Is it the economy, or are your fees holding you back?

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Feb 01, 2009

It's human nature to have biases — preconceived notions — that shade our daily experiences. Two people looking at a picture of a man whose expression is neutral can differ widely in their perceptions of him. One may call him thoughtful while the other believes he is sad.

How we perceive our practice situation is no different. Our attitudes affect and alter everything we do.

My full-time job is writing a management newsletter. Unless something stands out as unusual enough to require a more detailed analysis, I don't see many individual statistics. The subscriptions are updated in the bookkeeping office and then set to demographics where the digital details are engineered to unearth factors correlating to income production.

The most valuable details are current population and five-year projections of growth, and differences in household income within various radii of the practice's front door.

We study the average income of the majority as well as the top 15 percent of earners. Other factors analyzed are the dollars per capita spent on pet care, and dining out as a measure of discretionary income.

The computers are programmed to sort all this out to come up with an average transaction fee, which is the minimum that practices should be attaining with these neighbors in that town at this time. Then this average transaction fee is transformed into 29 pages of fees and estimates, based on perception of value studies, which, over 23 years of constant application, have consistently produced very successful demographically correct fees for hospitals.

The only time I see personal details are when some necessary information does not make sense. Sadly, that is about 25 percent of the time.

Determining appropriate fees

Our clients are asked for their current examination fee and their hospital average transaction simply because we want the fee schedule we produce to be implemented without shocking the system. Too often the hospital owner has increased the office visit alone without contemporary increases in all the other fees. Fees that are too low for a demographic area can be increased as much as 15 percent when done correctly, but the result can be disastrous if done disproportionately.

Clients know when fees are out of whack. You can charge up to 60 percent of your examination fee for an intestinal-parasite screen (without Giardia test), but only if your examination fee is close to 65 percent of the average family income (divided by 1,000.)

If you have a $60,000 average family income in your drawing area, then $39.60 would be perfectly acceptable as an examination fee and $23.80 for an intestinal-parasite screen.

If, however, you are charging an inappropriately lower exam fee, then $23.80 would be much less accepted by clients.

Imagine seeing a restaurant menu where a steakburger costs $7.95 and a tuna melt $9.95.

For years we have shown that most clients have a sense of proportion, so we prepared successful fee schedules based on their expectations. Meeting expectations lowers client complaints.

An examination fee that is too low is just as disastrous as one too high. Any perception of bait-and-switch only alienates clients and gets you a bad reputation. The exam fee that is too high creates expectations that you may or may not be able to meet. Clients may consider you a specialist, and then even a normal result may disappoint them.

Never make the strategic error of charging the same as neighboring hospitals. Unless you have an identical facility with an identical overhead, trouble looms. How much mismanagement will you be adopting when you choose to copy fees?

Three alternatives

Whenever you consider fees, there are three options:

  • Option 1 is the default — usually an uninformed guess based on the fees of the practice where you started. You left that practice because you did not like some aspect of its management, yet you seem willing to adopt its fee judgments.
  • Option 2 is a fee-management system such as "Fair Fees™" or its cousin, "Profit Solver,™" which computes a fee based on actual costs of every step in the service process with an owner-specified profit added in. The problem here is that simpler eye procedures that would be accepted at $400 might be priced at $200, and the practice loses while complex procedures can be astronomically priced and the client refuses the service and goes elsewhere.
  • Option 3 is perception-of-value pricing, where an injection in a neighborhood with a $90,000 average family income computes to $43.40, while that same injection in a $60,000 neighborhood will be $30.10.

Each of the two injection fees is appropriate for the demographics of their neighborhood but a disaster if the wrong fee is used for the wrong neighborhood. The formula here is 0.41 x average family income plus $4 for pets up to 40 pounds of weight.

The formulas for hundreds of fees have been computer-determined, and are in proportion to each other. Thus, raising fees is a simple matter of increasing all fees by a specific percent relative to inflation, rather than cherry-picking individual fees and throwing out all of the client perception of value proportionality.

Keeping fees in proportion

Who crafted your fee schedule? Studies tell us the average client in any given area earns 54 percent more than his or her veterinarian. That means the client thinks differently about fees than you. Just as a routine spay is viewed by clients as a life-threatening abdominal surgery, your definition of "just-right fees" is different from theirs, and it is this difference that has held veterinary salaries down for generations.

This information was generated by a client who told us that his office-visit fee was $36 and that his hospital's average transaction fee (HATF) was $80.80. Researching his demographics indicated his HATF should be $102.34, but his examination fee only $34.20. That means that he has lost competitiveness by being lower than colleagues and lost dollars by having the rest of his fees out of proportion. How much is he losing? $102.34, less his current $80.80, is $21.54 per transaction. The average veterinarian has 5,000 transactions, so the loss per veterinarian in that practice is around $107,000. Because profits come from last dollars, not first dollars, and last dollars are 80 percent profit, his take-home suffered by $86,000. Am I coming through loud and clear?

Your hospital's average transaction fee is properly determined by dividing a monthly gross by the total of all transactions (not just doctor transactions.) HATF should be a minimum of three times the examination fee and not a penny less. A doctor-only average transaction fee (DATF) should be 4.3 to 4.5 times the examination fee.

Note well that an associate whose DATF is $10 less than the owner costs the practice $37,500 per year.

Any practice that does not meet these basic requirements has a management incongruity that needs fixing before being overcome by our failing economy. Do not drag 2008 problems into the more severely depressed 2009-2012 economy.

Dr. Snyder, a practice consultant, publishes Veterinary Productivity, a newsletter for practice productivity. He can be reached at 112 Harmon Cove Towers Secaucus, NJ 07094; (800) 292-7995;
; fax: (866) 908-6986.