Understanding profitability in veterinary medicine (Proceedings)

Understanding profitability in a veterinary hospital can be like understanding a Chinese puzzle. Defining profitability can be confusing based upon the entity type. Corporations pay wages to owners which in part can represent a part of the profits earned by the practice. Partnerships can pay guaranteed payments which can also represent a payment for part of the profits. Sole proprietorships report net income before any payment to the veterinarian for the performance of veterinary services and management functions so for these types of entities, net income is the amount earned before wages or guaranteed payments paid to the owner veterinarian.

For practices to make a good comparison of themselves to other benchmarks, the best way to measure financial profitability is to look at what the practice makes before any payment to the owners for wages or guaranteed payments. This way, no matter what type of entity is being looked at, the starting place for the measurement of profit is the same. So for corporate practices add wages to the net income and for partnerships add guaranteed payments to net income as illustrated below:

To determine true profitability in a practice or as it can be otherwise defined; return on Investment (ROI), a computation must be made to compute the true worth of the veterinarian's time for the performance of veterinary services and management duties. To do so, the practice must make sure it is tracking the owner(s) veterinarian's production. So, for all doctors paid by the hospital, it is important to define production whether the veterinarian is paid on this basis or not. Production is provided to a doctor for all services and products a doctor provides a client in the exam room and also is provided credit for the oversight of dental cases and the actual performance of surgery whether they are the doctor who recommended it or not. In addition, they are also provided credit if they need to read a chart and order a lab test or radiograph but are not provided credit for prescription refills. In addition, owners should pay themselves a management fee of anywhere between 1% and 4% depending on the level of others performing management duties in the hospital. An owner who provides all management functions would pay themselves 4% while those who have a hospital manager or administrator would pay themselves 1%. It is strongly recommended that owners consider this type of pay arrangement for themselves in order to look at true profitability of the hospital. If they also own the practice real estate and pay rent to themselves, they need to pay rent of a reasonable fair market value. How do you determine fair market value? The same way real estate appraisers do. They look at a fair return on investment for the ownership of the real estate. In today's market anywhere between 10% and 12% of the fair market value of the real estate is considered a fair return on investment. Typical production pay paid to owners is no different than what would be paid to an associate at 20 to 22 percent. Once an pays themselves a fair market value rent and adequate pay, The practice ROI can be ascertained and monitored on a continual basis to look at profitability over a long period of time. To determine how the practice is performing with regard to ROI, you should refer to the VetPartners No Lo worksheet that can be found at the VetPartners website which is www.vetpartners.org. Tracking the changes in the ROI can be just as important as know what the ROI is. Financial statements should be formatted so a computation is the ROI is disclosed every time financial results are produced. Work with your accountants and make chart of account changes in your accounting software so your computer program can compute the ROI. To further the example stated above along, which can assist in computing ROI, financial statements should be formatted as set forth below. This should be in conjunction again with making sure the owner(s) veterinarians are paid a fair wage and rent.

Once the ROI is know you now have a true sense of profitability and ROI which is highly correlated to practice value. If the ROI is not a number you are satisfied with, a practice profit analysis becomes what is expected to affect the kind of changes that could impact the ROI. Here is what you should consider:

Income of the practice

Where does the practice generate its income from? Use your veterinary software to tell you. Analyze it monthly and track it in your accounting software (QuickBooks).

A hospital revenue analysis within the financial statement might look like the following:

When hospital revenue areas look weak, look for issues within control systems to make sure all income is being earned.

Here are items to consider in each area

Clinic services

1. Are fees for exams and vaccines separated and charged appropriately?

2. Are sick pet visits charged when a medical issue arises but started as a wellness exam?

3. Do medical exams which are extended for eye, neurological, or orthopedic reasons become extended exams and charged as such?

Pharmacy

1. Revisit mark-ups on drug and medical supplies

2. Revisit hospital dispensing fees. Does the hospital have:

» A counted and label fee?

» A separate label fee for items sold in full bottles or tubes?

3. Does the hospital have set minimum prescription prices?

Diagnostics

1. Do X-Ray prices include an interpretation fee?

2. Does the hospital charge for different size films and additional views?

3. Does the hospital add on clinic expenses when outside ultrasound specialists come in to do procedures?

Hospital services

1. Are surgeries and anesthesia procedures timed and billed accordingly?

2. Do hospitalization fees incorporate time spent by the nursing staff and the DVM?

3. Are hospitalization fees considered for day cases as well as overnight cases?

Lab services

1. Revisit mark-ups on outside lab services. Are prices current with outside lab price schedule?

2. Do in house lab prices reflect the cost of the test, equipment and related payroll costs to run and interpret test results? Are invalid tests considered a part of the cost of service?

Over the counter sales

1. Revisit mark-ups on all items.

Hospital fees and discounting

Owners and associates should be reminded that they have a responsibility to adhere to their fee schedule. This point should be stressed to the associates, if not made a part of their contracts. If an associate has an issue with hospital fees, it should be either brought to a doctors meeting for a resolution amongst all or brought to management's attention in a one-on-one session. The use of hospital estimates should be mandated. Clients need a clear understanding of expected charges. When clients receive unexpected bills, they get angry. This usually creates billing issues and eventually bad debts. Bad debts reduce the bottom line.

With most veterinary software monthly accounts receivable reports can be created on a per-doctor basis. These should be printed for each doctor so they may review the status of unpaid balances related to their clients. This does not mean they need to have the responsibility to collect the account but certainly be made aware of it and to assist with collection when appropriate. Practice owners should also share with associates how much of their accounts receivable are written off each month. Hospital accounts receivable for small animal companion hospitals should never exceed 2.5% of the hospital's revenue and not more than 11% for large animal practices.

To further assist practice owners and associates, if the veterinary software allows, a daily fee exception report should be run by doctor to monitor fee overrides. This information should be shared with all doctors. Fee overrides should not be permitted.

Also, practices should monitor all manual discounts given. These should not be allowed. To alleviate any ill will regarding compassionate care, a doctor charity account can be set up for each associate for which they have the ability to use for free or reduced fee care. We recommend a $1,000 limit per doctor.

Expenses of the practice

You cannot make money cutting expenses in a hospital. The best you can do is to control them. Budgeting is the best way to do that. Also, benchmarking your practice to the industry averages will let you know if you are in line with others. Below are the industry averages for the most common expenses: