John V. Guiliana, DPM, MS
Fellow and Trustee, AAPPM 

"If you need something, you will pay for it whether you buy it or not…."

This business philosophy permeates just about any industry. Once it’s determined that something is truly justified, you will either pay for it in its purchase, or have the misfortune of paying for it through lost revenue. The choice is yours.

Justification is indeed the challenging part. Years ago, it was easy to plan and budget for long-term goals. Today, the environment changes so rapidly, long-term planning has become a mere fantasy. Yet it is critical that we still engage in the practice of cost-justifying all major purchase or leases.

In a cost-justification analysis, I would suggest that you start by examining all real or potential benefits of the purchase/lease. The benefits may not just be limited to the direct financial gains. Improved customer service, enhancing the comprehensiveness of your care, or improved efficiency may greatly benefit the practice, and indeed lead to a financial gain indirectly. Although these indirect benefits are difficult to quantify, a needs assessment should be able to realistically predict their effect on revenue.

Calculating a purchase’s direct revenue production is relatively easy. Estimate the potential use of the purchase or lease and multiply that by the reimbursement for that usage. Calculating the indirect effect is more challenging and less scientific. I like to assume that every new patient has an inherent financial value of $1500 to the practice (through direct services as well as the referral trail that they may create). With this assumption, you can begin to predict what this new service may add to the direct and indirect financial gains.

Questions that you need to ask include

Expense issues

* How much will this new service cost to purchase/ lease?

* What will be the "opportunity costs" associated with the purchase/lease? (Since other opportunities may be present, a purchase not only has a direct cost, but a cost associated with the lost opportunities as well. As an example, you will lose the opportunity to invest that money in an interest-bearing vehicle.)

* What will be the cost of marketing this new service? (if applicable)

* What will be the cost associated with the "operation" of the new service? (Training, more staff, etc.)

* Is there any potential risk of the service reimbursement being lost? (Regulation changes for example)

Potential Revenue gains

* What will be the direct revenue gains associated with the use of the purchase/lease?

* What are the anticipated revenues associated with new patients that this purchase/lease might create.

* Will this purchase/lease increase my efficiency and lower overhead? By how much?

Predicting the answers to the above questions will enable you to calculate a "break even point" for the purchase or lease. A monthly lease that merely just pays for itself, for example, is well worth it due to the effects that it usually has on customer service and perception. An outright purchase should be considered cost-justified if it will pay for itself within a 3-5 year period.

An analysis such as this should be performed prior to any major purchase or lease. All costs and benefits, not just direct costs and benefits need to be considered. Many physicians miscalculate this cost/benefit relationship and either acquire something that there is no justification for, or conversely, refrain from acquiring something that they pay for every year!

FootZine  Volume 48

John V. Guiliana, DPM, MS
Fellow and Trustee, AAPPM 

Dr. Guiliana is a Fellow of the American Academy of Podiatric Practice Management and a member of their Board of Trustees. He is a nationally known lecturer and author on topics pertaining to medical practice management.



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