Optometric Management Tip # 432 - Wednesday, May 26, 2010
A How-to Guide to Instruments That Pay for Themselves
I've written articles about the clinical, financial and marketing benefits of adding instruments to your practice (see tip numbers 376 and 377), but here I'll present a how-to guide to determine if an instrument will pay for itself. If you perform this analysis and find that an instrument will pay for itself, you should definitely buy it.
A variety of instruments can pay for themselves. Some may be used in medical billing and some may function as screening tests for an additional fee that is not covered by insurance or vision plans. Some instruments can be used with both methods of payment. Here are some to consider:
- Digital retinal camera. Most eye care practitioners (ECPs) already have this instrument but if you don't, it may be the best example of an instrument that pays for itself. It can be used as a screening device offered to all patients for an extra fee and it can be used for medical documentation and billed to Medicare or medical insurance with an appropriate diagnosis code.
- OCT (Optical Coherence Tomography). With the large number of glaucoma suspects, macular degeneration patients and diabetics seen in many practices, this instrument makes excellent sense, even though it is fairly expensive.
- Macular pigment optical density test. This is relatively new technology that is used to screen for a risk factor for macular degeneration. It is not billed to medical insurance but a small additional fee could be charged to patients who opt-in for the test.
- Visual field. Most ECPs would agree that an auto-perimeter is a requirement to practice, not optional like many others on this list. But there is a CPT code and it would pay for itself in most practices with use.
- Pachymeter. The usual fee paid by Medicare is low for this test, but the overall cost of the device is relatively low as well.
- Anterior segment camera. CPT code 92285 can be used with many diagnoses of the external eye and anterior segment.
- Corneal topography. I don't bill medical insurance for this procedure very often but an annual topography test is required in my practice for contact lens exams and a separate fee is charged to the patient.
- Specular microscope camera for endothelial cell check. Many specialty contact lens practices use this device on a regular basis to investigate the physiological impact of contact lenses on the cornea. It could be billed to medical insurance or it could be charged to the patient as a screening test.
Projecting gross fees
The first step to determine if a device will pay for itself is to determine how much gross revenue it will produce in your practice. We must analyze how many tests will you do and how much will you be paid for each one. Consider these factors:
- Patient demand in your practice. You can generate data from your office management system to tell you how many people you saw last year with specific diagnosis codes, in certain age groups or with Medicare. If the new device will be a screener that is paid directly by the patient, determine how many comprehensive eye exams you did last year and use a factor for the percentage of patients you believe will opt-in. It will vary by the test but 60% would be realistic.
- Will having the device produce more cases than you have seen in the past? Many practices see more of a certain type of case than they did before the instrument because the device helps them to more accurately diagnose cases. Also, you may receive referrals of more patients because you have the instrument. To be conservative, you could simply ignore this potential and work from what you actually have seen in the past.
- Pent-up demand. You may generate a larger number of tests in the first year of owning an instrument because you have many patients on file with a specific history or risk factor who you could contact and urge them to come in for the procedure.
- Diagnosis codes. If the procedure will be billed to Medicare or medical insurance, you can often obtain a list of diagnosis codes that will be paid by checking the local coverage determination (LCD) for the plan. The LCD may be on the plan's website. If a list of diagnosis codes is not available, ask the instrument rep for the information. Be sure you are aware of all the potential for an instrument. OCTs have a large number of applicable diagnosis codes for retina and optic nerve issues, but some can also scan the anterior chamber and cornea, which opens up the device for many additional patients.
- How often will you do the test? You can check the LCD again or just use your judgment while considering the accepted standard of care in the profession. You can often use one test per year for this analysis, even though you may be able to do more than that based on the case.
- What is the fee? If there is a CPT procedure code for the test you can determine the current approved Medicare fee by checking the website at the Center for Medicare Services (cms.gov). If you factor in potential payments from private medical insurance be sure to consider if some percentage of those claims will be uncollectible due to high patient deductibles or other reasons. If you will use the device as a screening test, just decide on a fee that will be high enough to generate a profit but low enough that most patients will opt-in for the service.
The next step is to project how much the instrument will cost on a monthly basis. Consider these points:
- Cost of the instrument. Get the best deal you can by attending eye care conventions and comparing features and costs.
- Monthly expense. If you choose to lease or finance the purchase, just find the best terms and determine the monthly payment. Even if you pay cash for the instrument, use a hypothetical monthly payment with interest because you are tying up the use of your money that could have been invested elsewhere.
- Additional expenses if any. Consider lab supplies, maintenance agreements or any other extra cost that will be incurred by using the instrument. I would not typically include staff expense or the use of office space because most practices will use existing staff and space that are already paid for, but you could make a case to factor it in.
- Express the monthly expense for one year. Multiply the total monthly cost by twelve.
Resultant cash flow
Simply deduct the projected annual expense of the instrument from the projected annual gross income determined above and you have the profit you will generate in the first year. Any profit at all is a good thing when you consider that you'll also benefit from the additional clinical data and the public relations value of the wow factor. I'd buy the instrument even if it were a break even scenario in the first year because usage will often increase in subsequent years because having the advanced technology often leads to diagnosing more cases. And don't forget that the monthly payment is typically for three to five years and after the instrument is paid for, the entire gross income becomes profit.
In the United States, the IRS continues to provide strong income tax benefits for business owners who invest in capital equipment such as diagnostic instruments. Section 179 of the tax code allows a business to deduct the full amount paid for the device in the year it is purchased. Rather than having to depreciate the cost of the machine over seven years, you may take it as an expense all at once. This deduction converts to a discount of an amount equal to your tax bracket. If you are in the 35% tax bracket, a $60,000 instrument would actually cost $39,000. I don't actually work this tax savings into the projection calculations, but I view it as a very nice bonus.
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management