How to Conduct a Breakeven Analysis on a New Piece of Equipment
How to Conduct a Breakeven Analysis on a New Piece of Equipment
Long gone are the days when perioperative executives did not need to look at the financial analysis behind OR equipment purchases, says Pamela Hunt, BS, MSN, RN, chief nurse executive for Community Heath Network's north region in Indianapolis.
"We are being held to a much higher standard for our fiscal responsibility to our organizations," she says. "Consequently, we as nurse executives and leaders in the OR must be able to demonstrate that we know a purchase's breakeven point—the point at which we can expect to recover the cost of an investment—and the timeline for the breakeven point.We must then make an educated decision based on all of those factors of whether a purchase something that is logical, good for the community, good for the patients we serve and fiscally responsible to our organization."
Hunt identifies the following seven steps to take to conduct a simplified breakeven analysis on a new piece of equipment.
Understanding Expenses
1. Determine fixed cost."Thefixed cost is what a piece of equipment will cost that is not going to change based on the number of procedures you perform," Hunt says. "So if you have to buy a piece of capital equipment that costs $100,000, that cost does not change with surgical activity.However, the more procedures you perform using that piece of equipment, the average fixed cost per procedure declines. Therefore, the goal is to have enough volume to lower the average fixed cost."
2. Determine variable cost.A variable cost is a cost that is uniform per unit, but fluctuates in total in direct proportion to changes in volume. "An example of a variable cost is a disposable supply used in a procedure," she says. "The more procedures you perform, the more variable costs you are going to incur as each procedure requires purchasing theone-time use of a supply."
3. Calculatetotal cost.The totalcost is the addition of the fixed cost plus the variable cost. The average total cost of a procedure will go down as the number of procedures you do goes up.
Understanding Revenue
4. Determine number of procedures.Speak with physicians who will be performing the procedure to determine an estimated volume that they intend to perform each month."Remember:volume is a key component of a successful return on investment (ROI)," Hunt says.
5. Determine patient mix.When speaking with surgeons, also ask about the typical types of coverage for their patients (e.g., Medicare, Medicaid, private insurance, self-pay) for whom they will be performing this service. Based on the knowledge of the physician, determine a percentage for each payer type.
6. Determine reimbursement.Once you have gathered data on the number (and type) of procedures and the type of payer, you can now estimate the reimbursement that the service will generate each month.
"After understanding the procedure codes and payer mix, work with your finance department to determine the reimbursement for each procedure code and each payer mix,"Hunt says. "Understanding the potential reimbursement by payer and procedure code is vital to an accurate ROI."
Breakeven
7. Calculatebreakeven point.With all of the data gathered, you can now determine the new equipment's breakeven point. The calculation is as follows: The average reimbursement minus the variable expense divided into the fixed cost."That gets you to your breakeven point of how many procedures you have to do in order to break even," Hunt says.
With that figure, you can divide it by the average number of procedures you expect to perform each month. This will provide you with the number of months it will take to break even on the equipment purchase.
Don't be intimidated by this work or think that you have to do this alone, Hunt advises. "Call your business partners in finance, explain to them what you are trying to determine and allow them to help you with the information you need. Good business decisions are made on good data. Make sure you know the point in which you will recover the costs of the initial investment before you purchase."