The 5 Ws of veterinary diagnostics contracts

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Content submitted by Moichor, a dvm360^® Strategic Alliance Partner

It’s a process that every veterinary clinic owner is familiar with: signing your diagnostics contract. The company representative has explained the terms and the benefits, and pen in hand, you are ready to sign.

If you take one thing away from this, let it be this: contracts can be complicated, and contract lawyers are experts in their field. Asking a legal expert to review any contract before you sign is a smart decision. If the person asking you to sign the contract has any hesitation or pressures you to sign now, put down the pen.

Learn more about the ins and outs of diagnostic contracts from a diagnostics sales representative.

As someone who sold these contracts, I know they can be dry and boring. This is at odds with veterinarians who are generally the type of people who enjoy diverse challenges and dynamic tasks. As a result, most veterinarians are what we sales reps affectionately call “signers” rather than “readers” — once the representative explains the high notes of the contract, the veterinarian will sign without reading it. Before you scoff, consider for a moment: Did you read every page when you purchased or leased your last vehicle? Did you meticulously analyze the terms and conditions of your new phone or internet service? If you did, good for you! You should genuinely be proud of taking the time to understand the terms you are committing to. For the rest of us, let’s dig a little deeper into the 5 Ws of diagnostics contracts and the most important points to understand.

The ‘Who’ in diagnostics contracts

First up, let’s start with the “who” in diagnostics contract. The general assumption around many contracts is that the business is obligated to fulfill the terms of the contract, and the pen wielder is signing as an authorized agent of the business. If the practice sells, closes, or for any reason cannot fulfill the contract, the business is liable.

Before you make this assumption, look for something called a personal guaranty in the contract. If present, this states that the person signing the contract is responsible for fulfilling the contract and is liable for damages. Many of these contracts are transferable, so someone else can assume the contract and liabilities in case of a practice sale. However, in cases where the practice closes or experiences a marked decrease in business, the signer may find their personal assets such as savings, home, or investments at risk for any default amounts outlined in the contract.

The ‘What’ in diagnostics contracts

This brings us to our second W — the “whats” of a contract. This is the deepest part of any contract, so there’s a lot here: what is the benefit of signing the contract, what is being committed to the diagnostic company, and whatis the liability?

All diagnostic contracts come with a few basic benefits for signing. Most commonly those benefits include lower negotiated prices on testing, free equipment for the practice, “points” or rebates on testing services to be applied towards diagnostic expenses with the company, or even cash up front for the business or business owner to use any way they choose. It’s worth noting that some of these incentives are clearly illegal in the human diagnostics industry for both predatory and anti-competitive reasons.

Along with the benefits of “what,”comes the commitment of what. What is the commitment required in exchange for these promised benefits? Generally, a minimum monthly or annual commitment is required, which means the business must send a certain dollar amount of diagnostics testing to the contracted company. For example, if a business receives heavily discounted pricing on ten tests, a 30% discount on all other tests, and a new radiology system, then in exchange, the business must spend $36,000 annually, or an average of $3,000 a month with that same diagnostics company.

Seems straightforward, right? Sometimes, but alas, frequently not. This particular what can come with layers of complications. For example, if there is an exclusivity clause in the contract, that commitment suddenly becomes $36,000 a year or a certain percentage of the business’s total diagnostic spend, whichever is greater. If the business is spending $10,000 per month on diagnostics testing, that exclusivity clause can make the commitment 90% of $10,000, or $108,000 instead of $36,000.

There can also be a length of agreement complication; if the contract commitment is $36,000 annually for five years, it might seem logical to assume that if the business grows and spends more, the financial commitment will be satisfied once the business has spent $180,000 total ($36,000 annual x5 years). Again, this is not usually the case. The commitment is actually for $36,000 annually and 5 years with no early options once the financial commitment has been met.

Finally, there’s the liability what, as in what happens if the clinic cannot meet all the terms of the contract? This is usually a complicated what that varies dramatically. The clinic may still be obligated to pay the remainder of the promised amount for the term of the contract. In addition, the clinic may also be required to pay back any discounts, rebates, free equipment, and cash incentives. It’s not uncommon for default amounts to reach into the tens of thousands or even hundreds of thousands of dollars. This liability is frequently the most legalese portion of the contract, and although unwinding what would be required in case of default can cause the most savvy veterinarian’s eyes to glaze over, veterinarians should keep in mind that others in their field have been sued over these defaults.

The ‘When’ in diagnostics contracts

We already touched a bit on the “when,” or that contracts run for a specified length of time and are not to be terminated early even when financial obligations have been fulfilled. The not-exciting surprise tucked away in many diagnostic contracts comes in the form of an evergreen clause— many contracts automatically renew as though the signer has put the pen to paper all over again even when this has most certainly not happened. When it comes to these evergreen clauses, there is no ghosting the diagnostics company. The client needs to make the breakup official and tell the diagnostics company it’s over within the specific time frame and communication channel laid out in the contract.

The "Where" in diagnostics contracts

The next W: “where,” is typically a straightforward piece of the contract. Usually, the contract applies to the location named in the contract. There may be some nuances to watch out for, such as what happens if the business opens a second location? Is that included in the existing contract? However, generally the where is designed to ensure that the diagnostics company knows where to go to provide a service or ship replacement equipment.

The "Why" in diagnostics contracts

Finally, we come to the “why” of contracts: Why would a business sign a contract? We touched on this a little bit in the what dive (lower pricing, pricing protection, equipment or cash incentives), but after veterinarians read the fine print of many contracts, the question still stands: with all of the risks, why would anyone put their business on the line and sign a contract?

Most veterinarians know their businesses well enough to recognize if a diagnostics contract represents a risk to their practices. Most contracts complete and many auto-renew with no issues or risk of default. Larger practices with multiple doctors have the most insulation against contract default, while smaller practices carry the most risk. With many practices being smaller, the question still stands: Why sign a contract?

Animal diagnostics contracts going forward

For many years, contracts have been the “industry standard.” It’s been difficult to not sign a contract as most diagnostic companies all but require them to do business. The pricing model for most diagnostics has been to price the tests very high and then negotiate pricing down with a contract.

However, here is where my rebellious heart finds joy. We are starting to see diagnostics contracts practices change in the veterinary space. More diagnostics companies are coming to the table with non-contracted options and pricing that does not require negotiation. Why? Because there is now competition in the market that is pushing change. Where it was once unheard of to have lower negotiated pricing without a contract, there are more veterinarians who have successfully lowered their pricing without signing any paperwork. Companies are starting to offer unique acquisition programs that bring the benefits of contracts without the risks. While the movement is slow and has been largely geographically isolated, contract-free diagnostics is starting to take hold and spread.

How do we know this new type of agreement will become more popular? Consumer demand. We have seen this in many industries before. Think of a time circa the early 2000s when cell phone companies used to only offer high prices, limited use plans, and 2-year contracts. A few companies came along that offered lower prices with no contracts and unlimited use plans, and as consumers started to gravitate towards that, large companies began offering competing programs. Consumer demand changed the cell phone industry quickly, and I suspect that in the next 5 years we will see a similar shift with veterinary diagnostics.

In your next diagnostics negotiation, I recommend being the change you want to see and giving contract-free agreements a try. Diagnostic companies want your business, and they will compete for it. Be clear and direct about what it will take to earn your business. If that means the diagnostic company must drop contract terms to earn your business, there is a high likelihood that they will meet you where you are at.

Happy negotiating!