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Investing in a service line? Careful consideration required

Article-Investing in a service line? Careful consideration required

Key iconKey Points

  • In 2008, plastic surgeons did feel the effects of the economic downturn, experiencing just a three percent annual growth, the lowest since 2000.
  • Physicians need to delve into details of their communities, patient populations, practice processes, accounting figures and missions to determine whether an investment in an expanded service line will yield a return, when it will do so and how much it will bring in.

ACCORDING TO PROJECTIONS of the Centers for Medicare and Medicaid Services (CMS), the growth in national health expenditures is expected to exceed that of the gross domestic product — despite the recession, which may lead some doctors to believe that now's an excellent time to add a new aesthetic service to the practice or to expand an existing one.

Still others might be leery about expansion, especially in light of a survey released by the American Society of Plastic Surgeons (ASPS) earlier this year, which found that in 2008 plastic surgeons did indeed feel the effects of the economic downturn, experiencing a reported three percent annual growth — the lowest since 2000. What's more, the actual dollar amount spent on procedures was reported down nine percent.

But any physician's tolerance for risk shouldn't be influenced by just by one or the other of these data sources. Deciding to add an aesthetic service and getting a positive financial return requires a physician to actually run the numbers — which are different for each situation, surgeon, practice and community.

"The doctor is going to have to ask himself whether or not he has the capital and the cash, and if he can bring in additional business to his model by adding this [service]. It could be the absolute perfect time to do it. But on the other hand, if he doesn't have the capital, he doesn't have any cash, and the bank is not going to lend him any money, then there's not even a question. He simply can't do it," says Owen Dahl, MBA, FACHE, CHBC, author and consultant with Owen Dahl Consulting, located in The Woodlands, Tex.

Assuming the latter case isn't the actual situation, physicians need to delve into the details of their communities, patient populations, practice processes, accounting figures and, ultimately, their missions to accurately determine whether an investment in an expanded service line will yield a return as well as when and how much. In an audioconference available through Physicians Practice, Mr. Dahl walks expansion-minded practitioners through the calculations that can help them make smart decisions.

The first question to ask is what impact the addition of a new or expanded service will have on the mission and competency areas of the practice. Mr. Dahl poses the question, "Does the [additional] service I am considering relate back to the core competency?" If it does, Mr. Dahl tells Cosmetic Surgery Times , then a physician should run the numbers to see what effect it might have on volume, costs, revenues and return on investment (ROI).

'HEARING' THE VOLUME Physicians will have to consider their existing patient population and community in determining the need and potential uptake for the aesthetic service addition under consideration. In his presentation, Mr. Dahl suggests there are some obvious external forces over which practitioners have no control that can influence a decision, including the amount of competition and economic conditions.

"There are practices that have had some real struggles because of [fewer] private dollars being available for many of the elective procedures," notes Mr. Dahl. However, in those communities where dollars are available, physicians can use demographic, industry, association, manufacturer and other practice data to develop assumptions and estimates for potential patient volume with that new service.

CALCULATING COSTS This estimated volume is used in calculations to determine the potential costs of adding and maintaining the aesthetic service. "Costs are resources used to acquire something," explains Mr. Dahl. He specifies that they include not only capital and interest expenses, but also maintenance, staffing, construction, future replacement and consumable costs. Expenses may be fixed (such as rent) or variable (eg, consumable tips for an aesthetic device), but a realistic look will provide an accurate picture of the necessary investment. Once calculated, the costs can be divided by the estimated patient volume to provide the cost per patient. This is a figure that Mr. Dahl routinely discovers physicians do not know — in terms of even their existing services. "This is scary when they are determining whether to invest $10,000 in new piece of equipment," says Mr. Dahl.

REVENUES READ Physicians should also have a general idea of where their practice sits financially at the moment. Data can be generated by the physician, software or accountant, but should include balance sheets (or statements of assets, liabilities and equity), income statements (or statements of cash receipts and disbursements) and statements of cash flow. This information can be used to develop budgets and projections, including pro forma statements, which help to forecast the costs, revenues and returns of new purchases. Often forecast for 5 to 10 years out, pro formas look at the estimates developed for revenue and expenses, the difference between the two (indicating profit/loss), and the accumulated result over time.

Additional calculations using cash flow, initial outlay, time and finance information can be used to further estimate the payback period for ROI. They can also provide information that can be used in setting rates for the new procedure.

MANY HAPPY RETURNS These figures are the equivalent of a pilot run, since in many instances, the investment to test a new procedure is too great. Investigating both the community and practices sharing similar demographics can provide useful information: eg, can existing staff be trained or will a specialized professional need to be hired? Once the new service program has begun, monitoring specific metrics regularly can help to identify whether the implementation of the new procedure has succeeded or failed. "I think the first year, you should do that quarterly," advises Mr. Dahl. After benchmarks have been hit, then annual reviews may be more efficient. "If the margin has gotten worse, then serious consideration has to be done as to whether or not it was worth it," Mr. Dahl advises.

Ultimately, the surgeon should rely more on the math than the emotion. Running the numbers before, during and after the addition of a new cosmetic procedure can help to determine whether it will deliver a return — in any economy.

Mr. Dahl's audioconference, "Doing the Math," is available at

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