More than 300 industry leaders attending the KC Animal Health Corridor’s Market Insight Seminar in August witnessed “A View From the Trenches,” our presentation about some of the most pressing issues facing today’s veterinarians. Here are a few highlights.
It’s the Economy, Stupid
Economic data from the first half of the year showed that 2018 continues to move in the right direction, although more muted growth was observed than in past years. According to Veterinary Hospital Managers Association data, practice revenue through July was up 3.7 percent compared with the same period in 2017. Although positive, the growth was less than the 5.1 percent increase observed in 2017 as well as the 5.9 and 5.8 percent jumps seen in 2016 and 2015.
Other metrics appeared less favorable. Total practice visits were down slightly, 0.3 percent, through July compared with the increases observed in the prior three years. Additionally, new clients continued to decline, down 11.4 percent in 2018.
Insights from the Vetalytix data set revealed similar trends. The Veterinary Consumption Index, a proprietary leading indicator for clinical throughput, reported overall growth of about 4.5 percent through July. This was consistent with the growth observed in 2017 but significantly less than the double-digit volume increases seen in 2016.
However, other Vetalytix metrics seemed to provide more reason for caution. Over the past 12 months, the veterinary channel saw a 1.3 percent contraction in the total dose volumes of canine core vaccines and a 2.6 percent drop in feline core vaccines, suggesting a softening of veterinary wellness volume or even pet owners migrating outside of the veterinary channel for these core services.
The Student Debt Burden
When it comes to establishing the “right” compensation for new veterinary college graduates, two forces are pulling against each other, and the gap appears to be widening.
On one side of the equation are the needs of the employee and the relationship between clinical skills and the cost of education that drive what a new graduate “needs to make” in the open job market.
On the other side are the needs of the employer, which are driven by the relationship between the employee’s clinical skills and their ability to be financially productive for the practice. For a market to be in balance, both sides of the equation must remain in balance.
As the cost of veterinary education continues to rise and drive the “employee needs” side of the equation, additional pressure is put on the employee (and employer) once the graduate enter the job market. If employees aren’t capable of seeing a caseload and producing at a level that cover their salary requirements, the practice suffers. Considering that the average practice operates at a margin of 10 percent or less, that leaves little room for error for everyone.
The issue of student debt isn’t just a short-term challenge for the profession. With the cost of education at an all-time high, many new graduates enter the workforce and manage their debt load through income-based repayment plans. While this loan structure allows borrowers to pace debt service over time, interest continues to accrue on the loan principal, often in excess of a borrower’s monthly payment. Even with loan forgiveness, borrowers could face six-figure tax burdens after decades of monthly debt service. Twenty years from now, how many of these borrowers are going to have $100,000 ready to hand over to the IRS?
The Varying Customer Base
In a normal business model, entrepreneurs identify an unmet need of their target customer base and then build their business offering — a product or service — to meet that need more effectively than any other provider in the market. An entrepreneur’s business is based first and foremost on what the customer desires, whether faster, cheaper or of better quality.
In many ways, veterinary medicine has taken the opposite approach over the past decades. As a profession, we have determined our offering, set our availability and held to rigid market pricing. In essence, we have determined our business by what we wish to provide to clients. Should we really be surprised to see clients migrating to service offerings from new competitors in the marketplace?
This fixation on setting the standard of care can be self-limiting. Obviously, all veterinarians should adhere to a minimum standard of care. However, a 2016 study published by Idexx Laboratories and the American Animal Hospital Association identified a needs gap of up to five times revenue per patient in the typical hospital. That means people aren’t providing the best care for their pets and if they did, the care would cost five times as much as what they spend now. While mathematically correct, the analysis is based on the idea of 100 percent compliance with gold-standard care and not necessarily on the diverse needs of clients within your practice. Is it reasonable to expect all clients to want and be able to afford this higher level of care?
One should question whether compliance measured against a target of 100 percent of the patient population is a realistic approach in a practice whose clientele varies based on numerous social, economic and emotional needs. Practically speaking, most practices have more than one type of client arriving with unique needs, financial situations and value perceptions.
In today’s competitive marketplace, understanding local clinical norms is more valuable. While 100 percent is an aspirational target, it is far more valuable for a practice to intimately understand the clientele mix and meet the varying needs.
Telehealth
The topic of telehealth has received great attention over the past 24 months, and interest from the pet-owning public does not appear to be abating. The idea of connecting directly to a veterinarian without physically visiting the practice is of huge interest to many pet owners.
Telehealth is a booming enterprise outside of veterinary medicine, having gained prominence in many disciplines of human medicine, ranging from general family practice to pediatrics. Talkspace, a leading telehealth therapy and social services platform, references close to a dozen peer-reviewed telehealth studies in the treatment of psychologic and social disorders.
The veterinary telehealth space resembles the Wild West — a few renegades running wild and with little legal oversight. While the American Veterinary Medical Association issued a position paper in early 2017 providing recommendations and highlighting the critical importance of an existing veterinarian-client-patient relationship in the practice of telehealth care, actual legal regulation is sparse.
The broader adoption of telemedicine in practice will be shaped by three important factors.
1. What Role Will Local Regulatory Agencies Play?
The practice of veterinary medicine is regulated at the state level. What one state board dictates as the practice of medicine might be different from what is considered standard in a neighboring state. The level of regulation imposed and how strictly regulations are enforced will play a significant role in what a practice will and will not choose to offer clients.
2. What Platforms Exist?
Telehealth is more than just connecting virtually with a pet owner. It is a consultation between a doctor and patient that must be documented and cataloged within the medical record. While video conferencing, text communications and FaceTime calls are readily available platforms, seamlessly connecting the outcomes of these interactions within the PIMS system have not been clearly established.
3. How Do I Charge Appropriately?
One of the great barriers to adopting telehealth in practice is solving the dilemma of how to appropriately charge for services. For practices not engaged in digital communications, the prospect of telehealth represents a possible erosion of revenue and a potential loss of the interpersonal bond with clients. Conversely, for those practices that engage in text and video communications, determining how to effectively charge for a service that they have provided “for free” is a puzzle that will have to be solved.
Corporate Consolidation
Corporate buying of veterinary practices is one of the most hot-button topics in the profession. More than 40 corporate practice groups are actively aggregating private practices. While each group has its own positioning as to what makes it different, the investment thesis is consistent: Aggregate as many locations as possible, achieve economies of scale and exit to a strategic purchaser. An estimated 10 percent of the 30,000 U.S. small animal private practices are corporately owned, most of them larger practices.
Corporate groups have effectively dictated the conversation in the marketplace, capitalizing on the bias that associate veterinarians don’t want to be owners and paying aggressive purchase prices to owners who desire a guaranteed exit.
A broader look reveals that the overall market for practice transactions might be organically growing, given that the mean age of practice owners in almost every segment is at or near 60. Many veterinary industry lenders have reported record lending volume in past years, showing that a robust base of veterinary professionals want to become the next generation of practice owners.
While the investment pitch for many practice groups is founded on the premise that about 30,000 practices are potential acquisition targets, the reality is the number of “attractive targets” is much more limited. Veterinary Consumption Index data for the past three years shows that the small animal veterinary market is considered a 20/50 market — 20 percent of the total locations account for 50 percent of overall volume. This means that about 6,000 practices account for half of the market, or about 0.8 percent of the total market per location.
Conversely, almost 24,000 locations account for the remaining half of the market, or approximately 0.2 percent of the total market per location, a difference of more than four times. For a corporate buyer seeking thresholds in total revenue or number of doctors, the opportunities will continue to decline.
Whether a bubble will appear is hard to say, but practice groups will be forced to make operational decisions that maximize productivity as fewer top-tier hospital targets are available to acquire. While the market is considered in a consolidation phase, some organization ultimately will end up owning a significant share of the existing corporate practice groups today and will have to operate them effectively to find efficiencies and achieve profitability.
What that means for hospitals in those groups remains to be seen.
And Speaking of Consolidation
The impending merger of Henry Schein Animal Health and Vets First Choice represents a new dynamic in the veterinary distribution space and it will be interesting to see what the driving focus will be for the new entity.
Henry Schein Animal Health competes in the distribution space by delivering its products as a logistics partner to the veterinary practice channel. Vets First Choice, as a committed online pharmacy platform, represents a shift in the pharmacy dynamic, promoting commerce from product sales beyond the brick-and-mortar hospital.
While the impending merger of these two organizations holds intrigue for those who follow the animal health industry, it highlights this broader question in the veterinary space: What role will the in-house veterinary pharmacy play and how can it effectively compete in an online retail channel?
While certainly not as publicized as retail-focused competitors such as PetMed Express, veterinary-sponsored home-delivery platforms have been active for more than a decade and have had limited impact on the practice of medicine. While the market seems more receptive to this delivery platform every day, hurdles still stand in the way of broader adoption.
The first and likely most compelling barrier is the sacrifice of profit margin that accompanies online transactions. If a practice elects to fulfill pharmacy sales through the online channel, an accompanied increase is needed in the volume of products sold overall to make the same profit as when selling exclusively in-house. Most practices don’t have a strong idea about how to go about generating this increased volume. Because this dilemma has yet to be solved in the broader market, most practices generate only a small amount of revenue online.
A second barrier facing the veterinary home-delivery model is that of product packaging quantities. As long as a practice cares for patients in-hospital, there will always be a need for a base pharmacy. It is core to the offering and the value we provide clients. In fact, many of the human urgent-care business models are incorporating in-house pharmacies to provide a more client-friendly experience and meet the evolving needs of customers.
But as long as the veterinary practice is limited packaging options sizes — bottles of 250 tablets, sleeves of 12 boxes, for example — a practice’s relative cost of goods will be unlikely to change, even with an active home-delivery platform.
The Take-Home Message
Veterinary medicine is one of the greatest professions when it comes to opportunities to be both a successful clinician and entrepreneur. But there’s little doubt that today’s environment is more complex, more dynamic and more competitive than ever before. Today’s pet owners have new demands and new desires beyond the traditional exam room visit. These needs will drive changes in the way in which we serve our customers, and technology likely will take us into channels we never anticipated.
Thriving in today’s new veterinary marketplace will require openness, creativity and a competitive spirit to be successful. It’s not about just being the best doctor anymore, it’s about being the best small-business person.