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Design a Better Fee Schedule

Cynthia R. Wutchiett, CPA
Wutchiett & Associates, Inc.
2929 Kenny Road, Suite 215, Columbus, Ohio 43221-2415
Phone (614) 457-8444

Drs. Jeff Allen and Shirley Wells of Best Care Animal Hospital located in a stable, historic southern community wanted to improve their profitability, build market share, enhance their staff's efficiency and contribution to practice revenue, and develop a long-term exit strategy for their practice. To achieve their goal of improving profitability, we began by analyzing their revenue and expense components to determine which areas needed to change.

We analyzed their overall fee structure and found it didn't accurately reflect the level of patient care and client service they provide. One indication their fee structure was not in line was their average charge per doctor transaction. In Well-Managed Practices� the average doctor transaction typically ranges between 3 and 3.4 times the exam fee. Best Care Animal Hospital's exam fee was appropriately priced for their community's economics at $35, so their desired transaction fee was $105 to $119; it averaged $93.

Rather than increase fees by a set percent across the board, we selectively raised fees using the following pricing strategies most commonly employed in Well-Managed Practices�:

Competitive pricing

Use this strategy only for products and services that clients price-shop, such as vaccinations. The goal is to keep your prices at a level that is near or slightly above your competitions'. To be competitive, your price must be visible. So, in the case of vaccinations, be sure to separate your examination and vaccination fees. This also provides the opportunity to highlight the value of the exam. Once the consumer becomes a client, the practice can differentiate itself with high-touch, high-level care and strong client education programs to keep the client returning for other services.

Best Care Animal Hospital had already separated their exam and vaccination fees, but charged $29 for an exam when vaccinations were given rather than the full comprehensive exam fee of $35. Ideally, there is no difference in price for an exam when vaccinations are given - you provide the same comprehensive exam and shouldn't discount your time and knowledge. We decided to increase the exam when vaccinations are given to $31, with the ultimate goal of charging $35 in 12 to 18 months.

Based on the results of a community fee survey, Best Care Animal Hospital's vaccinations were competitively priced for the community. Therefore, we decided to maintain vaccination fees at their current levels.

Value-based pricing

The pricing of value based services depends, to a great extent, on your clients' perception of their value. In pricing these services, recognize that there are tangible and intangible benefits your clients' value other than price and set your fees accordingly. This can include specialized medical knowledge, friendly and helpful staff, the ability to talk with clients in a language they understand, and arriving for an emergency call with a smile on your face! Value-based services include most laboratory, radiology, hospitalization, and non-elective surgeries. Your fees for value-based services can be higher than any other practice in your community as long as your clients believe they are getting value for what they are paying. If the price is greater than the value, there will be no sale. Every practice should have a plan for continually increasing their clients' perception of value-it will allow you to raise your fees without a direct regard for the competition.

Setting fees for value-based services may require some trial and error. An alternative is to learn from the experience of Well-Managed Practices� by using published fee studies to see what these practices are charging. One source is the 2000 Well-Managed Practice� Study of Companion Animal Practices compiled by Wutchiett & Associates, Inc. and Veterinary Economics. Use your exam fee as your base line and look at the relationship between the exam fee and all other value-based services.

Using the Well-Managed Practice� Fee Study, we determined that Best Care's fees for laboratory, diagnostic services and imaging, hospitalization and treatments, anesthesia, non-elective surgeries, and dentistry were significantly lower than expected. Best Care Animal Hospital increased these value-based fees to be in line with their $35 exam fee.

Cost-based pricing

This strategy adds a profit or markup to the cost of a product or service to determine its selling price. It is used primarily for pharmacy sales. Be sure to include a dispensing fee as part of your pricing equation. Well-Managed Practices� most commonly use this pricing strategy for inventory. In companion animal practices, an average markup of 125% to 150% is added to the cost of medicine along with a dispensing fee of $2 to $5. Drugs with low turnover rates (less than 8 to 10 times per year) typically have a 200% to 250% markup to cover the additional carrying cost. The total price is then compared to a minimum prescription fee, and the client is billed the higher of the two. Dispensing and minimum prescription fees will vary depending on community economics.

Best Care Animal Hospital's standard markup on medication dispensed had not changed for several years and averaged 100%. They increased it to 135% and also raised their minimum prescription fee and dispensing fee.

Variable pricing

Use variable pricing to influence your clients' behavior to facilitate patient care or your practice's operating efficiency. Variable pricing is accomplished by charging a different fee for the same service based on who receives the service (class discounts); when the service is offered (peak hours); where the service is offered (in-hospital or house call), or, how the service is offered (bundled as part of a health care plan).

Best Care Animal Hospital is considering offering a senior citizen discount one day a week to fill appointment times that are currently low in demand. The final decision will be made once the other fee changes have been implemented.

The key to determining price is understanding the value your clients place on the services you offer. To be compensated for your time, knowledge and experience, you must:

Set fees appropriately

Know your costs, understand your client's needs and perceptions, be aware of your competition's pricing, and add client-perceived value.

Charge for all medical services

Your clients' perception of value is affected by price. Giving away a medical service sends the message it has no value. You may not be eager to provide medical services you get nothing for, and giving away services is very costly to your practice.

Value your time

Allow employees to assume responsibility, manage less than 6 hours per week, and value your family as you value your clients.

Most doctors still undercharge for their services, under-value their time, and struggle with low profits. Increasing fees by an overall average of 10% typically increases the bottom line profit by 25% to 30%. Adding a 10% reduction in expenses as well typically increases the profit by 40% to 45%.

Owners of Well-Managed Practices� recognize that the right pricing strategies are only part of the fee issue. You can spend days or weeks creating the perfect fee structure, but unless you bill your clients for all services provided your efforts are wasted.

In many practices overlooked charges include medical progress exams, skin scraping, blood collection, pre-anesthetic sedation, induction, monitoring, and in-patient exams and injections. Giving away one inpatient exam ($24) and one medical progress exam ($24) per day for a year amounts to approximately $14,000 in lost revenue. Dr. Neil Patton owner of Rainbow Animal Hospital in Las Vegas, NV prides himself in providing high-level care to their patients and routinely provides medical progress exams. However, until a few months ago, this service was provided free of charge. Dr. Patton decided to stop giving away this service and earned approximately $4,600 in three months, and is on track to increase revenue by $18,000 this year.

Doctors who say that clients don't value their time should first assess their own perception of value. For example, do they value their time by delegating non-doctor responsibilities to staff members? Owners of Well-Managed Practices� spend less than 6 hours a week managing, effectively delegate responsibility to employees and allow them to assume responsibility.

A veterinary practice has three levels of management - decision making, implementation, and the responsibilities associated with implementing management decisions - and five areas of management - financial, client, employee, facilities equipment and technology, and medicine.

Do you allow employees to assume responsibility for implementation and the associated responsibilities? Let's look at the example of inventory management.

An owner's responsibilities include determining which items to inventory, establishing the appropriate pricing formula, accepting and/or rejecting special offers, and consulting with the inventory manager as needed. An implementer (i.e., a technician) is responsible for making purchasing decisions, placing orders, receiving and pricing all supplies, maintaining inventory logs, and meeting sales persons.

If your staff is too busy to assume additional responsibilities and you're concerned you can't afford additional staff, perhaps you can't afford not to hire additional staff. Practices with higher staff-to-doctor ratios typically have higher average doctor transaction fees.

You can be compensated for your time, knowledge, and experience. The choice is yours.

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