The biggest bites out of your practice's wallet

Reflecting the same trends other small businesses report, veterinary practices are seeing the biggest increase in expenses when it comes to health insurance costs. And drugs and medical supplies aren't far behind. (See Figure 1.) Here's an in-depth look at what's happening in these areas.

Figure 1 : Tracking rising costs

The health insurance squeeze

Healthcare costs per privately insured American grew 8.2 percent in 2004, according to a study released in June by the Center for Studying Health System Change, located in Washington, D.C. That growth outpaced the 3.3 percent rate of inflation for the year, and it marked the fifth year in a row that employers have seen rapidly rising health insurance premiums, according to a June 20 article on

USATODAY.com

.

On a positive note, the 2004 rate of increase was significantly lower than the 11.3 percent peak in 2001. Yet employers aren't necessarily feeling the relief.

The Center for Studying Health System Change estimates average premium increases ranged from 8 percent to 10 percent in 2005. And employers are sharing those premium increases with their employees. For the fourth year in a row, the center says, employers increased patient cost sharing through higher deductibles, copayments, and coinsurance. Those figures align with reports from more than 50 percent of respondents to the 2005 Veterinary Economics Business Practices Study who say they've seen increases in health insurance.

On the revenue side

Drugs and medical supplies

The second-biggest area for increases is drugs and medical supplies. Respondents to the 2005 Well-Managed Practice (WellMP) Study, produced by Wutchiett Tumblin and Associates and

Veterinary Economics

, keep on hand an average of $14,504 per doctor in drugs and medical supplies. That's up about $300 from the 2003 study. And this category comprises roughly 12 percent of total practice revenue—second only to nonveterinary and veterinary staff compensation. (See Figure 3 for a breakdown of costs as a percentage of total revenue.)

What factors could be driving these increases? According to the U.S. Food and Drug Administration's report, "Challenge and Opportunity on the Critical Path to New Medical Products," released in March 2004, "During the last several years, the number of new drug and biologic applications submitted to FDA has declined significantly; the number of innovative medical-device applications has also decreased. In contrast, the costs of product development have soared over the last decade." In fact, the report shows that between 1995 to 2000 and 2000 to 2002, the investment required for a successful drug launch increased 55 percent.

Figure 2 : The top four planned cuts

How long could this go on? According to the FDA's report, the administration is working "to incorporate the most up-to-date science into its regulations of pharmaceutical manufacturing and to encourage industry to adopt innovative manufacturing technologies." This effort is one of several that the administration hopes will smooth over product development difficulties. Unfortunately, this response isn't a definitive answer.

Increases force decreases

In the meantime, some owners are forced to make concessions in other areas to balance out increases in expenses. (See Figure 2 on page 94 for places where owners plan to decrease spending in the next 12 months.) Practitioners' top cuts focus on entertainment spending, an area that makes up only 0.2 percent of total practice revenue for WellMPs.

Figure 3 : Costs as a percentage of revenue

And not everyone's cutting back. More than 12 percent of respondents to the Veterinary Economics survey say they don't plan to make any cuts.

The key: You need to know where you stand on these key expenses. If you lose track, your financial success may be more at risk than you know.