Small changes make a big difference in lifetime earnings (Proceedings)

The recession has made it clear to owners and managers of veterinary practices that an increased focus on good business practices is critical for increased financial success. Data from the National Commission on Veterinary Economic Issues indicated total revenue growth of about 4% in companion animal practices from 2007 to 2008. (This is an average figure—about 1/3 of the practices did not do as well as this and another 1/3 did better—there was a wide range of performance.) To put this in perspective, the average growth rate had ranged from 11-13% for several years prior to 2007. Transactions were down, on average, by 1% from 2007 to 2008 but an increase in the average transaction charge of about 5% bolstered revenue growth. While the average practice still saw revenue growth, it was clear that practices were going to have to work much harder than before to maintian revenue growth and improve profitability.

Both practice owners and clients are clearly more anxious about the future than ever before as evidenced by some of the responses to the NCVEI's monthly QuickPolls. In March, 2009, the NCVEI asked: Do you think your revenue for 2009 will be? Users responded as follows:

    • Greater than 2008     30%

    • About the same as 2008      32%

    • A little less than 2008     29%

    • A lot less than 2008     9%

In May, 2009 the QuickPoll focused on clients. The NCVEI asked: Has your practice seen a change in the payment options used by clients in the last six months? Users responded as follows:

    • No     26%

    • Yes, more pet insurance used     1%

    • Yes, more medical payment plans used     12%

    • Yes, more A/R or held checks     27%

    • One or more of the above     34%

    • While the recession is at the front of everyone's mind, other underlying trends also clearly indicate the need for improved business practices.

The average debt of a 2008 graduate of a US veterinary college was $119,803 with a median of $120,000. Approximate 90% of those graduating from veterinary school had student debt and 91% of the debt was incurred while in veterinary school. About 20% of the 2008 graduates had debt in excess of $160,000, 8% have debt in excess of $200,000, and some in excess of $250,000. The average private practice starting salary for 2008 graduates was $61,518 resulting in a mean debt to earnings ratio of 1.94. A traditional rule of thumb for borrowing to finance an education is that no more than the first year's salary should be borrowed (i.e. a 1:1 ratio.)

More debt of any kind reduces young veterinarians' options and increased debt means they have to look more carefully at their future plans and make more intelligent choices. The practices they choose to work in will have to give them the ability to make more money than in the past. This problem belongs to anyone who is going to need a young veterinarian in the future. While employers are not solely responsible for solving this problem, salaries must improve and employers will have to provide a practice environment in which associates can be more productive and be paid more.

It is also clear that much of the revenue growth in veterianry medicine has come from fee increases. 76% of the fees included in the AAHA Fee Reference increased above the rate of inflation from 2004 to 2006.

Some of the most significant changes included:

    • Hospitalization—50% of the fees had statistically significant increases of 7-16% above the rate of inflation.

    • Anesthesia—67% of the fees had statistically significant increases of 11-24% above the rate of inflation.

    • Treatment procedures—72% of the fees had statistically significant increases of 6-22% above the rate of inflation.

    • Surgery—60% of the fees had statistically significant increases of 8-54% above the rate of inflation and many surgeries had increases of >20%.

Fees did not increase quite so dramatically from 2006 to 2008 but they didn't decline either. And during these same periods, the average practice saw a decline in new clients per full-time-equivalent veterinarian from 271 in 2001 to 203 in 2007, per the American Animal Hopstial Association. Active clients also declined from 1299 in 2001 to 1141 in 2007.

A study published in JAVMA in 2008 ( "An Examination of US Consumer Pet Related and Veterinary Service Expenditures, 1980-2005") indicated that while inflation adjusted expenditures on pet products & veterinary services increased, the % of total households with veterinary service expenditures remained constant. Translated into practical terms, this means that the % of households spending money on veterinary services than is declining. Data from the AVMA indicates the number of owned pets has increased 16% from 2001 to 2006 and yet the % of pets visiting the veterainrain at least annually has declined. Data from AAHA indicates transaction growth in the average practice is flat.

What are the implications of these changes?

    • Fees are a big component of the increase in revenue and ATC over the last few years

    • Fee increases are likely part of the reason for the decline in visits to veterinarians

    • Real economic growth must come from better medical care, growth in client numbers and improved productivity & efficiency

So what's the answer? Results form the AVMA-Pfizer Business Practices Study released in 2003 indicated that 62% of practice owners don't use financial concepts to manage their businesses. Those that do make almost 2/3 again as much as those who don't. Veterinarians should and must continue to increase their earnings but it can't be through simply raising fees. They must focus on better business practices such as communicating value to clients so that they accept more recommendations and improving efficiency and productivity so that the practice becomes more profitable.

Doing well in the future is largely about going back to basics. There aren't any magical new managment techniques that will allow practices to make a lot more money with little effort. Instead, practices need to focus on fully implementing sound operational systems and management practices. "Fully implementing" is the key—many practices already focus to some extent on critical areas such as client communication and capturing charges but few really do it well. 99% accuracy isn't good enough. According to an unnamed source on the internet, 99% accuracy means:

    • 16,000 pieces of mail lost per hour

    • 20,000 incorrect drug prescriptions filled per year

    • 500 incorrect surgical operations performed each week

    • 2 unsafe landings at O'Hare International Airport each day

    • 50 newborn babies dropped at birth by doctors each day

    • 22,000 checks deducted from the wrong accounts each hour

While these figures may not be entirely accurate given the nature of what you read on the internet, the point is critical. Even small numbers of errors can have catastrophic effects.

Communicating value to clients is one of the most important areas practices must focus on going forward. In order for clients to accept the practice's pet care recommendations, they must first understand them and value them more than the other things they might choose to spend money on.

Why is this particularly important now?

    • Clients are increasingly nervous spenders

    • Fewer pet owners are visiting veterinarians; transactions are flat in many practices

    • It is an increasingly competitive marketplace

    • Veterinary care is complicated and difficult to understand

    • Hospital visits can be frightening

    • People take in information in different ways

Communication complexity increases because people learn differently. Visual learners pay most attention to what they SEE and need written/pictoral documents/instructions. Auditory learners pay most attention to what they HEAR and, for them, verbal communication is best for transferring information. Kinesthetic learners pay most attention to what they do and prefer hands on learning. Most people use all three ways, but may have a strong preference for one. Because of this, businesses have to communicate in multiple ways.

Before you can communicate well, it is first critical to understand how clients judge value. An article in the Harvard Business Review studied the communication of value at the Mayo Clinic. The Mayo Clinic happens to do this extremely well while spending little money on traditional forms of advertising. The authors noted that "When a company's offerings are hard to judge, customers look for subtle indicators of quality." Translated, this means that clients can't judge the quality of the medicine but will look at the aspects of your pracgtice that they CAN understand to make a judgment about the medicine. This may not make logical sense but it's the way it works. Clients can't and don't judge medicine; they judge service. And in order to get your message across, every activity, person, place, document, interaction, transaction, and communication should tell the same story—"Every patient, every client, every record, every time."

Clients take in hundreds of impressions during their visit to your practice. For example, in making the appointment:

    • How fast was the phone answered?

    • Was the receptionist friendly?

    • Did she have a clue about what was going on?

    • Was there an appointment time available reasonably soon?

    • Was it convenient for the client?

    • Did the receptionist call the client and pet by name?

    • Did she indicate interest?

When they arrived at the clinic

    • Did the client have to risk life and limb to access the parking area?

    • Was there trash in the parking lot?

    • Was it clear where the entrance was?

    • Did someone open the door as the client struggled in with a cat carrier/big dog?

    • Did the client have to wait to check-in?

    • Were the plants alive?

At checkin:

    • Was the receptionist friendly?

    • Did she have a clue about what was going on?

    • Was the record readily available?

    • Did the receptionist call the client and pet by name?

    • Did she know why the pet was there?

    • Did she know if it was a male or a female?

    • Did she indicate interest?

While the client sat in the reception area:

    • Did it smell?

    • How long did they have to wait?

    • Were the seats comfortable?

    • Was there something interesting to read?

    • Were the plants dead?

    • Were the wall posters curling up at the corners?

    • Was there a place to put the pet?

    • Was there water and a restroom available?

    • Was there a separate place for cats?

    • Did the receptionists gossip amongst themselves for all to hear?

    • Did the place look clean? Even the baseboards and corners?

These are just a few of the hundreds of impressions clients get of your practice every day. Individually, they are small changes but they can have a powerful impact on lifetime earnings. Hoping that all the things that need to happen in your clinic in order to give a good impression actually occur is not enough. Management needs to make sure this happens by:

    • Defining exactly what needs to happen

    • Assigning the task to one particular person

    • Giving that employee the resources to do the job

    • Setting standards and measuring performance against those standards

    • Rewarding performance

How could the practice specifically manage the previous client impressions?

    • Was the sign easy to see from the street? Quarterly inspection needed—whose task list is this on? Who reviews the task lists to make sure items are completed?

    • Was the parking lot clean and easy to navigate? Twice daily trash pickup necessary—again, whose task list is this on and who makes sure the employee completes the task?

    • How is the lighting when it's dark outside? Nightly inspection needed— whose task list is this on? Who reviews the task lists to make sure items are completed?

    • Is the reception area clean? Hourly inspection needed— whose task list is this on? Who reviews the task lists to make sure items are completed?

    • Is there a place to secure a leash? Monthly inspection needed— whose task list is this on? Who reviews the task lists to make sure items are completed?

There are hundreds of small activities that need to be well managed in order for a practice to run smoothly and the client to have a good visit; some other significant ones for the practice to manage and measure include:

    • # of times the phone rings before call answered

    • Time patient is seen versus when scheduled—# and length of delays

    • Frequency and types of complaints

    • # of improperly filled prescriptions

    • # and amounts of missed charges

Communication is one part of insuring clients comply with practice recommendations. However there are other aspects of client compliance as well and this continues to be critical to good patient care and financial success. Information from the NCVEI website indicates veterinarians perform between 8-10 fecals per doctor per week. This would be approximately 2/day. Does this make sense given the number of wellness exams done in the average practice each day? Information from the NCVEI website also indicates 2 dentals per veterinarian are performed each week in the average practice. Given the number of pets that need dentals, does this make sense? The American Animal Hopsital's 2002 Compliance Study revealed that many clients did not comply with practice recommendations as frequently as practices thought they did. While some of the responsibilty for this is clearly the clients'; there were many instances in which practices did not make recommendations as they should have or did not make it easy for clients to comply. Even small increases in these figures will improve pet care and practice earnings.

Why Don't Clients Comply?

    • Lack of time

    • Inconvenience

    • Don't see the value

    • Cost

    • Lack of recommendation by veterinary practice

    • Barriers put in way by veterinary practice

    • Lack of follow-up by veterinary practice

Cost is rarely the primary reason and its obvious from the above list that there are many things a practice can do to improve compliance. The Compliance Implementation Study done by AAHA in 2008 is an udpate to the original study. This study focused on practices who had made efforts to improve compliance and indicated the following:

    • Best results occurred in practices that did NOT make big investments in staff or equipment but that DID get full practice team commitment and buy-in

    • Many more practices feel they are now responsible for client compliance—in 2002, 60% interviewed said it was the client's responsibility; in 2008, 60% interviewed said it was the practice team's responsibility

In spite of all indications that improved client compliance is important both to good patient care and the financial success of the practice, only 22% of practices in 2007 audited medical records in the last year to measure treatment recommendations and only 20% audited medical records in last year for the rate of client compliance. You can't manage what you can't measure.

So what can your practice do to improve compliance?

    • Locate resources to help you improve—www.aahanet.org and www.dvm360.com

    • Pick the areas you first want to focus on—set goals that are a bit of a stretch but achievable

    • Train your staff

    • Review operations—do they support your goals?

    • Monitor progress

    • Reward team members

A third critical area that most practices need to focus on concerns discounts & missed charges. While practices may consciously realize they are discounting some of their fees; they very rarely know the full extent of it. And they almost never know the extent of work performed but never charged to the client. While the net effect on profits of both discounting and missed charges is the same, the causes are different and therefore the necessary corrective action is different.

"Discounting" is the deliberate reduction of fees charged to clients from what is stated in the fee schedule. It may be a partial discount or a 100% discount - either way the doctor or staff member is consciously deciding to reduce the fee for the services that the client received.

"Missed charges" happen accidentally (or sometimes, accidentally on purpose). For one reason or another; services performed for a client aren't included in the client's invoice. Often this is because the practice doesn't have good systems in place to capture charges.

"Discounting" is not automatically a bad thing. A practice may choose to have certain kinds of discounts in place as an employee benefit, a marketing tool or as a contribution to the community. However, it is critical that the practice periodically review all discounts and make sure they are still accomplishing the intended goal. Reviewing them also helps the practice understand the financial ramifications.

The first step in reviewing the practice's discounts is to identify the kinds of discounts being used in the practice. Common ones include those for senior citizens, multiple pets, breeders, and bundled services. There also may be a list of certain individual clients in the practice who receive special discounts. Additionally, in many practices, there are a large number of other random discounts given to individuals for reasons that are not specifically allowed by the practice. All discounts for groups of clients or for individuals should be reviewed to see if they are accomplishing the goals the practice has for that discount. For example, if the practice gives a free exam to everyone who purchases a puppy at a local pet store in order to build its client base, is this really working? Is the practice actually getting and keeping these people as clients? Does the prior owners' second cousin once removed still need to get a discount?

In addition to reviewing the types of discounts and the intent behind them, it is also necessary to look at the dollar amounts involved. According to AAHA's Financial and Productivity Pulsepoints, the average dollar amount of discounts in 2007 was 2.6% of total gross revenue, up from 2.3% in 2005. Unfortunately, the amount captured by the practices' invoicing system is almost always understated and sometimes by a significant amount. The software system can only capture discounts that are entered as such. If the fee was just changed in the computer for this particular invoice or put in as a miscellaneous or onetime charge of $25, no discount will be tracked by the system. And, of course, if a charge is accidently left off the invoice entirely, the software system can't capture it as a discount. In many practices, it is not uncommon to see 5-10% of the practice revenue lost via the combination of discounts and missed charges.

Discounts can have a significant impact on the bottom line; more than most practice owners realize. For example, let's say the average # of transactions per doctor in a particular practice is 5,000 with an ATC of $100. If 10% of the transactions are discounted by 10%, that will reduce the net profit by $5,000. This may not sound like a very high number but, assuming a 20% profit margin, the practice will need to see 250 more patients just to bring the profits in the practice back up to where they were before the cases were discounted.

A medical record audit is the only way to catch missed charges and to find many discounts not recorded in the invoicing software. To start, pull the medical records for 30 cases per doctor—this should be a mix of initial appointments, rechecks, and hospitalized cases. Compare the services provided to the client as documented in the medical record with what was charged on the invoice. Capture the results of the audit on a chart or a spreadsheet with the following items included: patient name, date and time of appointment, amount of invoice, type of appointment (surgery, hospitalization, outpatient) doctor, date, technician (if known), receptionist (if known) and information about the discounted or missed charges (procedure performed, correct fee, actual fee charged, amount missed or discounted). Once the amounts discounted or lost are calculated for this sample, they can be extrapolated to the total practice revenue for an estimate of the total lost in a month or a year.

After calculating the amounts lost, the types of cases where money is lost should be reviewed. Some of the dollars lost may be due to discounts the practice has chosen to allow; for example, senior citizen discounts. A decision needs to be made as to whether the amounts lost through the discounts are worth the benefits of the discount program. Most practices find a certain number of discounts in this audit that aren't part of any particular program.

Look for patterns in these discounts as well as in the missed charges. Is the same doctor involved in all of the transactions? The same receptionist? Do these things happen on the same day of the week? Same time of day? Same type of appointment? Patterns will help identify the root of the problem. For example, is one doctor primarily responsible for most of the discounts? Do all the missed charges happen on Tuesdays when the practice is short staffed? Or primarily with hospitalized patients?

Once the root cause has been identified, steps can be taken to correct the problem. Doctors may need to be reminded of their responsibility to follow the practice's fee schedule and their invoices monitored more closely in the future. One person may need to be designated to put in the charges for hospitalized patients each afternoon between 3-4pm. A new travel sheet procedure may need to be instigated. The corrective action depends on the problem identified.

Some hospitals have chosen to audit all records on a daily basis. The cost of assigning the task to a staff person is often less than the amount of discounted or missed charges and therefore well worth doing financially. At a minimum, the medical record audit should be done periodically to insure new problems are not creeping into the practice.

And finally, in looking at areas in which small changes can have significant impact on lifetime earnings: cats should mean business. There are 74.8 million dogs owned in the US and 88.3 million cats owned in the US. And yet cats visit the veterinary practice half as much as dogs, the percentage of cats not seeing the veterinarian annually is more than double that for dogs, and pet owners spend half as much on cat care as they do on dog care. Does this make sense?

Becoming a cat friendly practice is not a hard thing to do; some of the steps include:

    • Implement systems to identigy all the cats owned by clients in your practice

    • Train doctors and staff about cat issues and healthcare

    • Help owners comply with veterinary recommendations

    • Promote cat-friendly handling—help owners learn how to properly transport the cat and teach staff how to handle cats during their visit to the hospital

    • Design cat-friendly reception areas and entrances

Aside from the benefit to the cat, what's the benefit to your practice? Let's assume that in an average 2 doctor hospital, there are 9000 transactions per year of which 65% are dogs (5,850). Remember that 54% of the pet population is made up of cats and 45% of the pet population are dogs. If you have 5,850 canine transactions every year, you should have 7,020 feline transactions or 3,870 more than practice has now. If you have an ATC of $110, then 3,870 X $110 ATC = $425,700 in additional revenue per year.

If you just increased cat visits by 2 more cats per day per doctor, then the revenue increase would be as follows: 2 cats X 260 days worked X $110 X 2 doctors = $114,400 increase in revenue. This results in about $77,792 in profits after subtracting drugs & medical supplies and doctor compensation.

Over the long term, it adds up:

    • 5 year period—increase in gross of $572,000, increase in net of $388,960

    • 10 year period—increase in gross of $1,144,000, increase in net of $777,920

    • 20 year period—increase in gross of $2,288,000, increase in net of $1,555,840

As stated earlier, doing well in the future is largely about going back to basics. Practices must focus on fully implementing sound operational systems and management practices in key areas such as communication, capturing missed charges, client compliance and increasing the care given cats. Not only will the quality of care improve, but earnings will as well.