Income Center Magangement
Thomas E. Catanzaro, DVM, MHA, FACHEDiplomate, American College of Healthcare Executives
Dollars do better if they are accompanied by sense.
- Earl Riney
The current trend of literature, from the Veterinary Economics surveys, to the VHMA database, to the fiscal management evaluations being produced by AAHA, Pfizer, DVMNewsMagazine, and others, all have continued to be expense based. The progressive veterinary practice of today needs to go beyond the expenses once they are under control. A healthy practice has expenses within the 46-48 percent of gross range, but that percentage target is without the expense elements of rent, veterinarian's monies, or return on investment programs. The reason that I leave these last three expenses out of the general financial planning "target" computations is the variability found within these three factors. The fact that Owen McCafferty, CPA, also screens income statements for the average expense trends without these three cost factors adds a bit of comfort.
For effective financial planning, there are a few basic management facts that must be accepted. The veterinary medical industry is just becoming a "business" this decade. The past work done by management specialists in our profession have let us reach the point that we are at today. If we are satisfied with what we did to get where we are, we will stagnate. I see five basic facts which need to be shared to understand the need for income center management.
FACT: Financial planning is more than just controlling expenses!
FACT: CPAs center on expenses because they are past-tense and safe!
FACT: You can only spend net, and that is income beyond expenses!
FACT: If you can't (or won't) measure it, you cannot manage it!
FACT: For income goals, you can only compare to your own practice!
Every practice knows their specific income centers. Outpatient, inpatient, and ancillary care services bring in the cash flow; but most CPA-derived income statements do not show these as activity areas. Isn't that interesting? Sure, there are other "side investments" encountered, but for discussion here, we will center on the practice itself. Outpatient services usually have a vaccination portion, a medical portion, and in some cases, even a paraprofessional portion of the income. Again, most monthly and quarterly income statements never even reflect outpatient income as opposed to inpatient income; another interesting fact for you to consider! The inpatient income is derived from surgery, radiology, laboratory, ICU, electrocardiology, I.V. therapy, echocardiology, anesthesiology, blood pressure monitoring, pain management, medical cases, ultrasonography, dentistry, endoscopy, and a host of other categories that are practice philosophy dependent. The usual ancillary services are boarding, bathing, dipping, grooming, nutritional sales, cremation, and in some cases even things like behavior training and pet product sales; occasionally these areas are broken out since we pay staff members on a commission basis.
The basic rule of management still applies when looking at income centers: If you can't measure it, you can't manage it! If we look at the income center relationships, then management factors begin to appear that can affect income. The age of the patient can be compared to procedures for a month-to-month evaluation of the quality of care offered. An easy example would be to profile the pets over seven years of age presented within a given month, then comparing the "usual needs" to access of services, a sort of reality check on "practice philosophy":
The "demand" relationship is as good as the practitioner who sees the animal. If we talk to the experts, the majority of the pets over seven years of age have some form of kidney dysfunction. If we talk to the average veterinarian, chemistries are not offered for financial reasons, not for the lack of medical diagnostic need. When AAHA added the "Standard" requirement for an ECG capability on the premises, the reasoning for noncompliance was remarkable. One practitioner said he had an X-ray, so he didn't need an ECG; another said he had a stethoscope and 30 years of experience, so he would quit before he equipped his facility with these "diagnostic luxuries."
Marketing the Income Center
It is amazing to see the lost income because practitioners lower their medical standards to fit an imagined wallet capacity. Services must be offered before they can be understood and accepted by a client. In some companion animal veterinary practices, the dental status (+, ++, +++, ++++) is still not being recorded in the medical records, yet they want to know how to target market a population. Target marketing in health care has three clear and unique steps:
1. Make the client aware that a preexisting condition is in need of care.
2. Let the client clearly understand that the profession, and your practice, now has alternatives that can correct the problem.
3. Clearly inform the client that the practice team has at least two ways they can deliver those services and meet the needs to regain wellness.
The first two steps are exam room functions that require no financial planning, but the third step requires fiscal commitment. The third step requires training AND a continuing education budget, for both doctors and paraprofessional staff members. It requires a capital expense budget for procurement of income center equipment. It requires training time for the staff, reducing income initially but recouping it many-fold after training is completed. It requires a cash budget that is projected for the next twelve months; good accountants automatically do this for the veterinary practices they support. If you don't have an annual cash budget, the general guidelines and format are provided in Chapter 4, Building The Successful Veterinary Practice: Programs & Procedures (Volume 2), published by ISUP, as well as the updated Chart of Accounts in the Appendix.
Cause and Effect
The cause and effect relationships are not often evaluated within the CPA's financial planning cycle of a practice. For instance, the reminder system is not tracked in the majority of hospitals. How many clients responded to the first card, how many of the non-responders came in after the second message, and how many required three reminders to get action? Will there be a greater impact if the post card becomes a letter with a brochure included? Will a phone call be better than mail for the last reminder? Or better yet, how many current clients have gotten an appropriate mailing in a timely manner? These evaluations also require financial planning for postage, telephone, and man-hours, as well as other marketing costs.
We all know that 20 percent of our clients produce 80 percent of the income, or is it 30 percent produce 70 percent of the income? In your practice, it may be different, so determine the cause and effect of the client usage. There is a practice in Oklahoma that used their computer capabilities and found that only six percent of their clients caused 40 percent of their income; needless to say, that six percent is getting a lot more attention these days.
When a practice does an ECG, what percentage of those animals get referred for ultrasound? When there is an acute case of gastritis with possible ingestion of trash, how many of these subsequentially have X-rays, endoscopy, or chemistry profiles? The secret here is to sit down and develop "good medicine protocols" before the occurrence. Remember the AMC creed promoted by Dr. Bill Kay, "First do no harm." The neglect of the diagnostic tools at hand, the failure to offer the best care possible, may in fact be causing harm. There has been frequent litigation which shows that the harm can become reciprocal to a practitioner.
Financial planning in the new millennium will need a greater focus on the top line, not the bottom line. Income center management may be simply comparing the laboratory income from Dr. A. in the first quarter to the second quarter and asking about the change in trends. It may be focusing on the laboratory expenses compared to the laboratory income to see if the net is going up or down. It may even be tracking the monthly sales income and monthly operational costs on the same chart and seeing how the distance between the lines changes from month to month. The relationships abound even to the casual observer, and to someone who knows how to get data out of the practice computer, then use it to develop relationships that make the reams of paper into useful information; the capabilities are almost without limits.
The ability (habit) to discount and provide "no charge" services hurts the financial planning of most practices. When you give a 20 percent discount, it requires double the number of clients to break even, while a 20 percent service fee increase allows about a quarter less clients to stay even. If I had the power, I'd make every practice record everything they do, assess an equitable price, then allow the owner or provider to adjust only the bottom line of the invoice. In this manner, all adjustments come from the cash flow and not from the procedures count or income center. It is also easier to see that the "adjustments" are the same as giving away pure net. This logic and adjustment methodology has provided a good veterinarian-driven, self-limiting program in many practices we've supported.
The income-centered financial planning process will become more important during the remainder of this decade. The front door must swing! Regardless of where a practice starts in financial planning, the top line is an indicator of service success, the bottom line is an indicator of management emphasis. If the expenses remain well controlled and the net is low or decreasing, the problem lies in the client service plan; some call this the leadership factor. It is not the staff or the expenses which causes a practice to stagnate, it is the leadership and the vision for the future.
Income Centers (circa 2001)
For additional information, please review at www.v-p-c.com:
Signature Series monograph, Profit Center Management, w/diskette
ACVC Contact Information