Fee setting: Product pricing is a balancing act

Are you looking at the right things when it comes to setting fees?
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Jan 01, 2010

In the past 10 years, the veterinary profession has worked hard to be proactive. In response to the KPMG study that found we were the poorest profession, the National Commission on Veterinary Economic Issues was formed to educate practice owners and employees.

Then came the AAHA compliance study that showed how much better we could do in communication. Interviews showed a gap between clients' desire for clear recommendations and veterinarians who thought they wanted less information.

Industry factors such as huge student debt, were increasingly recognized as a requirement to raise fees. Rapidly increasing compensation packages added to the pressure to do a better job of managing fees. Advances in technology added yet another ingredient to the recipe for profit degradation and cause for top-line adjustments.

Microeconomics

It is clear that successful practice economics is driven by sensible revenue management. Fees are the lifeblood of any professional service. Proactive, sound, equitable reasons for prices benefit not only individual practitioners but also the profession as a whole. If practice fees are too low, the hospital director cannot maintain a profit margin adequate to sustain a standard of living for owners and employees. Financial pressures can compromise a code of professional ethics or even state practice statutes. Inadequate fees hinder the hiring and training of competent staff. If fees are too high, or are perceived as too high, clients may feel that charges do not reflect the value of services received. Client perception of high fees may result from employee miscommunication based on personal beliefs and experience or market constraints.

Macroeconomics

A balance between opposing and shifting demands must be struck. Costs of operation teeter against consumer demand. Fee structure is crucial to maximizing profit, credit management and personal income. Unfortunately, no one-size-fits-all standardization of fees is possible. Too many variables exist in any particular practice situation. Nevertheless, we are all smart enough to adjust to market forces and internal considerations of veterinary care. Improving a fee structure — while never perfecting it — continues to be both possible and attainable.

How fee schedules are built


Figure 1 Common variables that impact fees
Before a practice manager grasps at straws while trying to establish fee-setting protocols obtained from other sources, he or she should have a good insight into the particular practice's history and goals. Some of the most common variables that affect fee setting are in the chart below (Figure 1). Managers will soon learn to identify even more variables that will cause fees to be different in one practice compared to another.

Pricing, bundling, practice culture and philosophy, market pressures, and the effort of team members all play crucial roles in realizing adequate income. Good client communication results in client compliance with recommendations. Individual veterinarian productivity and success in generating revenue directly affects the compensatory arrangement. The collection of fees is the concluding measure of the profit cycle.

The practice manager considers and weighs the foregoing factors proactively to budget expenses and plan for fees charged. The practice's medical philosophy predetermines the type of clients attracted to the practice because of the nature of services and products offered.

Key to pricing individual procedures is intimate knowledge of service sophistication and client demand. Most veterinary practice work is service-oriented, which equates to labor cost. As the level of medicine practiced by a particular clinic increases, so does the cost of labor for an individual patient. As more procedures are added to the invoice, so increases the average transaction fee.

The practice manager reasonably segregates two major areas for pricing. The first is product or inventory sales. The second is fee setting for professional services.