Capital equipment process made simple
By Stephen W. Earnhart, MS
Earnhart & Associates
While we need to budget for new equipment in the surgical suites, we don't necessarily need to spend it. With already escalating costs for energy and labor, any area where we can save money or "capital" is wise planning.
Capital usually is any single piece of equipment that is more than a certain amount of money, typically a single item in excess of $1,000. A new sterilizer would be a capital equipment purchase, while a new minor instrument tray would not. Little known fact: The word "capital" is in reference to the U.S. capital, which is synonymous with the spending of money.
The biggest reasons for purchasing capital equipment are to replace existing equipment that is no longer functional or has become obsolete or . . . one or more of your surgeons went to a trade show.
How do you budget for capital equipment? Well, it is a bit confusing. Hospitals do it differently from surgery centers. Hospitals usually have a complicated method that entails looking at the useful life of existing equipment and taking into account how much money they have in the kitty to distribute to the various hospital departments: emergency department, med-surg, ORs, etc. It usually is so complex and difficult to understand that is it often is easier for the surgeons to build their own surgery center and not have to worry about it.
Surgery centers are more schizophrenic about the process by buying capital equipment only for the surgeons who treat the staff the best.
Occasionally, both systems need to buy something for the facility. So if you ever get in a situation where you cannot get away with "smoke and mirrors" or popularity contests, you might need to consider this scenario.
New equipment (not replacement equipment) needs to be justified before you should purchase it. Let's consider this situation: Your plastic surgeon (who wants everything) approaches you to buy a new CO2 laser that can obliterate eyebrows faster than the one that is sitting unused in the storage closet. The price is $45,000. What you need to do is to find out how many new patients this equipment will bring to the facility. Then you need to determine the fee you can charge for this new procedure. Add in labor, supplies, and recovery time expenses. Subtract your expenses, and find out what your profit margin is on this new procedure made possible by the laser. Let's use the following numbers:
- Facility fee = $800.
- Expenses (including labor) = $300.
Thus, not counting your fixed overhead expenses, you have a potential profit of $500 per case.
How many cases can you do? The surgeon tells you he/she can bring you 500 cases per year if you get the laser for him/her. Next, you need to reduce his/her expectations of new cases just a bit. Let's reduce it by, oh, say 400 cases. So you now have a potential new market of 100 cases per year with revenue of $80,000, expenses of $30,000, and profits of about $50,000. One of your goals is to pay off any new equipment in less than five years. Using this scenario, you actually could pay it off in one year. So it passes the financial test.
The next thing you need to do is test the market that your plastic surgeon claims is so rich with people who have unruly eyebrows who are willing to pay $800 to have them fried off. First, you do a literature search to learn all about this quirk of nature. Next, contact the manufacturer or sales rep that is selling the machine. Find out who else is using this machine for this procedure. Contact them and ask them how they are doing. Discuss it with your payers to see if it is reimbursable. (Yeah, right!) Lastly, take your findings and present them to your board or finance committee. If you are uncertain that there really is a market for this affliction, then tell the board that you are unable to substantiate the volume numbers and let them make the decision.
Bottom line, don't be so risk adverse that you pass up new revenue by not buying the necessary equipment. Just make sure you are as informed as you can be before you do.
[Earnhart & Associates is an ambulatory surgery consulting firm specializing in all aspects of surgery center development and management. Contact Earnhart at 1000 Westbank Drive, Suite 5B, Austin, TX 78746. E-mail: firstname.lastname@example.org. Web: www.earnhart.com.]