Fee strategies to turn over the upsidedown

Fee strategies to turn over the upsidedown

Apr 01, 2008

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 ( http://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.