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5 Ways to Stretch Your Capital Equipment Budget
Expert advice on how to be a smarter shopper.
Scotty Farris
Publish Date: June 9, 2008   |  Tags:   Ophthalmology
Whether you're opening a surgery center or managing an existing one, buying capital equipment may be expensive and time-consuming, but it is necessary for maintaining your competitive edge. Although staff management, case volume and scheduling may clamor more loudly for your attention, nothing will impact your overall scope of services and capabilities like your equipment investment.

Due to the considerable expense of medical and surgical equipment, almost no one has an unlimited budget. Even those with relatively deep pockets will wince when faced with spending $25,000 for an OR equipment boom or $100,000 for a laser.

The trick is finding ways to make the most of your capital equipment budget. Equipment planners have found that careful planning, research, and negotiation can go a long way toward stretching your budget to cover your center's needs.

1. Write a Budget.
You may be thinking, "Of course we start with a budget." But what I'm talking about is a comprehensive budget, not just a wish list for the current year. Here are some budget-writing tips:

If you're outfitting a new center, develop a holistic budget so you aren't forced to cut corners at some point. Consider your phone, security and data systems, housekeeping, food service, furnishings, and medical/surgical equipment. Then, take a studied approach to the whole business.

Look at the reimbursements for the procedures you're equipping the center to perform. Weigh reimbursements against probable case volume. Remember that 80 percent of revenue will likely come from 20 percent of your equipment line items. Identify the critical 20 percent and invest wisely in that equipment.

If you're in an established facility, ask yourself three questions:

Are we replacing existing equipment? Perhaps you need to update your technology, or perhaps something is just worn out. Be sure to consider the compatibility issue. If you are considering a new power-cutting tool, for example, make sure it will work with the blades, bits and burrs you already have.

Do an equipment utilization review. You may find it more economical to buy two new items that match, rather than expect one new item to work alongside an older piece of equipment, especially if you have to duplicate another set of disposable items.

Do we need more of the same equipment? This speaks to your case volume and scheduling. If you're doing more eye cases, you may need to add another microscope and a phacoemulsifier. Perhaps you're adding procedures in which the surgeons can use similar equipment. Hand surgeons, for example, can use same surgical microscope as ophthalmologists by simply changing the objective lens. Make sure there won't be scheduling conflicts with the equipment (any good OR software will help with this).

Are we investing in new categories of technology? There are several good reasons to do this. A new technology may help you remain competitive in your marketplace. Sometimes it's worth it just to break even or maybe even have a "loss leader." Or, perhaps you already have the infrastructure to handle a procedure, but you need to invest in the equipment. Another scenario is that your center may be part of a larger healthcare network, and the facility "break-even" is secondary to the network strategy.

Don't buy a $100 solution to a $20 problem. Play devil's advocate with physicians and staff to make sure they are getting what they need, and not merely what they want. A big part of your job is to mitigate the want/need/afford equation. You know what they want, but ask yourself "What does the center really need, and can we afford it?"

2. Identify What It Truly Takes.
Here's where you look at the true cost of things, and make sure these costs get figured into your budget. If you don't do this, you'll find the capital equipment budget will never stretch far enough. Some costing steps include:
  • Define the technology in generic terms and price it among several vendors or manufacturers.
  • Look at what additional new supplies are needed.
  • Identify annual preventative maintenance and service costs.
  • Will the equipment have additional staffing requirements? If you purchase imaging equipment, for example, you may need to hire extra support techs.
  • Will there be significant training time required for your staff on this equipment? Surgical robotics come to mind.
  • If the new equipment will increase your case volume, can your operational infrastructure handle this? In other words, look at your existing pre-op and PACU equipment. Do you have enough stretchers, patient monitors and recliners? These can represent hidden costs-they're what I call the "$5,000 gotchas."
  • Can your facility infrastructure handle the utility requirements of the new equipment? For example, if you are buying a new instrument washer, do you have the available plumbing and correct electrical voltages to support its installation?

If a new piece of capital equipment will have high utilization and presumably increased maintenance requirements, consider new equipment with factory service and support. You'll also need to know how flexible your selection criteria may be. If the surgeon has a proprietary ("brand name") requirement for the equipment, your cost may be fixed. If you have a broader set of criteria, you may be able to search out a "better buy" on the equipment and stretch your budget that way.

3. Consider Equipment Alternatives.
This is where you look at ways to get more equipment value for your dollar. Sometimes "value engineering" in this area can save a bundle. Some advice:

Educate your surgeons. When physicians offer proprietary requirements, do some research and inform them about cost differences among various brands of equipment. Ask the doctor if he will at least consider comparable units, and then do some research to show him truly comparable equipment and the price comparison.

Buy used equipment. Any technology has a finite amount of life in it and something purchased as used has gone through part of its expected useful life. Equipment that has been well maintained is worth considering. Much of the used equipment on the market is sold as "refurbished", meaning it has been mechanically overhauled and cosmetically refinished by the reseller.

Use caution when purchasing used equipment of any description, especially if buying sight unseen from an unfamiliar vendor. The terms of most used equipment quotations warn "All Sales Final - No Returns" and most used equipment vendors require a hefty down payment or total prepayment of orders.

Purchase demo equipment. This equipment is essentially new and usually comes with the manufacturer's full original warranty. Always ask if demo equipment is available.

4. Deal Fairly with Vendors.
Human nature tends to inject personal preferences, but when it comes time to make sound financial decisions, the numbers should stand on their own. Just because vendors may take your surgeons golfing or to nice lunches doesn't meant that you shouldn't do a critical break-even analysis. Don't show favoritism with vendors. If you are asking them to compete on price, approach it that way. One way to reduce the "games" vendors play is to not play them yourself.

It is good practice to have clearly defined institutional purchase authority. The classic situation is when the sales rep tells you: "Dr. J. wants you to order this." The vendor must understand who approves the purchase and who makes the purchase. Usually, it's not Dr. J. Even though the doctors are the users the surgical equipment and their preferences are often the deciding factor, it is the institution that purchases, owns, and maintains the equipment.

If you make it clear that you don't engage in games, it will strengthen your negotiating position. The vendors understand the boundaries on the playing field, and this reduces the amount of "funny stuff" going on.

However, in your quest to be fair, don't give away your bargaining position. Even if a surgeon has placed a proprietary requirement on you, go to the vendor with a formal Request for Proposal (RFP). Perhaps there is a preferred vendor for the equipment; in this case, submit an RFP to that vendor and to competing vendors so you can validate the price that the preferred vendor offers. Don't ever give a vendor an impression that it's "in the bag."

5. Consider Financing Options.
You have several options when it comes to financing an equipment purchase. Broadly they could be categorized as rent, purchase, or lease.

Renting. You can rent almost any durable medical device or instrument. Renting is a great way to fill a temporary or infrequent equipment need. It is a way to try out new technologies without a commitment. Renting is not a good way to obtain long-term placement of equipment because of the expense. Beware of "rent to own" financing, and if it is ever a consideration, run the numbers out over the payoff period and compare to other financing options.

Capital financing. Capital financing for purchases can come from a wide variety of sources, including conventional bank financing, a revolving credit line, third-party financing or vendor financing. Most finance vehicles of this type require some type of personal or institutional guarantee on the debt, depending on your facility's ownership. Interest rates can be fixed or variable. Unlike financing a car or a house, the equipment usually is not sufficient to collateralize the loan. Medical equipment and instruments generally lose their after-market resale value much faster than the loan principal decreases.

Leasing. It is reported that more than 80 percent of all companies lease some or all of their equipment. The reasons include lowering monthly costs, tax advantages, freeing up capital, and preserving lines of credit. There are two basic types of leases: the fair market value lease and the capital lease. There are many variations on both types of leases, with mysterious terms such as technology exchange lease, delayed payment lease, step lease, split lease, mutual acceptance lease, and purchase lease back- but in the end they are either a fair market value lease or a capital lease.
  • Fair market value (FMV) lease. This type of lease is also known as an "operating lease," and it is the lowest cost lease option. The facility pays the leasing company a flat monthly rate for a specified amount of time. At the end of the lease, you can either renew the lease, return the equipment or purchase it at its fair market value. The residual value of the equipment is considered, but not figured into the cost of the lease. This type of lease is not cost effective for items that have little residual value, like surgical instruments. FMV leases are a good way to obtain technology that is rapidly changing.

    Andy King of Acumen Healthcare advises using FMV leases for computers and high-tech medical equipment. He also suggests using operating leases with update provisions for technologies where software upgrades are frequent. As upgrades are required, they are purchased and their cost is rolled into the lease principal. Mr. King also believes in keeping lease terms as short as possible and shopping for the best combination of interest rate and fees, with an eye on the lowest monthly payment.

  • Capital lease. This type lease is also known as a "dollar buyout lease." Like an operating lease, the facility pays the leasing company a flat monthly rate for a specified amount of time, but at the end of the lease the equipment buy-out is a specified amount (often one dollar.) The residual value of the equipment is rolled into the cost of the lease. This type of lease is good for durable items with long expected useful lives, like lights and sterilizers.

  • Effective Shopping. When shopping for financing, Dan Saale, CFO of ASC Group, LLC, suggests identifying the key features you are looking for in a finance package and then "casting a narrow net on your requirements." Mr. Saale first considers the security provisions on a lease proposal, and second considers the lease rate. If it is a variable rate, Mr. Saale looks at what instrument to which the rate is tied (five year Treasury Bill, for example.) Other factors Mr. Saale feels strongly about include fees charged for administration, streamlined financing, response time, and accounts payable funding.

Objective, professional financial advice may be in your best interest if you are not in the market frequently, says Mr. Saale. "You can save administrative and money headaches later" by being an informed borrower. He advises talking to several possible lenders and your accountant before making a decision.

In the multitude of counselors, there is safety. (From Proverbs)

Mr. Farris is a medical equipment planner based in Frisco, Texas. He has more than 15 years of experience in facility planning and equipment project administration, purchasing, and materials management. He can be reached at [email protected] or at (972) 731-0626.