Biting the bullet on a new purchase is always an uncertain proposition, especially in a volatile market. Practices need to learn about the market, weigh the pros and cons of leasing and purchasing and consider competition, reimbursement and regulations.
Cardiology practices are constantly bombarded by opportunities to invest in new technology and need to choose between an early adopter strategy and waiting until the technology matures and penetrates the market. It can be a fine line between the two scenarios, and mistakes can be costly.
“Early adopters face higher risks as they introduce new technologies but can gain greater market share,” says Michael Rossi, MD, managing physician of Lehigh Valley Heart Specialists in Allentown, Penn. “Later adopters may lose market share to early adopters but may benefit from increased product stability. Plus, late adopters can learn from early implementations and may leapfrog the competition.”
Regardless of the timing, the first step for any practice considering investing in a new technology is the feasibility study, says Richard Beveridge, president of Richard Beveridge & Associates in Salt Lake City, Utah. The feasibility study should outline the local market for the technology and drill down to include realistic market share. It also can address variables like IT infrastructure. PACS or 64-slice CT, for example, may require a network upgrade or new workstations. IT costs can be factored into the equation, but also deliver benefits beyond a single piece of equipment.
The next hurdle compares total costs and revenues to determine the breakeven point (see graph on page 15). If the breakeven point exceeds projected market share, the practice can consider a joint venture. If projected market share shows the practice meeting the breakeven point, the practice can begin to weigh financing scenarios. “Practices should be sure to define assumptions in the breakeven analysis and stick to them,” states Beveridge. That is, if the practice projects a feasible 35 percent market share, it should use that number rather than edge it up to 42 percent if the numbers do not work out to the practice’s advantage. Beveridge & Associates also offers clients a Monte Carlo simulation, a computerized model that randomly varies drivers like market share and reimbursement 500 times to provide a realistic sense of risk associated with a given investment.
Lease vs. purchase
Leasing and purchasing each carry pros and cons, and each may be the right choice depending on the technology and situation. Practices should use the following questions to guide their decision:
- Is an exit strategy needed? Although there are no guarantees, a lease can provide an exit strategy if equipment is not utilized as projected, says Jim Burns, vice president of Corazon, a consulting firm in Pittsburgh, Penn. Similarly, lease terms may provide some flexibility if volume or needs exceed initial projections.
- Will the technology be obsolete at the end of the term? If a replacement will be needed in three to five years, a lease may be more attractive because it simplifies disposal. On the other hand, the productivity and profitability of an electrocardiograph or nuclear camera outlives the typical lease term, says Rossi. That is, an electrocardiograph will continue to add to the bottom line for years after the practice has paid for the system as a cash purchase.
The practice should review tax and cash flow implications, too. “A practice that amortizes the equipment as a non-cash expense over the life of the lease can add the expense back to cash flow and use the funds to remain current on other technology investments,” says Beveridge.
Various lease structures offer bottom- line benefits. A capitalized lease, which entails higher monthly payments, allows the practice to purchase the equipment for $1 at the end of the term and provides the tax benefits of depreciation over the life of the lease. An operating or off-balance sheet lease, however, offers cash-flow friendly lower monthly payments but no depreciation benefit. The practice retains the right to purchase the equipment at fair market value on an operating lease.
Leasing under the microscope
When Los Angeles-based Apex Cardiology decided to deploy a GE Healthcare CT scanner and Centricity PACS in 2005, the practice evaluated various financing solutions. Leasing was more attractive than purchasing the system for several reasons, says Mason Weiss, MD, managing partner. Cardiac