Establishing fees as different as individual practitioners

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May 01, 2004

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.

Answers difficultThe 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.

Long-term success strategyThe long-term success of your practice relies on two fundamental business concepts.

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.

Changes erode profitWhile 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.

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.

Hospitalization hemorrhageOne 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!

Levels of careLarge 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.

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.

Simple, reallyProperly 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.