Fee strategies to turn over the upsidedown

Is your practice upside down?

For the upside-down practice, the 70:30 vs. 30:70 ratio we discussed in previous columns comes into play. It goes like this:

The outpatient zone generates 70 percent of the revenue and the inpatient zone 30 percent. But 70 percent of the overhead is in the inpatient zone and 30 percent in the outpatient zone.

That's a bad situation. That ratio should be turned around.

To determine if one's practice is upside down, simply do the math:

Add up the fees from the radiology department, patient wards, surgical suite, dental procedures, treatment-room activities, inpatient pharmacy items and nursing fees associated with inpatient care. These should provide about 70 percent of the total income. But what we find is that most mainstream or "traditional" veterinary practices generate only about 30 percent of their income from the inpatient side.

That means outpatient services are subsidizing inpatient fees — a bad situation.

The challenges to the upside-down practice to provide short-and long-term quality medical care are profound.

Surgical specialty practices look to generate 90 percent of their revenue from the inpatient zone because they don't have an income stream from routine outpatient services.

At the other end of the spectrum are the "spay clinics," which do away with most of the accoutrements of a full-service veterinary hospital, thus sharply decreasing fixed expenses. As a result, the spay can be delivered at a lower fee.

The profession's confusion surrounding fees can come to a halt when we understand how to objectively set fees. In the February issue (dvmnews.com), we discussed how to do that using simple algebra. Now let's expand on that.

What are we missing?

Today we have an explosion of niche practices with different overheads and targeted client groups, so a fee schedule that fits all is unrealistic.

The fee-setting templates offered by the major veterinary organizations, the government and banks look at "what is," not "what is missing."

So, what are we missing? Simply put, fees from inpatient services are too low.

Use of space

The floor plan of any good veterinary hospital should devote 70 percent of the space to the outpatient zone. But that is not how space is allocated typically — again, a bad situation.

Additionally, it is my understanding that many architects designing and building veterinary facilities are not looking at the important issue of space utilization and budget planning.

Consumer attitudes matter

Within most business models, there are three basic niches: discount, middle-market and premium.

When a discount business charges big fees, consumer discontent escalates. When a premium business charges big fees, customer expectations rise.

When a discount business underachieves with the delivery of a service or product, consumers tend not to complain that much. They knew in advance that it was "discount."

In the middle-market sector, things are medium-priced for medium-level service and customers have medium expectations, which can be exceeded — a good situation.

Therefore, in setting up a business plan, we must strive to match customer expectations to our fees.

Client-fractured dollars

Consumers do fracture their spending. In the telephone industry they buy a land-line service, a wireless service, long-distance services, cable and satellite services and DSL from yet another provider.

The telecom industry's game plan is to get consumers to roll it all back into one bundle, the "unfractured" dollar.

In veterinary medicine, similar consumer-dollar fracturing is taking place. Discount vaccines, discount spays, a "family veterinarian," the late-night emergency room, and then the specialists for cardiac care, orthopedics, the eyes, internal medicine and oncology.The extremes are startling — from the $65 spay to $3,500 for a TPLO knee.

The overhead is very different among all these niches.

The discount businesses must be very astute when building their business plans, eliminating unneeded overhead items without compromising minimum standards of care.

Specialty practices must consider image an important part of their model and strive to exceed minimum standards.

Middle-market practices must find the middle ground, blending services with necessary fixed overhead to provide a reasonable variety.

Business factors

As a first step in setting fees, create a business plan.

• Select the equipment package needed for the selected niche.

• Select the best location for customer access to the facility, including parking and ingress-egress issues.

• Consider the hours for the public to access the services.

• Plan for staffing and anticipated salaries.

• Set up a budget for fixed costs, variables and veterinary salaries.

• Calculate the break-even point.

• Consider space allocation for inpatient and outpatient zones.

• Finally, determine the fees.

For practices already set up, it's a challenge to accomplish these steps retrospectively, especially if inpatient services account for 30 percent of gross revenues and the target is 70 percent.

Changing the ratio

Two major factors are in play: case work and appropriate inpatient fees.

An important element to consider with the 70:30 ratio is the relative penetration of veterinary-service offerings. Practices often overlook many diagnostic opportunities and case work.

But with price adjustments, increased recognition of complex medical and surgical costs, coupled with an increased delivery of inpatient services, a practice can increase its inpatient revenue.

Unlike the human sector where imaging, CT scan and MRI systems often are overused, veterinarians could improve their skills, especially in diagnostic ultrasound.

Ultrasound is an important addition to a veterinarian's daily diagnostics arsenal because it helps him/her visualize disease conditions early on that will require inpatient services — a good situation.

Over a five-year period, a practice can increase inpatient revenues with the current client base to achieve the desired 30:70 outpatient/inpatient ratio.

To flip the equation from 70:30 to 30:70, this illustration applies:

For a practice grossing $1 million, there would be $700,000 from outpatient services and $300,000 from inpatients.

To turn over the ratio, add $1.3 million from inpatient services. This would take the practice to about $2 million, with $700,000 coming from outpatient services and the rest from inpatient services — the desired 30:70 ratio. This is realistic.

The profession's challenge is that inpatient services and skills are more difficult to learn, require added nursing staff and, with production pay now predominant, it can be difficult to change a practice's culture.

We can use surgery time to identify needed inpatient services.

Add up all elective surgery minutes: spays, neuters and dentals.

Now double that number.

Within that client base will be additional, needed elective surgeries. Procedures can be added, such as anal-gland removal, exploratories, oncology and orthopedics.

Highs and lows

Apractice will have three basic sets of services — those with basic fees, high-profit fees and low-profit fees.

These fees can be calculated using the cost of labor as the variable.

• For basic fees, the formula is cost of labor divided by the desired labor-cost percent (usually 20 percent), so divide the labor cost by 0.20.

• For low-profit fees, it's cost of labor divided by 0.30.

For high-profit fees, divide cost of labor by 0.10.

So with the cost of labor at $10 the fees would be:

Basic fee $10/0.20 = $50

Low-profit $10/0.30 = $33.33

High-profit $10/0.10 = $100

Equipment costs

An adequate investment in equipment is one that generates its own weight in new services within five years.

Specifically, a $20,000 investment in technology equipment would, at the least, generate $20,000 in new revenues.

A new anesthesia-monitoring device costing $5,000 could generate $5 per anesthesia patient.

With 1,000 patients per year at $5 each, that is $5,000 — a good situation.

Production pay

In recent surveys we have found that 100 percent production-pay veterinarians usually will work an extra hour every day to drive up their production.

But they will not spend that hour learning a new skill.

This challenges the 70:30 model, because new skills are needed to turn the 70:30 practice into the 30:70 practice.

Success hint

Offer compensation packages that encourage teamwork, and the development of inpatient skills will thrive.

Steps to turn over the upside-down practice

• Assess the 70:30 vs. 30:70 ratio.

• Leave outpatient fees alone for three years.

• Set up a three-year plan to get inpatient fees adjusted.

• Set up a three-year plan to expand inpatient services.

• Eliminate unneeded services and overhead.

• Consider "realistic" equipment costs and income before purchase.

• Plan for and hire additional support staff for the expanded inpatient services.

• Identify 10 low-profit services and upgrade them to basic fees.

• Identify 10 services that could be high-profit and every three months for the next 30 months upgrade at least one service.

• Consider compensation packages that encourage development of new skills.

• Track the numbers to monitor as described in this column in January.

• Review the "quicksand fees" we described in February and their potential harm.

• Set up the business plan and determine your fees. Or, decide the type of practice, then do the calculations to charge appropriately.

• Get ready for happier days as practice becomes more emotionally rewarding, the staff is content and the cash crunch forgotten.

(For past columns, log on to dvmnews.com.)

Dr. Riegger, dipl. ABVP, is the chief medical officer at Northwest Animal Clinic Hospital and Specialty Practice. Contact him by telephone or fax (505) 898-0407, Riegger@aol.com or www.northwestanimalclinic.com. Find him on AVMA's NOAH as the practice management moderator. Order his books "Management for Results" and "More Management for Results" by calling (505) 898-1491.