equipment, hold the plate, pack up the equipment and archive the images. She is paid $15/hour and the other expenses for her benefits, payroll taxes, Workman’s compensation insurance, etc., bringing her hourly expense to the practice to a total of $30/hour, or $0.50/minute. She is quite efficient at her job, so her practice has estimated her time needed per image at 2 minutes ($0.50 x 2 =$1) per view. The practice purchased a service contract for the new machine that has an annual cost of $3,600, or $300/month. They decided to try a ballpark price of $50/view to see how many views they needed to take for the equipment to break even and begin generating a profit.
The price for each use minus the variable expense per use when divided into the total fixed cost will give you the break-even point of how many uses of the equipment are required in the loan amortization period.
In this case, the fee of $50 minus $1 per view for the technician is $49. Adding the loan payment of $967 for 60 months and the $3,600 per year maintenance contract cost for five years is $76,020. When divided by $49 the calculation states that a total of 1,551 views are needed in 60 months to break even. Dividing by the 60 months yields 25.85 uses per month to break even.
One can also do this calculation on a per-month basis. The price for each use minus the variable expense per use when divided into the fixed cost per month will give you the break-even point of how many uses of the equipment are required per month.
In this case the fee of $50 minus $1 per view for the technician is $49. Adding the loan payment of $967 and the $300 per month maintenance contract cost is $1,267. Dividing $1,267 by $49 yields 25.85 uses per month to break even.
If you divide the total number of uses you calculated as needed to pay off the total fixed expense by the average number of procedures you expect to perform each month, this will provide you with the number of months it will take to break even on the equipment purchase. So, in the case of the digital radiology unit, you need a total of 1,551 views taken with the DR. If you believe you’ll take 200 views per month during the busy half of the year, and half that many during the slow part of the year, your average monthly use would be 150. 1,551 views divided by 150 is 10.34 months.
Step 4: Determining Fees
You can determine the appropriateness of your fee for a new service by estimating the number of minutes of professional time required to perform the service and the expenses entailed in offering it. The formula for determining the overhead cost per doctor hour is:
(Annual Income statement expenses – doctor compensation – billable consumables)/Number of annual available doctor hours = Overhead cost per doctor hour. Calculation of the appropriate price per hour for services is:
Overhead cost per doctor hour/(1 – desired profit % – doctor compensation commission % – discounts/accounts receivable losses %) = service price per hour.
It is also often good to know a “ballpark” of what others’ fees are for this service in order to stay reasonably competitive. You might wish to employ a “mystery shopper” to gather this information. It is unlawful to collude with other veterinarians to set prices.
In conclusion, the more you utilize your assets to produce revenue, the quicker you can retire the associated purchase price and the sooner that equipment will be profitable. Be certain to capture all charges when your equipment is used. Beware of buying technology that will have expenses that you cannot offset with revenue because this will erode your overall practice profit. The time taken for a careful analysis of the break-even point will help you make the best decisions about purchases.