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A Better Way to Compensate Associates

Cynthia R. Wutchiett, CPA
Wutchiett & Associates, Inc.
2929 Kenny Road, Suite 215, Columbus, Ohio 43221-2415
Phone (614) 457-8444

If you're like half of all veterinary practices, you pay veterinarians a percent of production (or a base salary plus a percent of production). You're probably paying something like 22% to 25% (or higher for large animal ambulatory practices) of all revenue generated at the time of a doctor visit. For years, this has been the industry standard. But it's time for some new thinking.

Why change the veterinary compensation formula that's been around for such a long time? Because the practice of veterinary medicine has changed in recent years, and the old standard no longer reflects the new economics and medical emphasis of practice today.

In recent years, medicine and product sales have become a much larger part of total revenue than they used to be. The new formula separates medical services from medicine dispensed and prescription diets, compensating doctors at a different rate for each. The rate paid for medical services is higher than the rate paid for medicine dispensed and prescription diets.

What are the benefits of the new veterinary pay calculation? First, it more accurately reflects practice economics. Second, it shifts emphasis towards veterinary services.

The new formula more accurately reflects today's practice economics. We seem to have lost sight of the fact that the purpose of percentage-based compensation was to allow doctors to share in the profit from the services and medicines they provided. Original percentage-pay formulas were designed to pay doctors a percent of the gross profit margin (revenue less variable expenses). Practice owners found these calculations cumbersome, especially in practices that were not computerized, so the formula was rewritten to allow for the calculation of pay based on total revenue.

Percentage pay formulas were introduced at a time when practices were more homogeneous, so distortions due to varying profit margins were usually minor. Today, two practices with identical revenue can have very different profit margins due to significant differences in the mix of medical services, medicine dispensed, prescription diets, and retail sales. Continuing to apply the same pay percentages to dissimilar practices does not make economic sense.

Let's take the example of two practices: Florida Veterinary Services and Colorado Animal Hospital. Both practices are companion animal practices and have annual revenue of $620,000. Located in a state where fleas, ticks and heartworms are more prevalent, the Florida practice dispenses more medicine as a percent of total medical revenue. It therefore has a higher drug and supply cost, resulting in higher variable expenses. Accordingly, the gross profit and remaining profit is lower at Florida Veterinary Services. The difference in the gross profit between practices is $28,000!

New, split rate formulas highlight medical services. It's no secret that Well-Managed Practice™ owners are aggressively emphasizing the value of veterinary services in their practices. In order to shift the client's perception toward medical services, owners know they must first shift both their perception and that of their staff. And the way doctors are compensated certainly plays a part in shaping their perception.

Split-Rate Compensation™ Formula - Companion Animal

The percentages used will vary from practice to practice, depending on how quickly or gradually owners and associates are willing to accept the change. One option is to start with percentages that result in a compensation rate about equal to what you're currently paying. For example, if your practice is predominantly medical services (say 70% of total revenue) versus medicine dispensed and prescription diets, paying 28% for medical services and 5% for medicines and prescription diets will result in a blended compensation rate of 22%.

What about over-the-counter products? Over-the-counter products are not part of the compensation formula, but they do benefit doctors, clients, and patients. For example, the time a doctor spends with a client in the exam room discussing nutrition or providing behavior counseling is compensated as the result of a client charge for an extended examination or specific counseling. The sale of a training leash that may result from the exam room discussion is a by-product of that client education.

Split-Rate Compensation™ Formula - Equine and Food Animal

For equine and food animal practices, we not only consider the difference between medical services and medicine sales, but also the difference between ambulatory and in-hospital services. Because ambulatory services require driving from farm to farm, doctors generate less revenue in the same period of time compared to in-hospital work (even considering call fees).

What Does Production Include?

To pay associates using the split rate formula, you'll need to track revenue production by doctor. Production should be separately identified as medical services, medicine dispensed and prescription diets, and over-the-counter products.

Medical services revenue includes all medical services provided by each doctor, including all inpatient injections, medicines, treatments. Credit for hospitalized patient care is typically given to the doctor who provides each individual service. For example, if Dr. A admitted Sparky but

Dr. B examined him and administered an injection the next day, Dr. B would be credited with the exam and injection. For medical services provided by technicians, such as radiology or dentistry, the doctor who oversees the service typically receives credit.

Medicine dispensed and prescription diet sales include all medicines and prescription diets dispensed at the time of a doctor visit. You can decide how to handle prescription refills for your practice. Currently, 78% of all practices credit the original prescribing doctor for refills, and half credit the practice. Those who credit the doctor want to compensate him or her for assuming responsibility for the prescription. Those who credit the practice will give the issuing doctor credit for a refilled prescription only if it is associated with a patient visit.

Over-the-counter product revenue includes all non-prescription items such as collars, leashes and flea shampoo purchased either at the time of a doctor visit or separately. These should be credited either to a non-veterinary staff provider or to the practice as provider.

Let your computer system do the lion's share of the work in tracking production. Some systems are designed to separately track medical services, prescription medicines and diets dispensed, and over-the counter products. If your computer system does not provide separate tracking,

improvise by creating separate provider codes. For example, if Dr. Baker (provider #1) provides medical services (service code #1), the code entered into the computer would be 11. If Dr. Baker (provider #1) provides medicines (service code #2), the code entered into the computer would be 12. At the end of the reporting period, all you'll have to do is print out the provider report and you'll have all the information you need!

Because large animal practices will also track in-hospital and ambulatory revenue separately, they'll need additional provider codes for each doctor.

Compensation based on today's practice economics is crucial in keeping owners and associates happy in the long run, especially as personal and practice interests among partners changes.

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