Before you buy that new and indispensable technology your surgeons just gotta have, be sure you first answer this question: “Will this new piece of equipment prove its worth?”

The same goes when you’re replacing older equipment that’s become obsolete and unable to be serviced. The replacement equipment almost always costs more than the existing equipment and your operating margins are likely not increasing at the rate of these price increases, if at all. You’re walking the balancing act of increasing quality of care while decreasing costs in the value-based payment world.

Measuring return on investment (ROI) is an elementary practice of healthcare finance. The ROI calculation is typically done on a spreadsheet, but for smaller purchases you can do it in your head. The big decision centers around your facility’s ability to earn its money back after purchasing the equipment and then to go on to reap a profit. The timeframe for the profitability is also a factor. The finance term for this is internal rate of return (IRR). The calculation is straightforward and will serve as the guide in your decision making. The greater the IRR, the better your expected financial outcome is predicted to be. Let’s walk through the process.

1. Equipment cost. The first step is to input the actual cost of the equipment. Be sure to include sales tax. That’s easy enough, right?

2. Recurring cost. This encompasses the maintenance agreement, the staffing required to use the equipment, disposable supplies required and training expenses.

3. Utilization rate. How many procedures are projected to be performed on an annual basis using this equipment? How many patients will the equipment be used on? It’s easy to overestimate these numbers. That’s a dangerous trap. If you’re too optimistic, you could end up with a positive rate of return on paper when the actual rate of return is negative. Project this over a 4- to 5-year period, which is the time period usually used for these calculations. I’m sure you’ve seen the six-figure piece of equipment a surgeon just had to have that is now hidden in a storage closet (lead apron hangers) or in a hallway collecting dust. This is always an inherent risk in any large capital purchase.

4. Reimbursement. Finally, what is your expected reimbursement for each case or test? You’ll have to estimate this based on your current payer mix.

A new C-arm?

Let’s take a look at an example of the purchase of a large C-arm. Your upfront equipment costs are somewhere around $140,000. You have required maintenance for the equipment and staff required to do the cases and to run the C-arm and any training costs incurred. For labor and supplies, you can use the average labor-and-supply cost per case for your facility. If you don’t have an X-ray tech on staff, you need to add the costs to bring one in. The average reimbursement at your facility for orthopedics is $2,500. See the table atop the next page.

This analysis shows that you would have an IRR of 88%, which is fantastic. You have positive cash flow after 1 year. Remember, all of this depends on the accuracy of your assumptions. Another way to look at these purchases is to calculate how many cases/procedures it will take to break even. See the table below.

The ROI calculation considers depreciation (the reduction in the value of an asset with time passage due to wear and tear) and estimates the life of the equipment at 5 years. You’d need at least 32 cases per year at the contribution margin of $950 per case. You calculate the contribution margin by taking the average revenue per case ($2,500) and subtracting the supplies, labor and contract labor per case ($1,550). We calculated the service contract and initial startup costs (training and procurement) into the expenses. Based on our assumptions, this looks like an obvious purchase that will provide substantial profit.

The big decision centers around your facility's ability to earn its money back after purchasing the equipment and then to go on to reap a profit.

If your facility is concerned about cash flow, you can consider financing or leasing. You can also rent some equipment on a per-case basis. This can be a good option if you have low confidence in your utilization, as it eliminates the possibility of the equipment sitting in your storage area collecting dust. Be sure you’re not running afoul of regulatory requirements with any per-case agreement.

When your facility invests in a new piece of equipment, you need to know what kind of financial return the investment will yield. It’s critical to calculate your net financial gains or losses and to consider all of the resources invested and all of the amounts gained. This will mitigate your financial risk as you continue to grow your business and improve the quality of care for your patients. OSM