The financial consequences of COVID-19 for veterinarians

dvm360dvm360 May 2020
Volume 51
Issue 5

Dr. Christopher Allen takes a look at the potential financial fallout facing veterinary associates and practice owners post COVID-19. He also shares some possible opportunities for those who are prepared.

COVID-19 coronavirus in USA, 100 dollar money bill with face mask. COVID-19 affects global stock market.

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My father was a veterinarian, having graduated from Cornell shortly after Hitler annexed Austria. He grew up not having much, and the unfolding situation in Europe didn’t offer hope that he would have much for the foreseeable future after veterinary school.

Fast forward to the fabulous 50s when my siblings and I were growing up: Dad worked hard, taught us by example and didn’t interfere much in the choices we made. But there were two subjects that my brother, sisters and I had to hear about every night at supper. First, we were never to assume that times would always be good. Second, we should always live well below our means.

Along Came Nixon, Reagan, Bush and Trump

Armed with that advice, I began living my adult life. A mega-recession hit when I was an undergrad at Columbia and my classmates were routinely exiting the Ivy League and walking into a new league: the league of the unemployed.

The economy finally came back to health and everyone was spending until, on October 19, 1987, I returned home from my job at Buena Vista Veterinary Clinic to see Dan Rather break into the afternoon programming to announce that the stock market had crashed—dropped 30%—on that historic Monday. Suddenly, folks started being way more circumspect in handling their finances, and discretionary service businesses took a major hit. Buena Vista eventually closed.

The U.S. economy ultimately became jet-powered again, fueled by home mortgages being doled out like Halloween candy. But by the time Barack Obama took the oath of office, the bubble had burst again. The S&P 500 abruptly made its way from the mid-1500s toward the devil’s telephone exchange: 666.

The Great Recession was miserable. From my perspective as a veterinary legal and business consultant, I saw this:

  • Veterinarians whose retirement savings had been decimated
  • Homeowners unable to meet mortgage payments literally abandoning their pets
  • Record home foreclosures
  • Small business loans—including for veterinary clinics—going into default with capital equipment being repossessed
  • The leading edge of the Baby Boom afraid to spend their diminished IRA money on their pets
  • A precipitous reduction in traffic at my own veterinary practice

And today, that familiar economic tune is being released on a new label: pandemic.

Who among us is most at risk?

Every time I’ve watched so many people behave as if good times would never end, I am reminded of my father’s incisive supper-table advice about living a moderate lifestyle and the inevitability of hard economic times. In counseling veterinary associates and hospital owners, I make an effort to pass on those kernels of wisdom along with industry-specific anecdotes and actionable recommendations. I would like to offer some observations about the economic calamity that is virtually certain to follow the eventual resolution of the COVID-19 debacle.

“Pro-sal” compensation may bite participants

In good economic times, production-based veterinarian compensation can be a win-win for corporate veterinary employers as well as employed doctors. Efficient, highly motivated associates can generate bonuses for themselves every fiscal quarter and sometimes even score an increase in base salary to boot.

But the opposite side of the coin can prove to be extremely rough. Corporate hospitals that pay their professional staff based on production are being hit with a prolonged stretch of gross revenue reductions related to COVID-19. It won’t take long before the associates recognize that “pro-sal” compensation has effectively transferred the risk of high labor cost and diminished revenue away from the hospital management and onto the professional staff.

A veterinary hospital can save some money by ordering fewer supplies and cutting lay staff hours, but the biggest expense is the doctors.

If the associates have contractually agreed to accept a relatively low base salary (in anticipation of earning perpetual pro-sal “bonuses”), they have effectively insulated their employer from much of the practice’s most burdensome costs: DVM pay, DVM FICA and DVM workers’ compensation insurance premiums.

Specialists can be hit hardest

This is what I saw in 2008 and the years following, and I anticipate a replay post COVID.

When the Great Recession hit 12 years ago, I began receiving phone calls from specialists in every category seeking advice on possible renegotiation of their employment contracts. Many radiologists, neurologists, ophthalmologists and others had left residency and started earning—and generously spending—very respectable and hard-earned pro-sal–based paychecks.

Then came the credit default swap catastrophe. Pet owners began to hunker down and become considerably more careful about spending—especially about spending on anything other than absolute essentials. Specialist revenue began to drop, due to both salary cuts and/or failure to meet pro-sal revenue targets. Plenty of these specialists were simply forced to re-evaluate their own spending. Some of those I spoke with were forced to sell their homes into a horrific market because their personal spending and lifestyle had been fully correlated with a “best-case” personal economic forecast.

Clinic owners, credit ratings and cap-ex

If you listen to the CNBC pundits, you will learn exactly how the COVID-19 crisis will turn out economically. Goldman Sachs says the S&P 500 will bottom out soon. Credit Suisse opines that we are headed for a prolonged recession. Somebody else says there will be a “V”-shaped downturn and 2020 will see the greatest retail boom in history.

I’m no investment guru, but I know this: While we wait for one of these opinions to be proven right, a lot of practice owners will be wishing that they had not overspent on new facilities, new equipment and new staff additions well beyond their ability to weather a major stretch of income reduction. Unwise spending levels and failure to maintain a reserve cash cushion throughout practice upgrades and hospital expansion can prove to be serious mistakes when unanticipated economic challenges suddenly materialize. Owners’ credit—and access to capital—can be suddenly and severely damaged. The situation can be far worse if owners or partners have pledged loans with personal guarantees, something that became very common post-2008/9.

A final word

I waited until the end of this month’s column to mention a potential bright side of the downturn that may well follow this pandemic.

In the midst of the worry and self-assessment that are inevitably part of the COVID-19 catastrophe, remember this: For those who have budgeted carefully and have prepared effectively for an economic downturn, the inevitable financial struggles to come can potentially provide some outstanding opportunities.

Competition for commercial tenants will probably rise. (This is already happening in New York City and its environs.) Prices for clinic ambulatory vehicles may well plunge. Banks will be seeking solid, creditworthy borrowers with excellent business balance sheets. And interest rates will be low.

For those DVMs who have lived within their means and never forgotten that tough times occur without warning, the next 12 months may serve up opportunities that might have seemed unthinkable in even in January of this year.

Christopher J. Allen, DVM, JD, is president of Associates in Veterinary Law P.C., which provides legal and consulting services exclusively to veterinarians. He can be reached via email at Dr. Allen serves on dvm360 magazine's Editorial Advisory Board.

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