The shift in virus-aware veterinary economics

May 26, 2020

COVID-19 is turning the veterinary industry on its head, with effects that are both positive and negative.

When I began writing this column for dvm360, the publication was called DVM Newsmagazine. While the magazine’s name today implies universal coverage of the animal health profession, it remains fully committed to keeping readers informed of late-breaking news involving veterinary medicine and its practitioners. In keeping with that tradition, I’d like to share the trends I’m seeing in veterinary law and business economics as we move through the COVID-19 pandemic.

Some very good news

When it comes to the physical, emotional and economic health of veterinary practices, the news I am hearing from owners and associates is unexpectedly positive. Clients are showing up, animals are being cared for and, generally speaking, fewer practices than expected are facing severe economic upheaval.

At the start, of course, many of us had no idea whether what we do for a living was considered “essential” in the government’s eyes. Were we allowed to see patients? If so, on what basis and through the use of what logistics? In my home state, the New York Veterinary Medical Society was right on top of notifying members of the most up-to-date COVID-19–related guidance from the state’s education department, health department and governor’s office.

But somehow, every morning New York veterinarians’ status as “essential” workers was different. At the start, we weren’t that essential. Then the beef and dairy folks were essential but not companion animal docs. Shortly thereafter I became essential if I was giving rabies shots to pets, as long as they were overdue. Then emergency companion animal surgery was exempted from the lockdown. Long story short: It was pretty hard to know how much income we’d be generating when we didn’t know whether showing up at work on any given day was a violation of some freshly minted executive order from Albany.

Eventually, the authorities in New York and many other states basically told us to use common sense. So, it wasn’t long after the initial mandatory business closures that many general veterinary practices across the country were doing a fairly brisk business, albeit with innovative sanitation and prophylaxis protocols.

Now, months after the initial viral outbreak, many veterinarians have expressed to me that while office visits are down, they are down far less than was originally feared. Likewise, practices have needed to furlough employees to a far lesser extent than they had worried might be the case.

But private practice sales are slowing

Practice sale transactions, which through January had been closing at a record rate, are still being finalized, although the deals are progressing far more slowly. This is especially true where the buyer is an individual or small partnership, but corporate consolidators also seem to be taking longer to finalize takeovers.

Banks and other lending institutions are insisting on seeing “up-to-the-minute” financial reports, including profit and loss statements, before making final commitments to finance clinic deals that they had previously tentatively committed to underwrite. On the positive side, interest rates are remarkably low. But down payment requirements are ratcheting upward. This is torpedoing some hospital sales that in December and January seemed virtually certain to close.

Veterinary corporations, which live or die based on their ability to make perpetual acquisitions, seem to be moving forward with clinic purchases, but at a significantly more deliberate pace. Sale closings (and subsequent incorporation of acquired practices into the corporate “collective”) are substantially slower now than before COVID-19.

Even when a target clinic is ready, willing and able to move forward with the sale, virus-mandated logistics prevent the acquirer from executing the necessary steps to finalize the transaction at the customary speedy rate. Law firms representing landlords have paralegals calling in sick. Surveyors and title companies have laid off staff. Finalizing paperwork details is just a cavalcade of headaches.

Also a problem, veterinary corporation insiders have explained to me, is that their companies are nervous about committing a full “transition team” to descend on a new acquisition out of fear that their highly trained HR and IT staff members will become infected by the demon virus.

And consolidators are well aware that staff members at practices that are in the process of being acquired are already heavily stressed. Clinic teams are exhausted taking the steps necessary to provide care safely, including additional cleaning and sanitizing.

Consolidators are fearful—and rightly so—that staff members will pick now as a time to leave either temporarily or permanently. And the last thing they want is to take financial responsibility for a practice in which a large group of employees have quit or are afraid to come to work.

Associates are becoming more noncompete averse

Until recently, many associate veterinarians had been willing to sign employment contracts that include a relatively broad competition prohibition either because they felt they had landed their “dream job” or because the rate of pay was “too good to pass up.”

Now, associate candidates increasingly recognize the economic impact of the coronavirus, and are therefore becoming much more reticent to agree to large-radius noncompetes, particularly those that do not permit “moonlighting” as per-diem clinicians. Employed doctors are becoming more acutely aware of the inherent danger in limiting their employment options in the face of a serious downturn in spending and hiring.

The concept of what a noncompete represents—the legal commitment not to work for any of a large number of nearby practices—becomes far less amorphous in a world where everybody is talking about layoffs, pay cuts and mortgage defaults.

Corporations are beginning to close the money spigot

Veterinary consolidators are not immune from the economic impact of COVID-19. We are already beginning to see evidence of some reluctance on the part of veterinary “roll-ups” to purchase practices that have shown substantial dips in top-line revenue attributable to the pandemic. It may be too early to say that the acquisition “feeding frenzy” is over, but the big fish may be becoming somewhat more health-conscious in their meal selections.

Finally, consolidators also appear to be offering fewer and less advantageous benefits to the associates at practices they are buying, such as eliminating 401(k) contributions and employer contributions to health insurance plans. Traditionally veterinary corporations have tried to be just as generous to the staff of target practices as the prior private owner had been, at least for the first year or so. That luxury may be giving way to the exigencies of new virus-aware veterinary economics.

Dr. Allen 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 info@veterinarylaw.com.

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