Treating a low-value diagnosis

Drs. Anne Lynd and Scott Hutchins* co-own Sandy Creek Animal Hospital (SCAH), a five-doctor companion animal practice. Both doctors are 48 years old and plan to sell part of their practice to one or more associates in three to four years. They also hope to expand the facility in four to five years. The only problem is, their practice isn't profitable.

Earning a profit didn't top Dr. Lynd and Dr. Hutchins' list of reasons for becoming veterinarians. They loved animals. They wanted to make a difference in pets' lives. But earning a profit? That wasn't on the list. The same may be true for you. However, when you started your own business, profit became important—whether you knew it at the time or not. Profit enables you to elevate the level of medicine you provide and make the biggest impact possible on your patients' lives.

Being profitable is more important than ever if your practice is going to survive in this tough economic climate. Now's the time to breathe new life into your practice, tighten your belt, and scrutinize your financial viability like never before. Here are the strategies Drs. Lynd and Hutchins used to improve their low profitability.

URGENT CARE NEEDED

As part of a long-range planning effort, I sat down with Drs. Lynd and Hutchins so we could diagnose their practice's fiscal health and develop a treatment plan to ensure the practice would enjoy continued health. We began by valuing the practice and found that it was worth $783,000 (see "Calculating value" below).

Calculating value

Given that their annual revenue was close to $2 million, Drs. Lynd and Hutchins were shocked at this low number. I wasn't. The biggest portion of practice value is determined by profit, and SCAH's profit level was much lower than it should have been. During the valuation process, the doctors and I identified opportunities for improving profitability and discussed the steps they needed to take this year and next to prepare for the associates' buy-in and future facility expansion.

CRUNCHING THE NUMBERS

There are three ways to improve profit: reduce spending, increase revenue, or a combination of the two. First, we analyzed SCAH's operating expenses. At 26 percent, variable expenses were a little high—the target in Well-Managed Practices is 22 percent to 24 percent. We met with veterinarians and technicians and discovered a duplication of certain medications and diets—not unusual in a multiple-doctor practice. The doctors came to a consensus regarding their preferences and decided which items to eliminate. The inventory manager also reviewed and modified the reorder points for their most commonly used items.

Fixed expenses were normal at 8 percent, and spending in all categories was acceptable, so no changes were necessary in those areas. Staff compensation as a percentage of revenue was in line with Well-Managed Practice targets; however, the staff-to-doctor ratio was light (3.5 to 1 vs. a target of 4.5 to 1), indicating a potential damper on doctor productivity.

Facility expenses at 11 percent were also high. Ideally they'd be closer to 8 percent. So even though the practice owners wanted to expand in four to five years, they weren't generating enough revenue to fully utilize their existing space. The upshot: This was a revenue issue, not an overspending issue. See Benchmarks 2007: A Study of Well-Managed practices at industrymatter.com for a detailed list of targets for all expense categories.

REVENUE REINVENTION

The next step was to analyze SCAH's revenue. Annual medical revenue per doctor was about $200,000 lower than Well-Managed Practice targets. And the average doctor transaction (ADT) was $22 lower than expected. In Well-Managed Practices, the ADT typically equals about 3.4 times the practice's exam fee. When we evaluated SCAH's fee structure, we found the exam fee to be low for the community, the average markup on dispensed medication a little light, and some of the lab and anesthesia fees too low.

In addition, the doctors provided services such as fluid pump administration and inpatient exams at no cost, and they missed charging clients for provided care 25 percent of the time on outpatient cases and 50 percent of the time on inpatient cases. We estimated the annual value of these missed charges at approximately $163,000.

Next, we dissected the makeup of the practice's revenue and found that 72 percent of medical revenue came from services and 28 percent from medication sales. Ideally, the service and product mix would be 85 percent and 15 percent, respectively. We also identified that revenue from exams, dentistry, and lab services was lower than expected.

When we looked at doctor activity, we found that each doctor averaged about 3,000 invoices annually (compared to a target of 3,400), with 1,100 active clients who visited an average of 2.7 times a year for medical purposes (compared to a target of three visits per year). The doctors and team members acknowledged that they weren't always proactive about scheduling additional necessary care or following up with reminders.

In order to strengthen this area, we tweaked practice processes. Now the doctors tell an exam room assistant when a patient needs additional care such as a medical progress exam, dentistry services, or follow-up laboratory testing. The exam room assistant then schedules the next appointment before the client leaves. If the client can't schedule an appointment at the time, a client care representative calls within the next two days to book the appointment.

TAPPING INTO THE CLIENT BASE

The healthcare team was a bit frustrated by the lack of client compliance for dentistry services. The doctors estimated that 40 percent of their 3-to 6-year-old patients and 80 percent of their patients older than 6 needed their teeth cleaned. But the actual number of dental cleanings performed was far less than this target. So SCAH had a huge opportunity to improve patient care—and the bottom line—by improving dental compliance. Several of the doctors and technicians had recently attended a CE meeting and learned some new techniques for improving client compliance. They were regaining their enthusiasm for dentistry and were confident they'd see positive changes in client compliance as a result.

Each doctor saw about 200 new clients a year and the practice retained those clients for about 5.5 years. While SCAH's client base was strong, it had untapped potential to grow client numbers if the front office team could improve its effectiveness at handling callers—the receptionist's scheduling rate was a bleak 40 percent. CE in customer service and communication was in order.

TAKING IT ALL IN

Here's the action plan we came up with for SCAH and the projected impact on the hospital's profit.

Tighten inventory management. Projected savings: $15,000 a year. Eliminate medications the doctors don't prefer and don't duplicate medications and diets. Revise reorder points.

Increase the average doctor transaction to $141. Projected revenue increase: $300,000. Increase the exam fee to $44 based on results of market research and adjust fees for lab and anesthesia services using guidelines in Benchmarks 2007: A Study of Well-Managed Practices. Establish a fee for inpatient exams and fluid pump use and electronic monitoring.

Adjust the average markup on medication dispensed to 150 percent. Exceptions are heartworm, flea, and tick products (they're widely available elsewhere); oncology drugs (the cost of the drugs is high); and medications for chronic conditions (clients buy the whole bottle).

Use exam room assistants to improve efficiency and productivity and reduce missed charges. Have technicians enter charges daily on a treatment charge sheet to track care for hospitalized cases instead of waiting until the patient is discharged.

Increase client visits to three times a year. Projected doctor transaction: $150. Projected revenue increase: $380,000. Analyze compliance rates for fecal exams, dental cleanings, preanesthetic testing, follow-up testing for chronic conditions, senior wellness testing, and so on.

Fine-tune exam room communication skills and client education materials to ensure that clients receive clear, consistent messages.

Be proactive. Don't wait for clients to ask for an appointment. Schedule the patient's next appointment at the conclusion of the current visit. On the third reminder, call clients with a request to schedule an appointment.

Note: Variable expenses will increase because of the additional client activity. The projected increase is $115,000. CE costs will increase to $20,000.

Hire two additional technicians. Projected costs for compensation, benefits, and taxes: $90,000. Use additional staff to accommodate increased client activity and leverage the technical and nursing staff.

Preserve the veterinarians' time for responsibilities that require their medical license.

All these changes will help SCAH's earnings improve by $348,000 (see "A look at the before and after" in this issue).

A look at the before and after

Once we finished the analysis, the entire team was excited about the prospects for enhancing their patient care and strengthening their client relationships. The whole practice felt alive again.

Calculating earnings

Veterinary Economics Editorial Advisory Board member Denise Tumblin, CPA, is owner of Wutchiett Tumblin and Associates in Columbus, Ohio. Send comments to ve@advanstar.com or post your thoughts on our message board at dvm360.com. Catch Tumblin at CVC East in Baltimore April 24 where she'll discuss preserving practice value. Visit TheCVC.com for more details.