Investments 101: Calculating Capital Equipment Purchase and Procedure Costs

Running a medical practice is often a high-wire balancing act. Each day, practicing physicians make clinical decisions regarding patients' skin care regimens, therapeutic approaches to disease, and management of staff and operations. While physicians' training and expertise is in clinical management and decision-making, it is equally important to make sound investments and financial decisions that enable smooth operations and increase revenues.

For dermatologists who practice aesthetics, clinical and financial decisions run more closely together in some ways. Unlike the medical side of practice, which involves mostly diagnosis and drug selection, aesthetic dermatology requires investments in devices and procedures that physicians subsequently must integrate smoothly into practice. It involves clinical decision-making with practice operations, if only because devices require skill and time to operate, not to mention a certain market savvy on the part of physicians to know what patients demand. Compounding these matters are a number of intricate issues relating to financial considerations. Ahead, Michael S. Kaminer, MD, Assistant Clinical Professor of Dermatology at Yale Medical School and practicing cosmetic surgeon and Managing Partner at Skin Care Physicians in Chestnut Hill, MA, shares insights on the processes of selecting medical devices and procedures that suit your practice and style and will explore a full breadth of issues relating to general investments and tips for gaining the highest possible return on investments.

What strategies would you recommend to physicians to help acquire a stronger sense of financial aspects of practice?
A simple approach to investments starts with the operating expense (overhead) ratio, according to Dr. Kaminer. “Understanding and knowing your operating expense ratio is essential to efficient practice management. The operating expense ratio gives you the ratio of expenses to overall revenue of your practice, which enables you to calculate overhead costs and project earnings,” he observes. The ratio is as follows: the numerator is the sum of every expense of your practice, minus physician compensation. The denominator is the total revenue of the practice. According to Dr. Kaminer, this model is a simple and potentially effective way of approaching finances and gaining a broader sense of how your practice operates as a business. “Once you know your operating expense ratio, you can then determine how a specific decision or investment impacts your bottom line,” notes Dr. Kaminer.

Importantly, the operating expense ratio is a general model that provides you with a quantifiable measure of the expenses at which your practice operates versus revenue. Therefore, Dr. Kaminer reminds that there are nuances to how this model may be applied to more direct aspects of a medical practice. He suggests that one of the most effective ways to think about office expenses is to consider the costs and revenues generated by each examination room in your practice. “If you consider your overall revenue of your practice and you break it down by exam room, per hour, per day, you will learn how much each exam room generates and thus be able to better grasp how to evaluate the costs of that room,” says Dr. Kaminer. Let's assume that over the course of a year a dermatologist who works four eight-hour days per week generates $1,000,000 in revenue.

Assuming 46 weeks of work, that dermatologist logs 1,472 hours annually. Divide the total annual revenue by total hours worked to yield an average hourly revenue of $680. Now assume that the physician works out of two exam rooms per day. Divide $680 by 2 for an average revenue of $340 per room per hour.

The second variable in this equation is the operating expense ratio (OER), or overhead rate. Assuming a 50 percent OER, of the $340 per hour of revenue, half will go to paying for lights, rent, supplies and other costs of running your business. That leaves $170 of profit per hour per room. This number can help guide your decision making as to what procedures to incorporate into your practice, how much you can afford to pay for a new device, and what price you should charge for procedures.

These numbers are of course relative, but they provide an example of how physicians can break down costs and revenues and ascertain an operating expense ratio. “Once you determine the overhead costs and revenue for each room, you can begin to consider the ways in which your investments can increase your revenue and reduce your overhead rate,” Dr. Kaminer explains.

While every physician and practice is different, Dr. Kaminer emphasizes a general rule of thumb regarding capital equipment purchases that may aid in early decision-making: “Aim to have the cost of a procedure (consumables plus device carrying costs) be less than 25 percent of the total procedure price,” Dr. Kaminer says. This number will change according to the conditions under which one uses a given device, but it provides a broad parameter for where you should set your general goals in determining your own operating expense ratio.

Dr. Kaminer emphasizes the importance of knowing your overhead costs and actively trying to reduce them. “The financial goal of any practice should be to yield better financial results doing roughly the same amount of work, thus generating higher cash flows for your practice,” he says.

Given the current economic climate, how should physicians tailor their approach to capital equipment purchases?
Dr. Kaminer observes that general dermatology has remained relatively stable through the economic recession, therefore it would make sense during these times to ensure that general dermatology remains the foundation of a healthy dermatology practice. “If you also perform cosmetic procedures, it's important to constantly evaluate the state of the national and local economy and consider if they are permissive to adding new procedures and raising revenue per hour, per year in each room of your practice,” Dr. Kaminer observes.

Dr. Kaminer notes that the recession has taught physicians important lessons about patient demographics and cosmetic procedures. “We've observed that the economy appears to be stabilizing, and cosmetic procedures have trended upwards steadily for roughly the past six months. Given that patient demographics haven't changed, there are still a tremendous number of potential patients who are interested in cosmetic services from their dermatologist. As the flow of cosmetic patients increases, success with cosmetic procedures may depend more on locating the right price points for each procedure,” he says.

How can physicians determine the appropriate price point for specific procedures?
“The proverbial ‘sweet spot' of procedure costs will vary based on a number of things, such as local patient demographics, population, and other factors,” notes Dr. Kaminer. Nevertheless, there are broad parameters for what patients will and will not spend on a procedure. For example, many patients, regardless of socioeconomic status, are reluctant to spend more than $3,000 on a procedure, Dr. Kaminer notes. But patients are often more willing to undergo procedures costing less than $1,000, even if they have to be repeated more than once, he adds. There is not an exact art or science to determining price points that work best for your patients and your practice, but Dr. Kaminer notes physicians should always be thinking about these potential numbers relative to the overhead per hour/per room, and where a particular device or procedure would fit in the scheme of your operating expense ratio and what your patients are willing to spend.

Dr. Kaminer observes that the thresholds will be different for every practice, but he recommends using the hourly exam room scenario for thinking through expenses versus earnings with a given procedure or device: “If you are charging $1,000 for a procedure that costs $150 in expenses and takes an hour to perform, your revenue is going to be much higher than the $340 generated by seeing general dermatology patients in that room. Given that the overhead for that room was $170 and you are adding $150 in procedure costs, you are raising overhead to $320 for that hour. While that may seem like a lot of overhead, the practice has now generated $680 in profit, which is much greater than the $170 in the general dermatology model. In addition, overhead for that procedure is 32 percent, which is well below the 50 percent in the general dermatology model. If you decide to charge less for that procedure, or your overhead for that room is higher than $320, your profit will start to shrink and you may need to re-evaluate your plans.”

Can you offer any tips on how to get the most out of device-based procedures?
In terms of immediate impact on overhead costs, procedures such as Botox and Restylane are considerably less costly, because the initial investment is much less than that of a device that may cost upwards of $100,000, notes Dr. Kaminer. “The only significant difference between capital equipment purchases and fillers/Botox procedures is that of perceived risk,” he explains. Risk is less when the upfront expenses are small, such as with fillers and toxins. Risk rises as device costs increase and longerterm commitments are made to funding capital equipment purchases. The upfront costs of Botox include syringes and the medication itself, so investing in these depends on anticipated patient flow for these procedures, he notes. While one could estimate that physicians can see three patients per hour for Botox injections at $400-1,000 per procedure, Dr. Kaminer reminds that anticipated revenue must be tempered by the number of patients who undergo the procedure. “Very few of us have the volume of patients interested in one particular cosmetic procedure that would enable revenues to flow at high frequencies,” notes Dr. Kaminer.

On the other hand, lasers and other devices, while costly upfront, entail a whole different set of variables when making purchasing decisions, observes Dr. Kaminer. Practices must evaluate the cost of the device, financing and other carrying costs, maintenance contracts, consumable costs, and ultimately the final price to the patient. Nevertheless, high cost machines can generate significant returns on investment, and the key is to break down your purchase into its most simple elements to ease the decisionmaking process.

“Consider, hypothetically, a device that costs $100,000 and a bank offers you a five-year loan at five percent interest,” suggests Dr. Kaminer. “You will owe roughly $2,000 per month for five years at this rate, and if you charge somewhere between $700 and $1,000 per treatment, your monthly payment is covered after two or three treatments.” Thus, any procedures you perform with the device after you exceed your break-even number start to contribute to profitability. He adds, “You also need to factor in, as discussed earlier, your practice OER and revenue per hour per room. And perhaps most importantly, every practice needs to be honest with itself when anticipating patient demand for new procedures or devices. The last thing you want to do is over-estimate demand,” he observes. Therefore, a conservative approach to estimating demand, especially if just starting out in the cosmetic space, is essential.

The above example demonstrates the importance of the price you set for each procedure with a given laser or device. Ultimately, the price you charge for a procedure will be one of the single most critical elements of success. The right price will allow sufficient patient volume, cover expenses, and generate reasonable profit. A price set too high, although optimistic, can cut off patient flow. A price set too low will appear successful as patients start pouring in, but the profit generated per hour may not be sufficient to justify the expense and risk.

Do you have take-home advice for practicing physicians regarding their investment in capital purchases?
For physicians who wish to incorporate new procedures into their practice, Dr. Kaminer recommends starting with devices that are well-known, well-made, and offer cost-effective, reliable procedures for patients. “Once you master a device or procedure and gain familiarity with incorporating these types of devices into your practice, it is easier to make gradual steps toward more complex and involved devices or procedures,” he explains.

Dr. Kaminer also stresses the importance of researching various devices and companies, so as to learn as much as possible regarding how a given device may be incorporated into your practice and the support you will receive from the device manufacturer. He urges physicians to honestly evaluate risks of capital equipment purchases for their practice, and also to be careful not to choose a less costly device purely on the basis of up-front costs. “Less expensive devices do not necessarily save the money they promise. They may produce less significant results or cost more to maintain, which are both negatives if you are looking to reduce overhead costs and increase profit,” Dr. Kaminer observes. Therefore, it is important to learn as much as possible about devices and manufacturers. “I find it is always helpful to network with other physicians and experts in the field to gain the perspective of those who use particular devices.” he adds.

Perhaps the key factor for making smart investments regarding capital equipment purchases is self-knowledge. “This includes knowing who you are as a physician, identifying your skill set, and running your practice in a way that reflects these qualities,” says Dr. Kaminer. Appropriate investment strategies are anchored by the vision physicians have for their practices as well as for what constitutes effective practice of cosmetic dermatology. “Diversify, diversify, diversify. There is a synergy to providing a breadth of options to patients, and healthy practices capitalize on that,” says Dr. Kaminer. “There are a variety of devices, procedures, and strategies one can pursue in cosmetic dermatology, and rather than viewing each of them as separate, approaching them with an attitude of diversifying procedures and practices may foster a healthier over-all practice environment.”

Dr. Kaminer consults for several companies, including Solta Medical, Zeltiq, Lumenis, Miramar Labs, Sciton, and Cabochon.

Take-Home Tips
Understanding the operating expense ratio(ratio of expenses to overall practice revenue) is essential toefficient practice management and enables calculation of overheadcosts and project earnings. Aim to have the cost of a procedure(consumables plus device carrying costs) be less than 25 percentof the total procedure price. The right price to charge for aprocedure is one that allows sufficient patient volume, coversexpenses, and generates a reasonable profit.

The Relationship with Device Manufacturers
Device manufacturers understand that capital equipment purchases can beexpensive. Finding a company that is willing to work with you to ease theprocess and help you effectively add a new technology to your practice can beextremely valuable. Some important variables to look for:

• Negotiating a fair purchase price
• Attractive financing terms (perhaps best negotiated with your bank)
• Cost-effective maintenance contracts
• Provision of sufficient start-up consumables (included in your purchaseprice) to allow you to adequately learn and incorporate the procedure
• Availability of on-site guidance during first few months of treatments
• Access to advice from other physicians and experts who use the device
• A sense of partnership between you and the device company

—Michael S. Kaminer, MD

Tips on Hiring Support Staff and Incorporating Them into aPractice with Devices and Laser Procedures
Medical support staff (nurses, medical assistants, etc.) are often one of themost important assets of a dermatology practice, and effective utilization ofthis staff can be a rewarding experience and generate significant returns oninvestment. As devices and procedures become more automated, medical supportstaff can become extremely efficient extenders of physician time andskill. Numerous procedures can be effectively delegated to nursing staff underappropriate supervision by the physician as outlined by state regulations. Thisallows physicians to leverage their time and expertise by delegating thoseprocedures that do not need direct hands-on involvement of the physician toqualified support personnel. Ultimately, this strategy allows both physiciansand their support staff to be generating revenue independently and at thesame time.

Some factors to consider:

• Hire quality staff
• Consider hiring nurses who are able to work independently rather thanless costly assistants who will need more supervision
• Know your state regulations relating to who can operate a device andwhat type of physician oversight is required
• Consider the ability of your support staff to use a new deviceindependently when making purchasing decisions
• Invest in the time and effort it takes to properly train support staff toperform procedures independently
• Remember that the physician bears ultimate responsibility for thequality and results of the procedures performed by support staff
• As support staff become proficient at working independently withdevices, incorporate their involvement and revenue into long-termpractice planning and room allocation

- Michael S. Kaminer, MD

Time: Another Cost Factor to Consider
The time needed to perform a procedure is an essential factor to consider. Forexample, while Zeltiq is a relatively long procedure at approximately two hoursfor most patients, one must assess the realities of the time “costs.” After theinitial patient consultation, the procedure can be performed by an assistant,therefore requiring less of the physician's time. Additionally, because theZeltiq system self-monitors, the assistant does not need to be present in theroom after the first five minutes of device placement. Billed at $600-800 perhour, Zeltiq can nicely fit into the overhead model to maximize room efficiencywhile keeping overhead costs low for that hour.

—Michael S. Kaminer, MD