The Problem with Staff Costs

The Problem with Staff Costs

In my last post, I wanted to write a blog of gratitude.  Today, I will discuss staff costs as the start to a series on the issues involved with veterinary emergency hospital closures.

Veterinary Industry Challenges

The pandemic has created huge challenges for veterinarians and their staff.  These challenges have included staff illnesses from COVID, changes in workflow including curbside service, and the increase in pet ownership. The several month closure of primary care practices early in the pandemic had ripple effects.  Initially, emergency hospitals saw everything that needed to be seen.   Now, under vaccination of pets and difficulty getting in to see primary care veterinarians has led to an increase in severely ill pets presenting on emergency.  The pandemic induced financial strains on pet owners has led to more frustration with the costs of care. These stresses are often taken out on veterinary staff, who are also under stress.

However, the pandemic has been just the straw to break the camel’s back.  The veterinary industry was already under strain prior to COVID. The influx of outside investors looking for oversized returns and continued unsustainable growth for the sake of finances alone had already created an industry that was losing its focus on providing the absolute best care for pets and their people.

Financialization of veterinary medicine

In times past, veterinarians did not open hospitals looking for better than market returns.  Veterinarians opened practices to provide needed services to their communities.  When veterinarians lived in the communities in which they worked and owned practices, they knew the people they hired and the people who used their services.  This “knowing” led to certain checks and balances.  Veterinarians with reasonably run hospitals could have good careers, be trusted, and work with people they considered their teams.  These businesses were usually not run for a big jack pot at the end.  These veterinary hospitals were run to provide livable salaries for the veterinarian and their staff.  Veterinarians could save for retirement and have something reasonable (and likely affordable to young veterinarians) to sell and pass on.

With a switch in overall culture, the profession has become financialized.  You are no longer judged to be a successful veterinary practice if you have excellent outcomes, great service, and happy employees.  Now profit margins have to be higher, practices need to be bigger, and staff costs need to be minimized.  Your practice is not your vocation, your practice is first and foremost your business.  This trend started with VCA in the late 80s and has accelerated. The financialization and now rapid and aggressive buying spree with subsequent price increases is leading to distrust of veterinary practices by staff and among pet owners.

Employee Staff Costs

The number one cost in all service businesses is employee costs.  However, employees are also the key to success.  Since my days as an associate medical director for Pets Choice in the 1990s, the number one thing I was instructed was, “minimize your staff costs.”  Accountants, practice management consultants, corporate managers, corporate leaders all discuss, first and foremost, decreasing this line item in the budget.  If this line item is out of whack, your practice is judged to be poorly run.

Staff costs are a calculated percent of total gross revenue.  The “appropriate” percentages are discussed in management circles and by those advocating “well managed” practices.  However, “appropriate” staff costs are often assigned without thinking about the growth phase of the business or the TYPE of veterinary hospital.  “Appropriate” also does not take into account the personal goals or beliefs of the veterinarian who owns the practice.

Staff Costs in Emergency Hospitals

I believe it simply takes more staff to do emergency and critical care well than it does to do orthopedic surgery.  When you try to make the staff percentages of a hospital that is dominated by critical patients match the staff percentages of a hospital that is dominated by TPLOs, it doesn’t work.

As discussed in previous blogs, there is a direct link between the number of trained nurses in ICUs and quality care.  This has been demonstrated both in human healthcare and more recently with licensed veterinary technicians and veterinary ICUs.  When companies try to control staff costs too tightly, ICUs don’t have staff. When technicians see pets not getting the care they need due to lack of trained personnel, they leave.  Thus, staff turnover begets more staff turnover.

I am not advocating running a business without profit.   I absolutely believe it is crucial to a run a business in which your revenue exceeds your costs.  Without profit, you can’t pay your taxes, pay off loans, buy new equipment, expand your services or move locations.  You can provide excellent emergency and critical care and be profitable.  However, the profit and loss statement and percentages will not and should not look the same as primary care or other specialties.

Operational Efficiency Matters

Deep knowledge of different specialties can create business models that provide excellent patient outcomes and profit. However, the way you run a profitable business with higher staff pay is by having a huge focus on other cost line items.  You have to pay attention to operational efficiency.  You have to run your business with a mindset of continuous, local, operational improvement.

When outside financial investors are involved, short term growth targets are key.  Continued acquisitions are the only way to meet those growth targets.  A focus is on acquisitions leads to a lack of focus on operational excellence.  Because operational excellence is also key to improved medical outcomes, lack of focus in this area leads to further frustration for those directly treating pets.

Appropriate Profit Margins

I am not saying that operational efficiency is the only answer.  Ultimately, the question is what is a reasonable profit for a veterinary hospital.  It is hard to maintain quality at less than a 10% margin (you won’t have money to replace or add new equipment). However, striving for a 25% margin in emergency medicine leads to what we are seeing now in the profession – long wait times, burned out staff, and facility closures. When mission is replaced by profit drive, mission driven staff leaves.

Veterinary Technicians

Being a veterinary technician has always been a labor of love.  The school is not cheap. Wages are lower than appropriate for the skill involved. The job is physically and mentally demanding.  What had made the job worthwhile, was being a crucial part of the team and the hospital family, rather than a budget line to be controlled.  Because staff is the highest cost in a service business, it is not surprising that private equity investors and family empires have tried to minimize costs and keep total staffing levels low.  However, that cost control is now backfiring.  It is leading to not just hospital closures but a shortage of people who will even consider being technicians.

The Role of New Veterinarians

It is important for veterinarians to understand the motivation and the why behind the hospitals they choose to work for.  It is much easier to practice excellent quality veterinary medicine and provide exceptional client care when you have trained staff that loves their job.  When veterinary staff is viewed as a budget line item, with no voice at the table, the result is what we are seeing now in emergency medicine – burnout, staff shortages, and closures.

Next week, its time to talk about unions.