Operating budget may be better fit for PACS purchase cost

January 22, 2003

The majority of PACS installed to date were acquired through capital budget methods. For imaging modalities, the capital budget method of acquiring equipment -- whether purchased or leased -- has

The majority of PACS installed to date were acquired through capital budget methods. For imaging modalities, the capital budget method of acquiring equipment -- whether purchased or leased -- has worked well for specific reasons:

  • modalities have a limited range of features and costs that determine total cost of ownership
  • the equipment has an established, predictable life cycle, which lends itself to a five to seven-year depreciation schedule
  • established CPT codes for reimbursement make it possible to predict revenue streams, breakeven points, and cash flow
  • when the equipment reaches the end of its useful life, it has an established fair market value and can be recycled in secondary markets

PACS does not meet these budgeting criteria, and the operating budget may be more appropriate for acquiring PACS functionality. The high capital cost of PACS has been the greatest obstacle in the widespread adoption, implementation, and expansion of this technology. Capital budgeting has also been a major reason why installed systems have been inadequately configured and slow to deliver operating and economic benefits.

Far too many PACS implementations have compromised reliability and fault tolerance in order to project a more favorable return on investment to the capital budget committee. Then these reliability and redundancy issues made it impractical to eliminate film and to reduce the costs associated with the film-based system. PACS is not revenue producing, performance outcomes are uncertain, and there is a high probability of technology obsolescence.

The strongest case for acquiring PACS through operating dollars is the fact that radiology departments have traditionally paid for PACS functionality from the operating budget. If you view a PACS in terms of its functionality rather than as an equipment purchase, you will see that radiology departments have long been acquiring images (on film), archiving images (on shelves, in folders or jackets containing film and reports), transporting images (via couriers and sneakernet rather than electronic networks), and managing the whole film storage and retrieval process (manually rather than with information systems).

These "PACS" functions have been supported with operating budgets since the beginning of radiology. Annual budgets for labor, film, chemicals, jackets, labels, storage space, courier service, maintenance, etc., have been adjusted each year to support the manual film-based system and to allow for growth and the evolving needs of the department's imaging service.


So why, when the hospital is looking to replace a manual system with an electronic one, does it immediately consider it a capital expense that must be presented and approved by the capital equipment committee? Why require an operation that has historically been supported by operating dollars to be cost-justified and supported by capital dollars and decision criteria?

The answer may be that confusion remains concerning what a PACS is. PACS is generally considered a complex system consisting of hardware, software, and modality and system interfaces and relying on a network infrastructure. Focusing on the hardware, however, leads to the assumption that PACS must be purchased through the capital budget process. But defining lines between hardware and disposable technology can make it easier to separate the mix into capital and operating budgets.

As stated earlier, capital funding lends itself to products with defined life cycles and predictable fair market values. Operational costs usually apply to disposable items and services and recur on a yearly basis.

Most hospital executives include CR and DR as part of the PACS purchase decision even though they are actually acquisition modalities. This is an important distinction. We should reconsider this approach since CR/DR and PACS fit different budgeting criteria. CR and DR generate revenues, have predictable life cycles of seven to 10 years, and involve equipment with a projected fair market value at the end of these cycles. CR and DR's disposable and service costs are also predictable, fitting nicely into the capital budget scenario.

In contrast, workstations, software, interfaces, archives, archive media, networks, and monitors have a relatively short useful life and little or no residual value. You can't capitalize components with a 30 to 36-month lifespan on a five to seven-year depreciation schedule. If you do, you will run into trouble when your PACS becomes outdated and you have to go back to the capital committee asking for additional funds to upgrade the system. This is an avoidable situation.

Structuring a PACS acquisition with a mix of capital and operating funds can lead to a more positive outcome. CR and DR can be financed as a straight capital purchase separate from the PACS. The obsolescence-prone items can be budgeted as an operating expense, using the dollars saved from the film-based system to pay for the disposable parts of the electronic system on a fee-per-use basis.

As technology becomes obsolete and new faster, cheaper technology becomes available, a mechanism to facilitate the upgrade process will be in place. Users will be able to keep their technology current and maintain an optimal level of service to referring physicians and patients.

Since there is not yet a standard unit for measuring PACS usage, however, this financing approach requires more due diligence prior to contracting. A $12 per study cost may be a better deal than a $6 per study offer when you consider what is or isn't included. Until there is a universally accepted definition of what constitutes a study and what equipment, service, and level of performance are included in the unit cost, an in-depth analysis will be necessary to understand and compare different fee-per-use programs.

The fee-per-use operating budget financial model is well suited to PACS technology, offering greater versatility for addressing the complex issues of acquiring, maintaining, and upgrading PACS functionality.

Gary Reed gary@IRpacs.com is president of Integration Resources in Lebanon, NJ (www.IRpacs.com). He can be reached at 908-236-9360.