Excessive staff costs can sink your practice

Despite the nationwide recession, Elsewhere Animal Hospital was chuggin' along.

Like an iceberg, however, the surface image gave little indication of what was lurking below.

Few clients really took notice that when one of the three associates working for Dr. Owner left for health reasons. She just got sick of the place, finding a replacement was really impossible at the time, which, using a retrospectoscope, was really convenient as, by late 2001, when she left, the number of transactions had dropped about 15 percent.

The owner and each of the three associates had been seeing 18 transactions a day each and that 72/day had now dropped to 60. When one associate left, it just meant that the three remaining practitioners could handle the caseload by seeing two more transactions each for an average of 20 per day.

Now, any sane practitioner knows that 20 patients a day meant 12 one day and 30 the next, with an average unchoreographed chaos of 20 furry beasties a day and a whole bunch of over-the-counter transactions. Overall, the term feast or famine, otherwise known as coma and chaos describes most veterinary hospital caseloads pretty darn well.

During 2001 and 2002, the gross revenues just about stayed even, at about 1.3 million, but, they thought, "What the hay, we're in a recession, so keeping even is good isn't it?"

What did keep up, unfortunately, was the expenses. Unlike airline employees, who took a pay cut to keep their jobs, the two associates and 17 staff just felt that they were working hard and a 5 percent per year pay increase was the least that they deserved.

However, their practice overhead was racing ahead far faster than income! The associates being paid a flat salary and the paraprofessionals that kept the practice glued together got their increases, but the bottom line shrunk to where Dr. Owner was only getting paid half of his last year's compensation and was now the lowest paid veterinarian of the three left.

The race is on

Each associate was picking up one-third of the slack of the one associate who left. No one seemed to notice that the 17 staff who served to support four doctors now only supported three. The percentage of gross revenues paid out for non-doctor staff climbed from 18 percent to 24 percent but everyone "looked busy," and why lay off an employee when the economy is going to turn around any day now and good staff are hard to find?

Of course, that 6 percent increase in staff costs in this $1.3 million practice amounted to $78,000, and like the quicker picker upper, absorbed the departing doctor's salary completely. One staff member moved away, fortunately, and was not replaced, so it really only hurt the practice about $55,000 and that's not as bad as it could have been, was it?

With the recession and all, it hardly seemed like the time to raise any fees. Anyone can see that as completely logical and good business sense. That went double for the clients!

So, what a surprise when the practice cash flow started circling the rim of the toilet and finally dropped in. As their accountant explained to them, drug costs increased about 17 percent a year. Total staff costs including the associates increased 12 percent, health insurance increased 30 percent in that one year, but what a shocking surprise that the amount of "leftover" for Dr. Owner to take home was less than half of what his salaried associates took home.

Prices climbing

Most rats are smarter than many hospital owners, I guess! (I can't wait for the letters to the editors on that comment!) When the food supply starts to dwindle, the female rat's ovaries just start producing fewer eggs or more fetuses get absorbed or whatever, but the birth rate of the rat colony drops so there are less mouths to feed.

Many hospital owners, for the most part think that their accountant's profit and loss statements belong on the bottom of the parrot's cage because there it has a solid foundation to build on.

A well-managed hospital's (W-2) paraprofessional staff costs should never exceed 18 percent of gross. Some very well-managed hospitals can get that down to 15 percent. Some very over-managed hospitals get that down to 12 percent.

No well-managed hospital can afford to pay their associates more than 24-25 percent of the associates personal gross production (excluding diets and refills on prescriptions, of course).

The exceptions to this are where the doctor owner is a prisoner of their associate, and must pay more to avoid having to work themselves. They enjoy a two to three day workweek hiding in their offices while the "rent-a-doc" works.

Now, if the doctor-owner has sufficient support staff for the associate, the associate could make more income at 15 percent compensation of a much higher production than at 25 percent where the associate has to draw blood, take X-rays and prep surgical patients. Of course, all of this presumes a sufficient number of clients coming in the door.

I'm a big believer in allowing an associate to experience the edifying thrill of living from their production as associates before they are cast out into the phantasmagorical world of practice ownership.

Too many, perhaps 20 percent of practice owners today, would have fared better economically had they stayed an associate, but everybody seems to want to ride the rollercoaster of entrepreneurship. These 20 percent today earn less as owners than a five-year graduate in a busy multi-doctor practice. This is not hard to envision when the national average income for our profession is about $81,000 and new graduates in many areas are starting at $55,000.

Oh! Yes! I guess I got off the track a bit. This is a case study, so I have to tell you how we fixed the problem.

Oh! Gosh and Golly, Shucks! I'm out of room on this page! Drat! You'll have to wait until next month for the solution!