Financial Decision Making In Your Practice: What's It Really Worth?

To make smart financial decisions as a business owner, it pays to be aware of all components of an office cost structure—as well as alternate uses for money—when making selections on technology.

CURRENT RETURN ON INVESTMENT THOUGHT PROCESS

As plastic surgeons, cosmetic dermatologists, and other providers of aesthetic medical services, we are accustomed to evaluating purchases of new technologies and products with a pretty simple algorithm: how much will this cost, and how long will it take to “make back” my investment and realize a return on investment (ROI)?

THE THOUGHT PROCESS OFTEN GOES SOMETHING LIKE THIS:

“Here is the latest Laser-ultrasound-body-slimmer energy device by Gizmo, Inc. The rep tells me it normally costs $150,000, but I'll pay $120,000 if I buy it at this meeting. If I charge $2,000 per treatment and perform 10 treatments per month, I'll make back my investment in six months and the rest is pure profit.”

By this logic, you should expect to make $120,000 in profit every six months after the first six months, assuming volume projections are accurate, even with no projected growth of demand. Buy the device, right?

OTHER ROI CONSIDERATIONS

By applying some business acumen, you may find the decision is not so simple. Let's assume you pay the $120,000 purchase price up front, ignoring financing. If you instead invest this $120,000 into a conservative stock portfolio, you could earn a 10 percent return. In the six months until you “break even” on the equipment purchase, the $120,000 would have been worth $126,000, ignoring compounding. Basically, this means that to “break even,” based on alternative uses (a simplified model of the cost of capital) you need to actually make $126,000 in those six months—and do three more treatments than expected. The time value of money states that $120,000 today is worth more than $120,000 in six months (or gradually recouped over six months). If you were able to earn 20 percent on your money last year, you would need to complete six more treatments (or one more per month) to reach the “break even” point. Another way to look at it? While the present value of your $120,000 spent today is -$120,000, the future value at six months is -$126,000. Financial planners call this net present value (NPV) analysis.

But there's still more to consider. It may be even harder to break even on this technology once you take into account the customer acquisition cost (CAC) of those 10-11 patients, which may reach $10,000 per month on Internet and print advertising. In accounting lingo, this might go under the line item of Selling, General and Administrative costs (SGA). If each patient receives only one treatment— for a lifetime customer value of $2,000—you are spending $1,000 per month in marketing per successfully closed patient to schedule perhaps 25 appointments, of which 15 may show up and 10 receive the treatment, reaching the monthly “breakeven” quota. Ignoring administrative costs of no-shows and consults that do not result in a closed sale, you are now talking about $1,000 in lifetime value revenue above the CAC per sold patient. To break even at six months, twice as many procedures per month than initially projected need to be completed.

But you are still not breaking even, especially when you consider additional costs of generating revenue, such as office overhead and fixed costs. By allocating even a fraction of one exam room for the Gizmo device, you are potentially removing that space from being able to service other revenue generators, like aesthetician services, injectables, or skin care product sales. Even if the machine is tiny and in a multipurpose room, who is going to staff this procedure? Will the physician perform it? Will a PA? Can it legally and safely be done in your state by supervised ancillary staff paid at a lower salary? If they require direct supervision, isn't that actually costing you more than doing it yourself?

If an office runs at about 50 percent expenses (both fixed and variable costs including but not limited to rent/mortgage, insurances, supplies, employee wages/benefits), the cost is now $1,000 CAC plus $500 in “overhead” to generate $2,000 in revenue from each Gizmo treatment. You now will need to do four times as many treatments than projected simply to “break even,” ignoring the time value of money. In all this analysis, we have not considered ongoing “consumables” such as replacement parts/tips for the Gizmo device, chargebacks/refunds, increased insurance premiums and possible liability payments.

SUNK COSTS

The introduction is worth repeating: To make smart financial decisions as a business owner, it pays to be aware of all components of an office cost structure—as well as alternate uses for money—when making decisions on technology.

You bought the Gizmo device six months ago and lament that it may take at least another year to realize an ROI based on the original calculations. Now there is a newer technology on the market that you really like. The temptation is to wait until you've “made back” the Gizmo investment before you can spend new money on an alternative technology. That's a challenge.

In the EMR software space, we face this challenge all the time as vendors. Too often clients and physician colleagues believe they need to “realize a return” on cash they have already spent for an expensive software system because they can't stomach the notion of “having wasted” all that money. The reality is that these are sunk costs that the practice will never recoup. If you are continuing to incur CAC and other costs in an attempt to “pay back” the price of buying the prior technology, and/or you pay expensive support costs (upwards of $12-15,000 each year), you may actually be better off paying the switching costs of converting to another system and abandoning what no longer makes financial sense. In addition to the business reasons, switching costs may be worth paying for the “user delight” of having something that you simply enjoy using better than what you had before. We upgrade cars and smartphones all the time without insisting we get a financial “return” on the investment.

I urge physicians and office managers to think about similar financial parameters very closely to evaluate purchases, whether for EMR systems, practice management programs, marketing website portals, lasers or others. This may help conserve energy and money while limiting any entropy in the office.

Tim A. Sayed, MD, FACS is Medical Director, EMA Plastic Surgery^™ and EMA Cosmetic^™ at Modernizing Medicine. He is also an Executive Committee Member of HIMSS EHR Association.