Reps can become valuable partners by helping physician practices think through utilization, infrastructure, financing and the business case for new equipment.
Physician practices are facing a financial balancing act: rising costs are colliding with pressure on reimbursement, making it harder for practices to invest in their businesses while maintaining day-to-day operations.
Deuce Lukemeyer, a principal with PYA, an accounting and advisory firm that works with clients in the healthcare space, says capital purchases are increasingly competing for attention in an environment “marked by declining reimbursement and higher operating expenses.”
Labor is one of the biggest contributors to that pressure. Physician shortages are well documented, but practices are also struggling to recruit and retain the broader teams needed to keep offices running. Medical assistants, in particular, can be difficult to hire as practices compete with other industries for workers.
At the same time, the cost of borrowing has increased. Higher loan rates add another layer of expense for practices looking to purchase equipment, expand facilities or make other capital investments. Malpractice and office insurance costs are rising as well.
The result is a challenging operating environment in which practices are being asked to do more with less. “There’s just a whole host of environmental influences today that make practicing medicine more expensive,” Lukemeyer says.
And reimbursement pressure isn’t going away. Medicare and other government payers continue to look for ways to reduce healthcare costs, putting additional pressure on physician practices even as the cost of delivering care continues to rise.
For Repertoire readers, these financial pressures have an important implication: physician practices are likely to scrutinize every purchase more closely. Reps calling on practices need to consistently remember that customers may be balancing the need for new products, equipment and technology against rising labor, insurance and borrowing costs in an atmosphere of declining reimbursement.
That doesn’t necessarily mean practices will stop investing. Instead, the conversation may shift toward value, efficiency and return on investment. Products that can help practices save staff time, improve workflow, reduce waste or support better patient care may have a stronger business case than products viewed simply as replacements or upgrades.
Look beyond the tax break
When physician practices are considering a major equipment purchase, the tax benefits can be attractive, but they shouldn’t be the reason for making the purchase in the first place.
PJ Birmingham, a manager with PYA, cautions practices against buying equipment simply to generate a tax deduction. “There needs to be a real business purpose for the equipment,” he says. “Don’t let the tax deduction drive the decision-making process.”
Instead, practices should consider the purchase from several angles, starting with cash flow. Paying cash may avoid interest charges, but practices need to make sure they have sufficient funds left for everyday operating expenses and, where applicable, distributions to owners or partners. Financing can preserve cash, but higher interest rates create additional monthly expenses that need to be factored into the decision.
Birmingham also recommends looking beyond the initial price tag to consider utilization and longevity. Questions to consider include:
- Will the equipment be used enough to justify the investment?
- Could it become obsolete in a few years?
- Does the practice have the space and infrastructure to accommodate it, or will the purchase require construction, structural modifications or a new suite?
For med/surg reps, those considerations can provide an opening for a broader conversation with customers. Rather than focusing exclusively on the equipment itself, reps can ask about expected utilization, workflow, space requirements and the practice’s longer-term plans. Helping a customer evaluate the total investment – not just the purchase price – can make the rep a more valuable resource in the decision-making process.
Finally, Birmingham emphasizes that purchasing equipment doesn’t automatically make a practice eligible for every available tax benefit. “There’s a laundry list of things to consider,” he says. The business purpose, cash position, financing, utilization, longevity, installation requirements and tax implications all need to be considered before a practice signs on the dotted line.
Section 179
For physician practices considering equipment purchases, Section 179 can provide a valuable tax benefit, but it should be viewed as a planning tool, not a reason to buy equipment. “Section 179 is an election, not a requirement,” Birmingham says.
Practices need to first determine whether accelerating depreciation makes sense for their financial situation. For a startup practice operating at a loss, for example, an accelerated deduction may provide little immediate benefit.
Section 179 is also subject to limitations. The deduction is tied to the amount of qualifying property placed in service and deductions are phased out as the amount of assets placed in service surpasses set IRS thresholds. A practice cannot use Section 179 to create a tax loss, although unused deductions can be carried forward. Practices also need to consider whether state tax rules conform to federal accelerated depreciation provisions.
Another consideration is the timing of the tax benefit. Accelerating 100% of an eligible equipment purchase into the first year can reduce taxable income today, but it also means there may be less depreciation available to offset taxable income in future years. That makes the decision a matter of tax planning, not simply tax savings.
The distinction can become especially important with major equipment purchases. An MRI, for example, may qualify for accelerated depreciation, but the construction required to house it may be subject to different depreciation rules. A new room, structural modifications or other improvements could have much longer depreciation periods.
For med/surg reps, the takeaway is that Section 179 can be part of the conversation when customers are evaluating capital purchases, but it shouldn’t be the centerpiece. Reps can help customers think through the clinical and operational business case while encouraging them to involve their tax and financial advisers early.
“There’s a lot more considerations that need to take place,” Birmingham says. “There needs to be more planning and more discussion on the front end rather than on the back end.”
Help practices do their homework
Whether a practice ultimately leases or purchases equipment, the best decisions start with the same foundation: due diligence. For med/surg reps, that creates an opportunity to help practice administrators ask the right questions without stepping into the role of their financial or tax advisers.
Lukemeyer suggests starting with the clinical need and expected utilization. How much referral volume does the practice currently send elsewhere? How much volume could the new equipment capture? And how would bringing that service in-house affect the practice’s daily schedule, revenue and operating expenses?
There are also practical questions that can be easy to overlook. Will the equipment require a specialized technician, ongoing licensing, additional insurance or maintenance? Does the practice have the necessary space, electrical connections or other infrastructure? And could the equipment improve patient experience or quality of care?
For reps, helping customers work through those foundational questions can be more valuable than simply presenting a product. It can also help identify when other experts need to be brought into the discussion.
The same applies to payer considerations. Practices should understand how a new piece of equipment could affect pre-certifications, prior authorizations and payer contracts, Lukemeyer says. Reps may be able to help administrators identify the procedures and volumes they should track as they evaluate the investment.
And leasing shouldn’t be dismissed as simply an alternative to buying. As Birmingham points out, leasing still represents an expense. When entering into a lease, both parties need to be mindful of who bears responsibility for maintenance, insurance and repairs.
Ultimately, the role of the med/surg rep is not to make the financial decision for the practice. It’s to help customers gather the information they need to make an informed one. As Lukemeyer puts it, “Those are good things that will shortcut the time and energy investment required of the practice administrator.”
A Good Purchase Starts With a Good Plan
The practices that make sound equipment decisions tend to have something in common: They understand when to bring their financial advisers into the conversation, and when they don’t need to.
PJ Birmingham, a manager with PYA, says the right level of outside guidance depends on the size and sophistication of the practice. A small or startup practice with limited cash and little financial and operational experience may benefit from consulting its CPA more frequently, while larger organizations may have enough internal expertise to evaluate routine purchases on their own.
The bigger warning sign is when a practice allows a tax benefit to drive a purchase that doesn’t make business sense.
A practice that can step back and say, “Maybe we could use it in a few years, but let’s plan this out a little longer,” is demonstrating the kind of discipline that can lead to a more successful investment, Birmingham says.
For reps: When a customer is considering a major purchase, ask whether the practice has considered utilization, timing, cash flow, implementation and the tax implications. Those questions can help uncover issues before they become problems – and position the rep as a strategic resource rather than simply a product salesperson.
Key Takeaways
- Look beyond the tax break: Section 179 and other tax benefits should support a sound business decision, not drive the purchase of equipment.
- Consider the total investment: Practices should evaluate cash flow, financing, utilization, longevity, space, infrastructure, maintenance and staffing before making a purchase.
- Do the homework: Tracking patient volume, referrals, reimbursement, payer requirements and potential revenue can help practices determine whether an investment makes clinical and financial sense.
- Help customers ask the right questions: Med/surg reps can add value by helping practices evaluate their needs and identify when they should bring in CPAs or other financial advisers.