Giving the Veterinary Team a Raise

Denise L. Tumblin, CPA, WTA Veterinary Consultants, Columbus, Ohio

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Giving the Veterinary Team a Raise

Small businesses, including veterinary practices, often find it challenging to provide competitive wages and benefits to team members and still nurture revenue growth. In today’s job market, practices that want to attract and retain first-rate team members must rethink their compensation and benefits packages. Many owners want to offer higher wages but have limited cash flow. The following demonstrates how a practice can afford a $1-, $2-, or even $3-an-hour pay increase for every team member.

In this case study of a practice with 11 employees and 2 full-time equivalent (FTE) veterinarians, the veterinarians produce 80% of total revenue and are paid 20% of production. The owner produces 55% of veterinarian-generated revenue and the associate veterinarian produces 45%. The owner also receives a management fee equal to 2% of total revenue. To afford well-deserved pay increases for team members, the management team must identify opportunities to improve cash flow and develop a plan to tap  into those opportunities. A practice improves cash flow in 1 of 3 ways:

  • Cutting expenses
  • Growing revenue while maintaining the same expense level
  • Using a combination of revenue growth and improved expense management

The practice in this case study focused on cutting inventory expenses and growing revenue by:

  • Modifying the fee schedule
  • Analyzing the top 50 fees
  • Capturing charges for all patient care provided
  • Increasing associates’ average invoice amount
  • Enhancing client compliance

(See Table 1 for the required cash flow improvement necessary to accomplish the pay increases and Table 2 for the cumulative effect of implementing the changes required to accomplish the pay increases.)

Table

1

Cost of a Pay Increase

Position Full-time Team Members Current Hourly Pay Rate Total Hours Worked Per Position Per Week Yearly Wage Per Position +$1 +$2 +$3
Practice manager 1.0 $21 40 $43 700a $2100 $4200 $6200
Client service representative 2.5 $14 100 $72 800 $5200 $10 400 $15 600
Veterinary nurse 3.5 $16 140 $116 500 $7300 $14 600 $21 800
Veterinary assistant 2.5 $14 100 $72 800 $5200 $10 400 $15 600
Pet care specialist 1.5 $10 60 $31 200 $3100 $6200 $9400
Total Wages       $337 000 $22 900 $45 800 $68 600
Payroll taxes (9% of yearly wages)       $30 300 $2100 $4100 $6200
Employer contribution to retirement plans (3% of yearly wages)       $10 100 $700 $1400 $2100
Current total staff investment       $377 400      
Increase needed (wages + payroll taxes + employer contribution to retirement plans)         $25 700 $51 300 $76 900

aAll numbers have been rounded to the closest 100

Making a $1-Per-Hour Pay Increase Viable

Reduce Inventory Cost

Ideally, a practice would have $10 000 to $16 000 of inventory on hand per FTE veterinarian.1 This practice, with 2 FTE veterinarians, should have $20 000 to $32 000 of total inventory. The practice actually has $52 000 of inventory and is therefore $20 000 overstocked. 

To reach the target inventory and reduce spending by $20 000, the practice will need to:

  • Minimize the number of duplicate or redundant drugs in the in-house pharmacy
  • Move low-margin items (eg, diets; heartworm, flea and tick products) to the practice’s online pharmacy
Modify Pricing

Pricing of medication dispensed in-house may need to be modified based on recommendations found in Benchmarks 2017: A Study of Well-Managed Practices2 and the American Animal Hospital Association’s (AAHA) The Veterinary Fee Reference.3

The average markup on medication dispensed in-house in this practice is 125% versus the recommended 150%.

Adjust Value-Based Services

Nonshopped services (eg, diagnostic imaging, laboratory testing) based on the veterinarian’s time and knowledge should be priced using fee research (eg, Benchmarks 2017: A Study of Well-Managed Practices,4 AAHA3). Expected fees for key diagnostic and procedure services can be calculated using the worksheet provided in the 2017 WMPB.4

Charge for All Patient Care

Based on a medical records review of the previous year, the practice identified ~$60 000 in missed charges and modified the processes to capture this revenue.

These changes resulted in revenue growth of $105 000 and reduced inventory cost of $20 000.

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Additional Steps for a $2-Per-Hour Pay Increase

Identify Average Transaction Discrepancies

The owner’s average transaction was $15 higher than the associate’s. Possible causes include:

  • Different case types
  • Lack of written medical protocols leading to inconsistent care
  • Different medical philosophies
  • Failure to recommend ideal treatment plans because of concerns about client finances
  • Missed charges, or giving away or discounting services

Although the veterinarians’ caseloads were similar, the associate did not always strictly follow practice protocols, was not always diligent when charging for all work performed, and assumed clients would approve only inexpensive treatments. To grow revenue an additional $54 000 in one year, the practice implemented written medical protocols and weekly case discussions to enhance the veterinarians’ quality and consistency of care. The team focused on capturing charges for all medical care provided and having frank discussions with clients about their budget. The practice also implemented a client loyalty program5 to show clients appreciation, resulting in happier clients, increased visits, and improved profitability.

Analyze Fee Codes

Use practice management software to analyze the top 50 most frequently used fee codes to understand where the practice focuses its efforts. 

  • Does the list include mostly products and very few services? If so, review and identify opportunities to grow service revenue.
  • Is the average invoiced service price lower than the price stated on the fee schedule? 

EXPECTATION 

$55 physical examination fee 

× 3000 times performed in 2017

= $165 000 in revenue

ACTUAL

$50 physical examination fee 

× 3000 times performed in 2017

= $150 000 in revenue

  • The practice discounted the examination fee and/or did not charge for some patients’ examinations, resulting in a loss of $15 000. If this is happening with other fees, the practice could easily be losing thousands of dollars each year.
  • Are the top 50 fees appropriate based on the practice’s quality of care? Even a fee $1 too low can result in significant losses. This practice’s top 50 list included nail trims, fecal examinations, and anal sac expressions. In one year, the practice performed 4000 nail trims (actual fee $16, recommended fee $176), 2000 fecal examinations (actual fee $29, recommended fee $307), and 4000 anal sac expressions (actual fee $23, recommended fee $246). A fee increase of $1 for each of these services would result in annual revenue growth of $10 000.8 (1 × 4000) + (1 × 2000) + (1 × 4000) = $10 000

These changes resulted in total additional revenue growth of $79 000.

  •  Increasing the associate’s average invoice amount = $54 000
  • Charging the correct examination fee = $15 000
  • Adjusting the price of nail trims, fecal examinations, and anal sac expressions = $10 000

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Additional Step for a $3-Per-Hour Pay Increase

Identify Potential Growth Areas

The practice also analyzed client compliance with senior screening panels and dental care. The practice has 900 patients older than 6 years of age with a 22% compliance rate for senior screening panels versus the target rate of 75%. Dentistry revenue represents 2% of medical revenue versus the target rate of 3% to 4%. 

The team brainstormed ideas to improve compliance and decided to update educational materials with more images and infographics and fewer words so clients could quickly and easily grasp the necessity of the care for the patient. Team members also developed scripts to strengthen their presentation skills about the need for specific care (eg, dental, screening panels for senior pets).

Hitting these compliance targets will grow revenue by an additional $92 000.

Table

2

Revenue & Expenses (% of Revenue) When Making Changes to Allow for Pay Increases

Revenue & Expenses Current $1 Increase $2 Increase $3 Increase
Revenue $1 500 000 $1 605 000 $1 684 000 $1 776 000
Variable expenses $450 000 (30%) $430 000 (27%) $430 000 (26%) $430 000 (24%)
Fixed expenses $135 000 (9%) $135 000 (8%) $135 000 (8%) $135 000 (8%)
Staff compensation $377 000 (25%) $403 000 (25%) $428 000 (25%) $454 000 (25%)
Facility cost $75 000 (5%) $75 000 (5%) $75 000 (4%) $75 000 (4%)
Total operating cost $1 037 000 (69%) $1 043 000 (65%) $1 068 000 (63%) $1 094 000 (61%)
Available for Veterinarian Compensation $463 000 (31%) $562 000 (35%) $616 000 (37%) $682 000 (39%)
Associate veterinarian compensation $121 000 (8%) $130 000 (8%) $136 000 (8%) $159 000 (9%)
Owner (veterinarian) $146 000 (10%) $158 000 (10%) $166 000 (10%) $159 000 (9%)
Owner (manager) $30 000 (2%) $32 000 (2%) $34 000 (2%) $36 000 (2%)
Owner Return on Investment $166 000 (11%) $242 000 (15%) $280 000 (17%) $328 000 (19%)

 

Implementing Changes

Implementing changes to give a $1-per-hour pay increase results in revenue growth of 7%, a team and veterinarian compensation increase of 7%, and owner return on investment (ROI) increase of 46%. (See Table 2, above.)

Changes for a $2-per-hour pay increase result in improved patient care and revenue growth of 12%, increased team and veterinarian compensation of 14%, and an increased owner ROI of 69%. 

Changes for a $3-per-hour pay increase result in improved patient care and revenue growth of 18%, increased team and veterinarian compensation of 20%, and almost doubled owner ROI.

Conclusion

The impact of a pay increase for team members, whether $1, $2, or $3 per hour, is huge—less stress, a better life for themselves and their families, and perhaps even staying in a profession they love. It is worth the time for practices to dig into the data available through their accounting and practice management software, identify opportunities, and make changes so that a $3 per hour increase is viable.

1 Look for ways to reduce inventory costs and modify product markups to produce revenue growth that will enable staff pay increases.

2 Understand that money can be found to increase wages and that fair compensation is vital to retain team members in a competitive market.

References

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