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
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 http://industrymatter.com/ for a detailed list of targets for all expense categories.
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.