Equipment

Costly Ophthalmic Equipment: Buy or Lease?

Attractive new products beckon. How do you acquire them?

By Jerry Helzner, contributing editor

Ohthalmologists are always looking to improve their practice. First and foremost, they aim to achieve superior outcomes that delight patients and create referrals. But secondly, they’re seeking advanced technology that enables these superior outcomes and lets patients know that their ophthalmologist has access to the best equipment available.

Many New Equipment Choices

Happily, eyecare practices have never had more choices available. Innovation in ophthalmic technology has been rapidly increasing, in recent years, with exciting new diagnostic instruments and surgical equipment being introduced to the market. The most notable recent advances include OCT, femtosecond lasers for both refractive and cataract surgery, state-of-the-art phaco machines and intraoperative wavefront aberrometers. But this advanced technology almost always represents a significant investment. The challenge is for practices to cost-effectively acquire technologies that most contribute to better patient care, improve staff productivity and that can justify their cost.

Here, we will explore the basic financing strategies that practices can employ to acquire high-priced instruments and equipment.

Four Ways to Acquire Equipment

There are basically four ways to acquire big-ticket ophthalmic equipment, notes Mark Kropiewnicki, principal consultant of the Health Care Group in Plymouth Meeting, Pa., who advises ophthalmology practices on financial management.

For a solo-doctor or small practice, the simplest way is to pay cash. This can be accomplished by taking a pay cut for the year in which the equipment is purchased or to use earnings that have been retained or accumulated in the business. The advantages of paying cash are that there are no interest charges and, assuming that the equipment improves practice efficiency and productivity, the payback on the investment begins almost immediately.

With this scenario, you can depreciate the equipment on a yearly basis or write off the entire purchase in one year under a Federal tax law called Section 179. This section of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. This means that if you acquire or lease a piece of qualifying equipment, you can deduct the full purchase price against gross income. In 2013, there is a cap of $500,000 in deduction under Section 179. Practices should consult with their accountants for further details about this provision of the tax code.

Take a bank loan to finance the purchase price of the piece of equipment. “Usually, you would want to take a five-year loan that would match up with a five-to-six-year depreciation schedule for the equipment,” says Mr. Kropiewnicki. “That way, you can match your cash outflow to the depreciation, which makes the financing terms more manageable. If the interest rate is a based on the prime rate of interest plus one percent, you would be paying about 4.25% interest on the purchase, with the interest being tax deductible.”

Again, with the bank loan scenario, you can write off the entire cost of the equipment in one year under Section 179. To the extent the asset is written off or deducted under Section 179, the suggestion of matching cash flow obligations of the loan to a depreciation schedule would not apply.

Finance the purchase with a capital lease. This is essentially a way to pay off a piece of equipment over a specified time period and own it at the end of the lease term with a nominal buy-out or purchase amount. Just as with the outright cash purchase and the bank loan methods of acquiring equipment, Section 179 also applies to acquisition via a capital lease. With a capital lease, as with a bank loan, you are paying principal and interest, with the interest being tax deductible. Capital leases, however, may have hidden administrative charges, which then become part of the monthly payment and can make a capital lease more expensive than a bank loan. Before agreeing to a capital lease, the practice should be clear as to what specific charges are being included in the monthly payments. This will also allow for easier comparison to other financing alternatives.

Finance the purchase with an operating lease. Mr. Kropiewnicki explains that an operating lease is almost the same as a long-term rental. Acquiring equipment under an operating lease arrangement does not qualify for Section 179 tax treatment. “If the piece of equipment is valued at $100,000 new, you may be able to lease it for five years for a total of $90,000 plus interest payments and then return it to the leasing company. The leasing company then has a five-year-old piece of equipment with a residual value of, say, $10,000,” says Mr. Kropiewnicki. “The residual value is an estimate of what that piece of equipment will be worth at the end of the lease.”

For example, a laser may become obsolete in a few years, whereas outfitting a lane with slit lamp, phoropter and examination chair carries almost no risk of obsolescence. Mr. Kropiewnicki advises, with equipment that may obsolesce quickly, a three-year operating lease may be preferable to a five-year lease, even if carries a higher cost.

Achieving Payback

A major aspect of acquiring high-priced equipment is making an accurate estimate of how and when the equipment will begin contributing additional profits to the practice, according to Mr. Kropiewnicki. With some highly sophisticated ophthalmic equipment, making this estimate can be difficult, due to factors like “click fees,” software upgrades, maintenance charges and changes in reimbursement under specific procedure codes.

“The easiest calculation is when you are replacing an existing piece of equipment with something intended to take its place,” he says. “When you are acquiring replacement equipment, you know how much it will be used and its importance to the practice. You expect the new equipment will enhance efficiency and productivity above what the old equipment was providing, so it is fairly simple to estimate the payback on this new acquisition.”

It gets complicated, Mr. Kropiewnicki says, when you are bringing an entirely new piece of equipment into the practice. “That’s where you have to make an estimate based on some variables that may or may not play out in the real world,” he says.

These types of estimates require more research and planning, especially with such new acquisitions as a femtosecond laser. This is the type of advanced equipment that, with some practices, requires additional payments (and possibly an additional decision) from the patient.” This variable makes it more difficult to estimate payback. Check with non-competing practices to determine how they’ve fared of attracting patient volume to new equipment. OP