Over the 20 years I have spent working in healthcare, I have realized that it is critical to understand how to access capital and manage assets. And with the expense of imaging assets, it is imperative that the imaging administrator be able to tell the right story to help the executive team make informed decisions.
Here are the six steps I have found helpful to build the justification and tell the story for managing assets.
1. Know the Plan
Understanding where to begin with asset management in radiology starts with understanding your organization’s strategic plan. It is essential to know the strategy to meet the needs of the patient population that is targeted. For example, if the organization placed a high priority on cardiovascular services as a major service line, you will need to evaluate if you have the imaging assets to compliment the strategy.
2. Create an Asset Inventory List
Next, you will need to organize all of your imaging assets on an asset inventory list. Data to track would be modality, vendor, model, age, projected volume growth, estimated life, service cost over two years and any comments that may add value. This asset list is an objective way to inform the capital budgeting process. If you have an aging asset with high service cost that is growing volume due to it being aligned with the strategic plan, then it is a good example of an asset to target for replacement.
3. Create a Five-Year Capital Plan
Once an asset inventory list is created, you should start working on the five-year capital plan. This exercise should occur prior to the organization’s capital planning in order to best inform the planning process. Create a grid for a rolling 5-year period that lists the modality, description of equipment, cost and total cost by year. This exercise is completed annually and updated on a rolling five-year basis. It is helpful for an organization to understand the type of capital needs coming in the future that may lead to higher spending. This gives everyone a longer runway to plan for upcoming costs and helps keep the team on the same page at all times.
4. Choose Your Equipment
Selecting the vendor and model of equipment can be a challenge without a standard process to work within. Another decision that will need to be made for each piece of equipment is whether a purchase should be new, used or leased. There are pros and cons to each of these options. For example, a large hospital system may choose to always buy new and never lease to ensure buying power is maximized. A small private practice or imaging center, however, may elect to lease to ensure modern technology optimization is in use while preserving cash flow to the business. Understanding company resources to take advantage of buying power and existing contracts will help narrow choice and streamline process. If you are in a small business or independent practice, you will have more flexibility on choice, but will need to send out a Request for Purchase to vendors to get an apple-to-apples comparison of equipment delivered in an objective format for review.
5. Create Your Proforma/Business Plan
Once equipment has been selected, it is time to build a proforma or business plan. The business plan should tell the story, in financial terms, of whether a project should be considered. Decision makers can then compare multiple business plans and decide what should be funded based on organizational goals and strategy.
To construct the proforma, reach out to the finance resources available to you within the organization; there are typically some templates used that the decision makers can evaluate when planning is complete. If a template is not available, then work alongside the finance designee within your organization to build the document.
As the subject matter expert in imaging, be prepared to create volume assumptions for the equipment. The volume needs to be new/incremental volume to support the investment of the project. A good way to assume volume is to study leakage from the referral base or study the ratio of imaging referrals based on physician specialty. If the physician specialty in the service area refers 100 tests per year per provider, you can assume that if a new provider of that specialty is recruited, then a similar volume will follow after ramp up time is considered. Talking with colleagues within the imaging administrator arena is another good way to see how other professionals create volume assumptions.
Once volume assumptions are complete, you can start working on the expense side of the equation. There is history within the business that will demonstrate the per-unit cost associated with similar business. If the current cost per unit in the department that is getting the equipment is $100/test, it will be a good starting point to assume future expense on the future volumes. Specific operational costs that will be new need to be included in the new cost per unit number.
Of course, there also are staffing costs that need to be considered. The exercise most helpful to use is taking the current productive hours per unit of service as a ratio and then calculating the productive hours needed to support the new volume. For example, if it takes 40 productive hours per week (one FTE) to support 100 tests per week, the ratio is 40/100 or 0.4. If the new volume in the proforma is projected at 5,200 tests per year, multiply 0.4 by 5,200 and get 2,080 productive hours needed to support that new annual volume. (Remember: One FTE is equal to 2,080 hours per year!) The net new FTE for the project in this example would be one FTE. You can then multiply the 2,080 hours by the projected average hourly rate plus 20 percent for your estimated benefits cost.
Volume, cost per unit and labor are the main components to putting together a proforma. Other data that will be needed to complete the proforma are charge per test, service costs, depreciation and allowance rate used to discount revenue. Allowance rate is determined by the payor contracts and revenue cycle process the organization has. It is the relationship between what is charged and what is collected. If total annual charges for a service are $1 million and the business collects $400,000 based on contracts and revenue cycle practice, then the collection rate equals $400,000/$1 million or 40 percent. The allowance rate is what the organization will discount or allow off of the total charges, which in this case is 60 percent.
But you’re not quite done yet. All of the variables for the proforma have come together and they now need to be detailed in a projection over a 5- to 7-year period. This total financial analysis should be coupled with a narrative of why the purchase fits within the strategic plan and initiatives of the organization, which shows why the very first step I mentioned was to make sure you fully understand the plan.
6. Conduct More Analysis
The proforma is a tool that helps you show the projected revenue and expenses associated with a project. More detailed financial analysis also should be conducted to further tell the story, statistics such as Net Present Value (NPV) and Internal Rate of Return (IRR). NPV describes future revenues in terms of the present-day value of money, since we all know $1 today does not have the same value as $1 in the past. The organization needs to be comfortable that the investment in the project will yield value in the future considering their buying power will be less due to inflation. In general, if the NPV is above zero, the project is considered worthy to pursue. The higher the number, the better.
IRR, meanwhile, captures the percentage of profit over the life of the investment. The higher the percent, the better the return; somewhere between 8 to 12 percent is average. This demonstrates the “hurdle rate” needed to overcome risk associated with an investment.
Once these six steps are complete, you should be ready to pitch the project idea to the decision makers in the organization. Good luck! This level of due diligence will ensure that you are prepared to answer to the assumptions around the analysis and be able to describe how the project fits within the long-term capital and strategic planning of the organization. Keep in mind that your overall goal is to put the organization into a position to make objective, informed decisions with the scarce capital dollars that exist within healthcare.
Kevin Smith, MHA, is the vice president and chief operating officer of High Point Regional Health, part of UNC Health Care, in High Point, N.C.