Imaging in practice: it’s a numbers game

The global veterinary imaging market is forecast to surpass £1.5 billion by 2025, driven by the continued growth in penetration of the pet insurance market and ever-higher expectations from pet owners.Demand drives innovation – which, in turn, drives demand for the new products and services. Vets desire not only the best for their clients and patients, but for their own professional development. The introduction of the “advanced practitioner” status has democratised specialisation and fuelled expectations of ever-higher standards of equipment within GP practices. But all this technology comes at a cost. The critical question is: does it pay?

Digital transformation

It is all too easy to relegate the issue of whether to invest in a piece of diagnostic imaging kit to one of simply return on investment (ROI). Maybe a vet asks for a new ultrasound machine, a sales rep suggests you really should be routinely performing dental x-rays, or you wonder if a CT machine could be justified in the hospital refurb you are planning.

To do so outside of a broader digital strategy, however, would be remiss. Progressive organisations are prioritising customer experience investments in short-term and long-term digital transformation.

Many of the major trends affecting the industry at the moment are resulting in increased competition, and so it is essential to be clear about how your practice will approach the issue of client experience, and what role digital transformation plays in that. Giving thought to how you will meet the future needs and expectations of your clients early on as part of a digital transformation strategy may yield surprising results.

A new CT might, for example, yield a positive ROI, but how does it compare to investing in the digitisation of more routine imaging modalities, such as ophthalmoscopes and otoscopes?

Would the ability to capture, store and share digital media of these consult room imaging techniques yield even greater returns? The digital transformation challenges us to rethink what we consider to be included in our suite of diagnostic imaging tools and how we ensure they are all productive resources within our practices.

Price doesn’t equal cost

If you decided the new equipment fits within your digital transformation strategy, it’s time to work out the real cost. The total cost of purchasing diagnostic imaging equipment is rarely the same as the price you will pay the supplier. Before it is possible to determine whether your investment is wise, you need to know how much it will really cost. Table 1 highlights some important areas to consider.

Table 1. Cost considerations when purchasing diagnostic imaging equipment
Cost	Example
Capital expenditure/direct costs	The “price” paid to acquire the equipment.
Indirect costs	Cost of utilities (electricity, water), rent, consumables and other overheads required to operate the equipment.
Maintenance costs	The cost of planned and unplanned maintenance of the equipment over its expected lifetime. This should include both the cost of any service contracts, plus an allowance for any additional repairs that might be required that fall outside of these.
Training costs	The cost of training staff to use the equipment. This should include the cost of any CPD/trainers plus the salaries of staff attending the training.
Opportunity costs	The loss to other alternatives through choosing this option.
Intangible costs	Unquantifiable costs relating to an identifiable source –  for example, losses in productivity, customer goodwill, drops in employee morale, loss of brand value and damage to corporate reputation.
Costs of risks	Cost of regulatory, competitive and environmental risks.

Some costs are easier to quantify than others, but the process of considering each is an important part of ensuring appropriate “due diligence” is undertaken. Inevitably, the higher the direct costs the more attention should be given to the process of determining total costs. In considering direct costs, you should also review whether it is better to buy or lease the equipment. Table 2 may help you.

Table 2. Cost considerations for buying or leasing diagnostic equipment
Finance option	Advantages	Disdvantages
Capital expenditure (buy)	• No leasing costs • Equipment becomes an asset for the company immediately • May be possible to secure a lower price • Capital allowance may reduce tax liability	• Larger capital outlay required upfront, reducing availability of funds for other projects and negatively impacting cash flows • May incur cost of debt if practice does not have access to sufficient capital itself
Lease	• Cost of leasing may be treated as a business expense, reducing tax liability • Lower upfront costs • May have option to upgrade mid-contract • Reduced risk of cost of failure of equipment	• Regular payments required for duration of lease requiring commitment to future cash flows • VAT may be payable upfront if asset becomes owned at end of contract • Cost of leasing may be higher than purchase due to cost of interest • May incur additional end of lease costs

Once you’ve worked out the costs, you can start to estimate the revenues the equipment might generate. This is as much of an art as a science and it is important to be aware of the impact of cognitive biases in your estimations. The optimistic vet keen to play with a shiny new piece of kit is likely to overestimate the revenues it will generate, while the frugal accountant may well underestimate.

If the equipment being considered is an upgrade to existing kit then you should have some decent figures for the revenues generated currently. These can be used to forecast what might be achieved in the future, perhaps with an uplift if the improved quality justifies a price increase or will make higher volumes of imaging possible. If the equipment considered is to bring new capabilities to the practice, estimating revenues can be trickier.

The selling price should be based on how much it costs you to complete each image/imaging sequence, plus an appropriate profit margin. Dividing the total acquisition cost into the projected number of chargeable images over the equipment lifetime will give you the marginal cost per image.

Marginal cost per image = total acquisition cost / total lifetime chargeable images

On to this should be added an overhead cost. This can be tricky to accurately define, but a rough-and-ready approach would be to base this on the space utilisation.

Overhead cost = total annual practice overheads / practice sq m / annual chargeable images

Knowing how much your vets and nursing team really cost you per minute to employ is also important; how many of them will be required to undertake the imaging and how long it will take should all be factored in to calculating the selling price.

Selling price = staffing cost + overhead cost + marginal cost per image + profit margin

It’s worth picking the brains of colleagues in other practices. Many VMG members find the members forum an invaluable source of information and advice. In my experience, new equipment can take 18 months to two years to reach peak usage, so bear this in mind when forecasting revenues. It is also important to account for price increases – particularly for equipment that is expected to have a relatively long lifespan; this can make a significant difference to the ROI.

Finally, make sure a realistic lifespan is forecast. You’re probably not going to get away with keeping your new digital x-ray processor running for the next 30 years.

ROI versus pay back period

You can evaluate the commercial viability of investments in equipment, such as that used for imaging, in several ways. The most commonly used are ROI and pay back period (PBP). It can be useful to evaluate both – particularly when comparing a number of different investment options.

Let’s say our wet chemical x-ray processor has finally given up the ghost and we are trying to decide whether to purchase a computed radiography (CR) or digital radiography (DR) digital system. We have calculated the costs of each and forecast our revenues as shown in Table 3.

Table 3. Example costs and revenues from both digital radiography (DR) and computed radiography (CR) processors
Equipment	Capital cost	Year 1 revenue	Year 2 revenue	Year 3 revenue	Year 4 revenue	Year 5 revenue	Year 6 revenue
DR processor	£10,000	£3,000	£3,300	£3,600	£4,000	£4,400	£18,300
CR processor	£5,000	£2,200	£2,300	£2,500	£2,600	£2,700	£12,300

The DR system is more expensive than the CR system, but our practice is busy and we have calculated that the faster processing will encourage greater usage, plus attract some additional indirect revenue as a result of improved staff productivity (Tables 4 and 5).

Table 4. Return on investment (ROI)
Equipment	Net revenues/cost of equipment	Percentage ROI
DR processor	£18,300/£10,000	183%
CR processor	£12,300/£5,000	246%

Table 5. Pay back period
Equipment	Cost of equipment/annual cash flows	Number of years
DR processor	£10,000/(£18,300/5 years)	2.7
CR processor	£5,000/(£12,300/5 years)	2
DR = digital radiography, CR = computed radiography

For simplicity, we have assumed the equipment will be purchased from in-bank practice cash and a lifespan of five years. The accuracy of these assessments can be improved in two ways. The impact of inflation should be taken into account when determining the forecast future revenues.

If revenues grow at 2% per annum, for example, but you think inflation might run at 3% then in real terms the revenues fall each year. The discounted cash flow model can be useful to examine the effect of the time value of money – particularly over longer periods. Secondly, where revenues are expected to change significantly over time then a modified PBP may be used for a more accurate result.

Both the ROI and PBP in this scenario suggest the CR processor is a better investment. The ROI is significantly higher and the PBP significantly shorter. Better returns, less risk and a lower capital outlay would make a compelling case for the decision to invest in a CR processor.

However, we must also consider the absolute ROI, which is £7,300 for the CR processor and £8,300 for the DR processor. If the capital is available (and no other investment option exists to consider) then it might be a better option to purchase the DR system in return for a better absolute return.

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