As a stakeholder in a private radiology center, a decision influencer in the imaging department of a large healthcare network, or as a hospital administrator, your fiduciary responsibilities are far-reaching. Others rely on your judgment about expenses that impact their jobs, the viability of the organization, and patient care. Software for your imaging equipment is one of those cost considerations, and the decision between subscription or perpetual license can make a big difference. Here are three important considerations in determining if software subscriptions add up to dollars and “sense” for your situation.
Imaging is a highly digital process (with some mechanical elements). Computer programs play a role in:
- Scanner operation
- Protocols and dose
- Volume rendering
- Image reconstruction
- Access to electronic medical records (EMR) databases
- PACS (picture archiving and communication system)
- Integration with billing systems
Software that runs these operations is a significant expense item. Its value is directly linked to the profitability of each exam.
In a 2014 Beekley Corporation report1, John J. Cergnul, JD, CPA explained the Cost/Volume/Profit or CVP analysis in terms of the impact of software cost on each imaging exam. “The basic CVP formula is the breakeven formula: where FC is fixed costs, and CMu is contribution margin per unit.”
“If the annual license fee for the software is $250,000 and the contribution margin per unit of the typical MRI scan is $1,400, throughput would have to increase by over 178 scans per year to breakeven,”1 said Professor Cergnul.
Because a perpetual license anticipates years of continued use, the upfront cost is much higher. Thus, it can be more challenging to gauge amortization of value over the life of the product.
Capital expenditure vs. operating expense
Traditionally, imaging software was purchased through a third-party vendor as a perpetual license for use, which is a capital expense. According to Investopedia, “A capital expenditure is incurred when a business spends money, uses collateral or takes on debt to either buy a new asset or add to the value of an existing asset with the expectation of receiving benefits for longer than a single tax year. Essentially, a capital expenditure represents an investment in the business. Capital expenses are recorded as assets on a company's balance sheet rather than as expenses on the income statement. The asset is then depreciated over the total life of the asset, with a period depreciation expense charged to the company's income statement, normally monthly. Accumulated depreciation is recorded on the company's balance sheet as the summation of all depreciation expenses, and it reduces the value of the asset over the life of that asset.”2
Along with the upfront cost of the license and the capital impact to the financial statement, come ancillary costs – the need for additional computing capacity and IT staffing to handle installation, training, and ongoing support.
With a software subscription model, however, software falls into the operating expense category, described by Investopedia as, “expenses incurred during the course of regular business, such as general and administrative expenses, research and development, and the cost of goods sold. Operating expenses are much easier to understand conceptually than capital expenses since they are part of the day-to-day operation of a company. All operating expenses are recorded on a company's income statement as expenses in the period when they were incurred.”2
Since SaaS (software-as-a-service) utilizes cloud-hosting, it is easily deployed to end-users, without substantial hardware upgrades or extensive IT involvement.
Software subscriptions may appeal to organizations of all sizes, no matter their financial situation. Additionally, the software subscription model can attract investors by demonstrating the organization’s dedication to providing quality service while containing operating costs.
In a 2019 interview, Ken Denison, Global Director of Marketing for Digital, MICT with GE Healthcare explained how software subscriptions could put a healthcare organization in a nimbler position, better able to adapt capabilities at different imaging sites to match changing needs. “If my only option is to do a capital acquisition, then that means I have to really understand what I'm going to need for the next say, 10 years at a given site because I've got to buy it now and live with it for the next decade.”3
For example, a cardiac surgeon may join the staff, requiring additional CT capabilities, then leave after a year or two. Subscription software allows for “on the fly” adaptation without an exhaustive budgeting process. It is a matter of picking up the phone and ordering additional software or discontinuing a subscription, across the enterprise or at a single site.
Maintaining a reputation for leading-edge services
Each healthcare institution has a unique focus and status in the communities they serve. Perhaps your organization relies on drawing physician referrals and patients from a broader geographic area through a commitment to providing high-value imaging services, not usually available outside urban centers. In this circumstance, you are continually challenged with how to keep imaging systems upgraded and how to justify the cost of upgrades.
A subscription service neatly addresses both concerns. Subscribers automatically get updates as soon as they are available. Software subscribers have the assurance that their systems include the latest available clinical capabilities, such as dose-lowing reconstruction algorithms, provided in a cost-effective delivery mode. Again, there is no need to pull valuable team members out of their daily roles to prepare a return on investment or cost/benefit analyses for repeated budgeting reviews.3
Is a software subscription service right for you?
That question calls for some reflection:
- What is the financial situation of your organization?
- Are you in an area of changing demographics?
- What are you trying to achieve – for your facility, staff, referring physicians, and imaging patients?
Candidly answering those questions will help to determine if imaging software subscriptions are right for your department.