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Savvy steps for capital equipment acquisition

Here’s how some financial knowledge helped Jason P. Brinton, MD, save some cash when he bought refractive equipment late last year.

First, the right timing, as it does in most areas of life, proved indispensable. Dr. Brinton’s purchase occurred during the 2017 fiscal fourth quarter and also at year’s end, a welcome boon for sales representatives who want to sweeten their own sales numbers, says Dr. Brinton. A solo practitioner, Dr. Brinton found: sales reps were willing to negotiate price; he could defer payment until January 2018; and because of the deferment, he could write off 100% of capital purchases under provision 179 in the tax code, up to a certain amount.

For Dr. Brinton, these factors make the decision to buy equipment, as opposed to leasing it, an easy one. Making such decisions is relatively quick when armed with some financial knowledge – such as there are differences between what national sales reps and local sales reps can offer.

“I think ophthalmologists hold the cards,” says Dr. Brinton, a refractive surgeon in St. Louis, Mo. “If someone [prefers], they can go to a local dealer. But there are substantial differences in what reps will offer.”

Ophthalmologists who regularly hold those cards likely appreciate the following: grasping the financial distinctions between leasing versus buying equipment – a comprehension that naturally parallels appreciating economic sensitivities in general – is important to a practice’s overall business success.

“Being the sole proprietor, I am responsible for the whole shebang,” says Richard A. Norden, MD, PCEO, Norden Laser Eye Associates in Ridgewood, NJ.

Both physicians, who have cash-only, referral refractive practices, are offering advice here to ophthalmologists who have wondered about the financial advantages and disadvantages of leasing versus buying, along with suggestions to honing their business acumen.

And to those ophthalmologists who don’t think this advice applies to them, who are not interested in advancing their business beyond removing cataracts and so therefore want to maintain the status quo, Dr. Norden says the standard of care is changing and they need to stay current.

“If you are a cataract surgeon, become a refractive-cataract surgeon. That is where things are going. … Today people are not expecting to wear glasses after cataract surgery.”

BUT FIRST …

A few words about our physicians. Both are very knowledgeable about finance. Dr. Norden attended Physician CEO, a business school program strictly for physicians, and Dr. Brinton was an investment banker. Dr. Norden, besides his refractive clinic, has a noninvasive aesthetic clinic that he opened a few years ago. Dr. Brinton opened Brinton Vision in 2015.

Dr. Norden acquires the more expensive pieces, like a femtosecond laser, with a capital lease, which has a dollar buyout at the end of the term. If the practice needs one piece that is relatively inexpensive, say $10,000, and cash flow is good, then the practice buys outright.

Dr. Norden advises practices to resist the temptation to upgrade equipment to a new model each year if those models do not offer significant patient advantages over what the practice already has.

“We don’t change for the sake of change. If there is something that will help us treat better, that is something I tend to jump on.”

As for Dr. Brinton, he only buys.

LEASE VERSUS BUY

Physician, know thy own circumstances.

“You have to consider your own situation,” says Dr. Brinton.

Meaning:

  • Is your practice on an accrual or cash-based accounting system? Had his practice been on the former, Dr. Brinton could not have deferred the payments on his new equipment. With accrual accounting, purchases have to be expensed in the year they are purchased. (He warned against switching accounting methods, unless it was after an established amount of time, like 10 years. The IRS, he says, would raise a collective eyebrow. Check with your accountant.)
  • Does the equipment generate revenue through a CPT code? Not all equipment, as this reading audience well knows, have CPT codes. If it has a code, then you will want to negotiate the longest warranty period that you can. In Dr. Norden’s experience, companies are more inclined to extend the warranty as opposed to lowering the acquisition price. Once the warranty expires, if it is durable piece of equipment with few breakdowns, you might want to pass on paying for a pricey service contract. But, the beauty of a service contract is that “a technician will come out in one or two days,” says Dr. Norden.
  • This step is called distributive negotiations. If you need a few pieces of equipment, but one is vital, negotiate for a lengthy warranty on that piece. Cede to the sales rep’s wishes on another. “When you have three things to negotiate, you can give on one,” says Dr. Norden. (But don’t sign a thing without a lawyer’s okay.)

OTHER FACTORS TO CONSIDER

You might find that acquiring the equipment doesn’t make economic sense. You need to do the math: figure out the annual projected revenue vs the cost of acquiring, maintaining and using the equipment for an extended period – including click fees. Your projected revenue should be greater than your annual expense.

Also, determining buy versus lease isn’t a one and done scenario: every time you make the decision to purchase capital equipment, you should go through the “should I buy should I lease” process again.

Two more points: Don’t be afraid to ask for a trial basis. Dr. Norden was recently offered one on a piece of aesthetic equipment, which he ultimately declined for various reasons.

And finally, it’s always great to have alternatives, says Dr. Norden. Talk to multiple companies, get multiple proposals, so you can leverage one against the others – and let them know you are doing so as you get closer to signing a deal.

Dr. Brinton says some small businesses do not consider how a lease can affect their line of credit. There also could be implications for their credit score and the rate at which they can borrow. “It depends on the amount of existing debt.”

It takes time for the ophthalmologist, whether through business school or other forms of education, to learn about running a business properly. Regardless, say these physicians, learn enough to supervise that person in your office who does it day in, day out. It will be time and money well spent. OM