ROI on purchasing new technology\equipment

In a previous blog, I discussed how to determine the costs of running a medical practice and how to calculate the break-even point where any additional patients result in increased income and fewer patients indicate that you are losing money. In this article, I will provide guidelines to help you determine the return on investment (ROI) when considering the purchase of new equipment that may generate additional income for your practice.

There comes a time when nearly every physician decides they need a new "toy" or the latest technology to stay competitive with other practices, and they must convince the bean counters that this new purchase will benefit the practice. If you prepare a business plan for your request and can demonstrate that this new purchase will add to the practice's revenues, you are in a better position to make your request. Merely stating "I want" or "we need this new device because" is not likely to persuade those in control of the purse strings to acquiesce.

Creating a meaningful business plan is more than scribbling a few numbers on the back of a napkin. It may start with the napkin approach, but to truly achieve success, you must create a simple spreadsheet that outlines one or more potential scenarios for your proposed request.

Begin with the contribution margin. This is the amount of money that each additional procedure or patient contributes to the practice's bottom line. The contribution margin is equal to the increase in revenue generated for each procedure or patient minus the variable costs, or the additional equipment or supplies needed to perform the procedure. If we recall from the previous blog that the fixed costs don't change regardless of how many patients or procedures you perform, but it is the variable costs and the number of patients that receive the new procedure that will determine, after the fixed costs have been covered, will determine the contribution margin or the profit that is to be expected.

Let us take a urologic example of the request for a urodynamic machine that can be used to evaluate men and women with voiding dysfunction. Each procedure will generate approximately $250 of incremental income, and the variable cost for each case is $50. The contribution margin is $250 minus $50, or $200 for each case. The bean counter knows that for each patient who has a urodynamic evaluation, you add $200 of contribution margin to the practice's bottom line.

This sounds like a no-brainer, and the management will welcome your suggestion. However, first we must conduct a break-even analysis. The break-even analysis considers both fixed and variable costs to calculate the actual financial value of your recommended purchase of the urodynamic equipment. This break-even point is calculated by dividing the fixed cost by the contribution margin. Let's assume that the urodynamic equipment costs $100,000. Then, the break-even point equals $100,000 divided by the contribution margin of $200, resulting in 500 cases needing to be conducted to break even, or the 501st patient must be seen to generate a profit. My takeaway message is that you will need to visit 500 patients to cover the cost of the urodynamic equipment. ROI is the gain expressed as a percentage from having spent money on an investment

The formula to calculate ROI:

Investment's total proceeds or income – investment's total cost – expenses, in this case, the price of the disposables or $50\case

An example: The cost of the new equipment is $100,000, and it generated an income of $200,000

Subtract disposables or expenses for generating the $200,000, or $25,000

ROI formula step 1:

$200,000 - $100,000 - $25,000 expenses = $75,000

ROI formula step 2:

Divide answer step 1 by the cost of the investment

$75,000\$100,000 = .75

ROI Step 3:

Multiple answer of step 2 by 100

0.75 x 100 = 75%

Interpreting the ROI

A positive ROI (greater than 1 or 100%) means the investment is profitable, generating more income than it costs, while a negative ROI (less than 1 or 100%) indicates a loss. The higher the positive ROI, the greater the return on the dollar invested. The ROI should also consider non-financial benefits, such as improved patient outcomes, efficiency, and patient satisfaction, in addition to the monetary gains.

For example, an investment in new technology is expected to generate enough revenue to cover its costs and still provide a profit. In contrast, a negative ROI means the investment resulted in a financial loss.

Bottom line: By presenting a business plan and evaluating contribution margins, performing break-even analysis, and analyzing target markets and anticipated return on investment for your new widget or technology, you will increase your likelihood of securing funding for your project. By demonstrating that you have given thought and time to calculate the ROI, you improve your position and are likely to convince the bean counters of your request.

Neil Baum, MD, a Professor of Clinical Urology at Tulane University in New Orleans, LA. Dr. Baum is the author of several books, including the best-selling book, Marketing Your Medical Practice-Ethically, Effectively, and Economically, which has sold over 225,000 copies and has been translated into Spanish.