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Establishing fees as different as individual practitioners
What can we say about fees and fee structure that hasn't already been said?
What can we say about fees and fee structure that hasn't already been said?
Yet, day after day and year after year many practice owners and practice managers continue to struggle with fee-related issues. How often should I raise fees? How much should I raise fees? What is the proper formula for deriving fees? How and when should I shop fees? What is the best way to structure fees? Should I match the latest local or national fee survey? How much profit do I need, or should I make?
If you are reading this article, I will assume you have asked yourself most, if not all, of these questions at one time or another. However, I can tell you that after working with almost 400 veterinary practices, there is not a single correct answer to any of these questions.
The answers are different because veterinarians are different. One size does not fit all, so there is not a single correct answer for the number of ways a practice can approach establishing and maintaining fees.
How many hours do you want to work each week? What is your personal compensation target? How much profit would you like to have for reinvestment into the practice? Is your personal philosophy to be part of a high-touch, low-volume practice that caters to A clients, or would you rather be a low-touch, high-volume practice that caters to C clients? Maybe you have trouble with those extremes so you want to be all things to all clients?
Fee structure is also influenced by other factors such as where your practice is located on the business life cycle.
Is it a start-up, in a growth phase, a mature plateau or a state of decline? What about the impact of competition (yes, veterinary medicine is influenced by basic supply-and-demand theory). Perhaps the most vivid example of the impact of supply and demand is what we are seeing with emergency practices. Many emergency practices were guaranteed success by being the first to open in their market. Some practices had a lock on market share for five, 10 or 15 years, but now they have competition. Failure to respond to competition has caused many practices to experience an erosion of both market share and profitability.
If you have not asked and answered the questions in the paragraph above, odds are you do not have a fee structure that is compatible with your needs and philosophies and therefore, you are probably not happy with the business results you are getting. If you are getting results that make you happy despite a lack of conscious planning, consider yourself lucky. Unfortunately, relying on luck is rarely a successful long-term business strategy.
The long-term success of your practice relies on two fundamental business concepts.
Long-term success strategy
First, you must understand that your practice's most valuable asset is the professional expertise of its staff.
Second, veterinary medicine is a business and as such, requires planning to become successful and remain successful.
Veterinarians are notorious for undervaluing their professional expertise! I first noticed this when I saw veterinarians charging for vaccines without itemizing the physical examination they performed. It continues to this day as veterinarians continue to price their physical exams as loss leaders. These fundamental decisions made years ago, are having a devastating impact on practices today.
It was Dr. Tom Catanzaro who I first heard articulate the concept that "in a small animal general practice, 30 percent of the work is performed in the exam rooms, yet this accounts for 70 percent of the practice's profit. Conversely, 70 percent of the work is performed behind the exam rooms and only accounts for 30 percent of profits."
I would agree with his observation because many practices do not properly establish fees for the labor-intensive procedures in the treatment room and beyond. Some veterinarians may do this subconsciously as they enjoy the intellectual stimulation of these procedures and therefore, do not want to make them what they perceive as cost prohibitive to their clients.
While not very sound from a business standpoint, this model did work for the last several decades. Unfortunately, changes in the industry are eroding the fat profits we used to enjoy from the exam rooms. Vaccines are moving from one to three years, Internet drug suppliers have appeared, some people are heartworm testing every other year and rumors abound about heartworm preventatives and flea and tick products moving to over-the-counter status.
Changes erode profit
There are precedents in human medicine to remove the entire pharmacy from the practice to prevent a conflict of interest.
In optometry, physicians must write a prescription for your vision correction after they perform an eye exam, so it is possible that some day the feds may require you to write a prescription for heartworm preventative after you complete a heartworm test. Then the client could buy the preventative from you, or stop by Wal-Mart on the way home.
Thus, many doctors who feel they are "doing the right thing" by moving vaccines out to three years are experiencing a decrease in reminder response rates and the number of office visits because they spent decades training their clients to come in for a vaccine, instead of a vaccine and an annual physical examination. Precious time in the exam room is now being spent educating clients on these changes instead of discussing life stage wellness programs and other procedures that could be performed. Therefore, valuable exam room profits are eroding and practices will be in trouble if they do not fairly charge for their time spent in the back of the hospital.
One example of improper backroom fees that hemorrhage profits is hospitalization.
Many practices still charge a single flat rate for hospitalization, or have several fees based on the weight of the pet.
In my mind, hospitalization has three separate and distinct components.
The first is basic hospitalization which is similar to boarding. It is providing the pet a place to stay, food, water and "routine" cleaning.
The second component is the doctor's professional time to manage the hospitalized patient. This includes a daily physical, preparing a treatment plan, rounding with other staff members and client communication. A case that requires a lot of medical oversight, or a family who requires a lot of communication consumes larger amounts of professional time and should be charged accordingly.
The same concept holds true for the amount of nursing care provided for that patient.
Specific treatments the technicians perform, such as catheterization and fluids administration, are itemized separately, but what about all those other things the technician may have to do? If a patient requires one technician to restrain the pet while another treats it, this expense needs to be passed along to the client. Those pets that require extra attention such as hand feeding or additional cleaning consume more technician time. The cost of a technician cleaning up projectile diarrhea from a parvo dog must be passed along to the client!
Large specialty practices may have as many as 12 or 15 levels of daily professional care or daily nursing care, but the average general practice does quite well with just three or four levels. Every hospitalized patient should receive three itemized charges; one for hospitalization, one for daily professional care and one for daily nursing care. A simple three level system may define level one as not on fluids, level two may be an "average" patient on fluids and level three would indicate a high maintenance client or patient.
Levels of care
It is not unusual under this type of system to see the various levels of care change throughout the patient's stay.
For example, a hit-by-car that is hospitalized for five days may have two days at level three, two days at level two and the final day at level one. Thus, the cost of care decreases as the patient's needs decrease because its condition has improved.
This type of system places emphasis on the expertise of the doctors and staff and charges clients fairly based on the individual needs of the case. The "one size fits all" method is no longer viable.
Properly developing fees for these types of labor-intensive procedures is simpler than you might imagine.
My favorite method uses the concepts of hard and soft labor (sometimes referred to as direct and indirect labor).
Hard labor is the time spent performing a task that supports customer service or patient care. Hard labor can include client communication, handling the record, preparing medications, administering medications, recording the treatment and cleaning up the work area after the procedure has been completed.
Soft labor includes all of the time spent in the support and development of the staff that does not include client service or patient care. Soft labor includes such items as staff selection, staff training, performance appraisal, continuing education and staff meetings.
In veterinary medicine, the time spent performing hard labor is supported by an equal amount of soft labor. In other words, they are said to exist in a 1:1 ratio.
For example, if a technician takes three minutes to read a record, obtain a syringe full of saline, flush a catheter, discard the syringe and make a notation in the record; there is an assumption that three minutes of soft labor time must be accounted for as well. The calculation would look like:
- minutes hard labor + 3 minutes soft labor = 6 minutes total labor; 6 minutes of labor = 11/410 hour
If the technician is paid $10/hour the labor cost equals $1 (11/410 x $10).
If staff labor is budgeted at 20 percent of revenue, then the revenue generated should equal:
$1 divided by .20 = $5
Therefore, the proper fee for the three minutes the technician spends flushing a catheter is $5.
A small bump in technician wages from $10 to $12 per hour results in a bump from $5 to $6 for this simple three-minute procedure. Once you have performed this calculation based on the average rate of pay for your technical staff, you can rebuild your fee schedule knowing what fee you need to set per minute of procedure time ($2 per minute in the above example). If two technicians are required to complete a task (one performing restraint) the proper charge becomes $4 per minute.
The same calculations can be done for doctor time as well.
Doctors the same
If a doctor wants to work a 40-hour week and be compensated at $65,000 per year, his or her hard labor needs to be billed out at approximately $5.20 per minute. When was the last time you charged a client $52 for a 10-minute progress report phone call on a hospitalized patient?
If you are at a general practice and your clients get sticker shock at the emergency or specialty practice, it is because those practices do not have all of the front end fat to subsidize their back room procedures, so they must charge properly or go out of business. Likewise, if you work at a specialty or emergency practice and you are not as profitable as you would like to be, could it be because the person establishing your fees is using a general practice frame of reference?
Veterinary medicine is not the first industry to undergo this type of transition.
Not 'a first'
Just as our clients are veterinary industry consumers, we are automotive industry consumers. Twenty years ago you went to the car dealer to buy a new car and went to the gas station for all of your service needs. A typical car dealership generates 75 percent of its net profit from new car sales, 15 percent from the service department and 10 percent from its parts department. Today, gas stations are convenience stores; you go to them for milk and lottery tickets. You go to Jiffy Lube if you need an oil change, you go to Pep Boys for new tires, and you go to Midas for mufflers. You can still go to the car dealership to buy a new car (or you may even buy one online), but thanks to Consumer Reports and the American Automobile Association pricing guides, you barely pay a dollar over dealer costs. Thus, car dealerships now net only 5 to 10 percent of their profits from new car sales and the same 10 percent from their parts department, but their service department now accounts for a whopping 80 to 85 percent of net profits!
Why? Because they have learned to place value on their professional expertise.
The technology that has made it possible for modern cars to get more than 40 miles to the gallon and last 100,000 miles between tune-ups has also made it impossible for the local garage to stay up-to-date with their sophisticated technology. When your car hiccups, you need to take it to the dealership for the 15-minute $100 computer diagnostic in order to find out what the problem is. They know it, so they charge for it! Does anyone have an issue with an automotive technician who has a two-year college degree charging $100 for a 15-minute computer diagnostic, while a veterinarian with an eight-year degree charges $38 for a 20-minute physical exam/office visit? Could the future of veterinary medicine be letting go of vaccines and the pharmacy and charging $100 for diagnostic expertise?
Veterinarians, like all business owners, need to plan.
Need to plan
The easiest tool for facilitating planning is the development of a strategic operating budget.
The strategic component of the budget is the key. Revenue projections are made based on medical policies and compliance.
Once the practice strategies for the upcoming year have been identified, the budget becomes a monthly scorecard for making sure the desired results are achieved.
Reviewing the fees for the practice and helping to set them at the proper level is one of the many management tasks the budget helps you through. With a budget in place, you can benchmark each month's results and adjust your strategic plans as needed.
Without a budget, many practices fly blind and rely on luck to make sure they can meet payroll in the winter or have the cash to handle delayed billings in the summer or fall. Using a budget will help you answer many of the fee questions practices struggle with daily.