Pharmacy and other inventory typically account for a large slice of veterinary practice revenue – from 20-30% in most cases. However, in the wake of intense competition from online pharmacies and increasing prevalence of third-party home delivery partners, in-practice pharmacy sales are being surrendered as a ‘lost cause’ from a growth and profitability standpoint. Despite the trend to online fulfillment, there is significant potential to improve practice EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) by using modern tools to streamline the practice pharmacy. Inventory hardware automation with electronic revenue capture has the potential to turn the pharmacy into a growth leader, rather than a laggard, re-shaping the practice management landscape in the process.
To test this claim, we gathered and analyzed data from four practices. In early 2020, these practices deployed inventory automation (aka ‘Smart Cabinets’ or ‘Automated Dispensing Cabinets’ / ADCs). Following a 60-90 day onboarding period for the automation, data was gathered for the remainder of 2020 and compared to the same period of 2019 (before automation
o This group of four practices:
o Range from $6 million – $12 million in revenue for 2020
o Each implemented the CUBEX MiniPlus smart cabinet
o Consist largely of general practice in terms of patient visits
o Automated the dispensing of all controlled substances, as well as selected other medications deemed a ‘high risk’ for missed charges.
The number of practice visits for each period was used as a predictive benchmark for increases or decreases in revenue for SKUs managed by CUBEX, which in turn was compared to all other practice revenue. In the absence of major protocol changes (there weren’t any), the number of patients seen should broadly correlate to the amount of pharmacy revenue collected during each period.
As the veterinary economics landscape becomes increasingly focused on EBITDA, cost-of-goods sold (COGS) is also getting more attention, but often for the wrong reasons. Simply put, COGS measures what percentage of revenue has to be paid to cover costs. While prices paid for drugs and other inventory items does of course impact COGS, in a relatively high- margin business like veterinary health care where the largest cost (labor) is inelastic, top-line revenue is as much (or more) responsible for COGS than the actual prices paid. While of course the EBITDA of practices vary widely, they generally fall between 13-18%, higher than utilities, restaurants, and even biotech pharma. In other words, selling more goods raises EBITDA faster than reducing prices paid, though ideally, you’ll want to do both.
The in-practice pharmacy is a durable, significant factor in practice EBIDTA. Annual & chronic prescriptions like parasiticides and NSAIDs make up most home delivery doses today, leaving the vast majority of medications to be administered in-clinic or dispensed traditionally. The pharmacy is also strategically important; stocking a broad array of therapeutics which can be used immediately is an increasingly important differentiator against disruptors such as Chewy.com, which are combining telemedicine with next-day medication delivery to erode the scope of service enjoyed today by veterinary practices.
While most practice management software systems offer an inventory management module, the uptake and resulting impact of these software-only systems has been mixed. A published case study1 focuses on processing time rather than revenue growth. The absence of any conclusive research on COGS reduction or pharmacy growth over the decade these systems have been available is further evidence that a PIMS system, by itself, has a limited ability to drive EBITDA through revenue improvement.
In contrast, hardware automation with software integration offers several potentially attractive (and now proven) benefits.
o Electronic counts for on-hand items
o Automated replenishment of goods to prevent ‘stock outs’
o Maintaining ‘Goldilocks’ inventory levels (not too big or too small)
o Physical security to prevent shrinkage and waste
o Digital logging of narcotics and other controlled substances for the DEA
o Biometric user identification
And most importantly from a COGS standpoint:
o Automated charge capture for medications, which manufacturers suggest can raise pharmacy revenue
It’s common for veterinary practices to ‘miss charges’ from medications administered to hospitalized patients, or dispensed but never added to the client invoice. While service- group billing codes, electronic medical records, label printers for dispensed medications, and electronic whiteboards such as Smartflow, Instinct and VetRadar all create safeguards against missed charges none of these can physically prevent a patient care-focused technician working with an emergent case from grabbing an injectable from a shelf or lockbox, administering a dose, then forgetting to add it to the record.
The future of the veterinary profession is sure to be more automated than the past. Operators of veterinary practices are charged with maintaining a clear value proposition amidst the increasing ability of next-day delivery, machine learning and other disruptive technologies like third-party telemedicine to encroach on the niche we enjoy.
In order to keep pace with the competition, practice management and ownership should lean into this trend rather than away from it, leveraging automation to maximize the effectiveness of an already scarce labor force. The smart inventory cabinets examined in this study, provide a host of benefits in addition to the financial return:
o Superior patient and staff safety at a time when overworked providers are more at risk than ever
o Regulatory assurance via biometric identification and electronic (automated) record keeping
o Group-wide visibility to key metrics such as inventory on-hand, average inventory turns, and weekly re-orders
o Notification of compliance with your established regulatory standards (regular cycle counts, discrepancy resolution, etc.)
And then of course there is the ROI (Return on Investment)!
o In the past, risk reduction was perceived as a necessary cost o The results of this study clearly shows that risk reduction via inventory automation is exceptionally profitable
o Operators and owners have a fiduciary duty to stakeholders and a professional obligation to employees to make their practices safer and more profitable by using these new tools.
There is no area of the practice that offers as much return on investment as inventory automation. This study provides strong evidence that missed medication charges, particularly for controlled substances, are a rampant problem for veterinary operators, and that an automated ‘smart cabinet’ has the potential to immediately provide a return on four to seven times it’s monthly cost, in addition to the other benefits above.