You heard this adage: “A dollar saved is a dollar earned.” But what if you could save $50,000, $100,000 or more than $300,000 over the life of your next long-term laboratory contract? Great news: You can. If raising prices is your primary approach to drive revenue and profits, the time has come to look at your veterinary practice’s cost of goods sold and use your leverage to potentially save tens of thousands of dollars — or more — on lab services.
As companion animal hospitals focused on wellness care over the past 20 years, the laboratory became a significant part of revenue growth. Gone are the days when you had to explain to clients why you recommended a senior profile. Today, clients are often surprised if you don’t order bloodwork during an annual exam. Equipment sellers and reference labs understand this reality very well. The lab is big business.
The Old Days
At one time, lab contracts were straightforward. You signed a five-year agreement with an equipment seller or service provider and received cash upfront, points or coupons roughly equal to one year’s annual spend. The required yearly minimum spend was based on your prior year’s usage, so as long as you did the same amount of lab work or more, everyone was happy. If you were lucky, you would get a guarantee that prices would not increase more than 8% a year. Ah, the good old days.
Over the past several years, some lab providers have increased their prices at rates higher than overall inflation. And as standards of care improved, lab profiles included additional and costlier tests. As a result, you might have struggled with setting appropriate prices as vendors raised theirs, leading to lower profit margins for you.
Today
Most lab contracts range from five to more than seven years. I also see big swings in upfront incentives and huge variances in supplier prices. The better contracts have rebate structures to account for growth, an annual limit on price increases and free tests for team members’ pets. Some of the differences lie in the size of the clinics and each one’s purchasing power.
Unfortunately, many practice owners don’t know what is possible. Let’s change that.
First, let’s understand why lab providers love long-term contracts. For starters, the agreements lock in certain amounts of revenue for the companies over a defined period, which makes their plans for capital investments and staffing easier to forecast and their forward-looking profits much easier to display to investors.
To be clear, I don’t oppose any of that; it’s good business. The equipment suppliers and service providers focus on what is best for them, just as you want what is best for you.
Let’s now shift to negotiating the best lab contract for your practice and the five areas you should focus on.
1. Annual Minimum Spend
This section of the contract is a laboratory company’s holy grail. It locks in a practice’s minimum sales requirement and impacts the clinic’s expected benefits. Generally, historical spending determines the annual minimum. You don’t want to promise more than you can deliver.
If your lab revenue rises and you’re confident the growth will continue, you and the vendor might agree to a higher annual minimum. However, don’t do it unless the contract spells out a significant increase in the benefits you receive.
Here’s an example: A two-doctor practice hired a third veterinarian three months before negotiating a new long-term lab contract. After those three months, the clinic’s monthly reference lab bill jumped from $8,000 to $12,000. The practice was growing fast, the team was on board with lab protocols, and the rise in lab services was sustainable. Raising the annual minimum under the newly signed contract gave the practice $60,000 worth of additional coupons toward future lab invoices.
2. Upfront Incentives
The upfront incentive can include equipment, cash or coupons (points). Vendors often start by providing their equipment free of charge, which isn’t bad if you need it and will use it. Unfortunately, some practice owners accept an ultrasound machine or chemistry analyzer and rarely use it. They think, “It’s free, so I should get it, and maybe I’ll use it.” No, you won’t. If you don’t need the free equipment, ask for cash, coupons or points instead.
How much upfront incentive should a contract specify? The answer depends on other factors. Some practices might get a mountain of money at the start but pay more for particular tests. The answer also depends on the contract’s length. The longer you are willing to guarantee revenue for the lab company, the more benefits the vendor will share with you. In many cases, a five-year contract can garner 100% of the annual minimum purchase requirement. A six-year contract might deliver 120%, and a seven-year agreement could award 140%.
3. Special Pricing
All lab contracts include a list of special-priced reference tests. The key for you is to ensure the agreement shows the four to eight tests you do most commonly and that each price is reasonable.
Here are two other thoughts regarding special pricing:
- Get your DVMs to agree on which tests constitute a senior profile. Labs offer many senior profile options, so the cost can vary depending on the test package.
- Confirm with your doctors that the tests in each profile you run are appropriate. I’m not suggesting medicine by number, but if you can streamline the tests you run, the contract negotiations will be easier.
Another example: A four-doctor practice sent all fecal tests to the contracted reference lab. By negotiating a $5 price reduction, the hospital saved $30,000 a year on that one test.
4. Rebate Structure
A rebate structure is vital to a growing practice. While historical spending helps determine the upfront incentive, the rebate structure rewards you for higher spending and ensures that significant savings don’t slip through your fingers.
The top tier of the rebate structure needs to be high enough so that everything has to go just right to achieve it. You don’t want a rebate structure that caps out at monthly spending of $10,000, but you’re paying $15,000 a month in year four of a seven-year contract. Remember that the more upfront incentives you receive, the lower the percentage on the rebate schedule.
A final example: A large practice with annual spending of $250,000 before signing a six-year lab contract might receive $50,000 in rebates each year, assuming continued growth.
5. Limits on Price Increases
Don’t sign a long-term contract that’s missing a yearly price cap. I’ve seen proposals with no annual limit on vendor price hikes and others that called for an 8% ceiling. Both of those are unacceptable. Before pandemic-era inflation, I typically saw limits of 3% to 4%. Today’s standard is 5% to 6%.
Remember that negotiating long-term contracts is a critical responsibility when you run a business. When you do it well, you profit.
FINAL TIP
Ask your lab vendor for a discount on all tests not included on the special pricing list. The additional cuts protect your practice should new standards of care change the tests you recommend. The best discount I’ve seen is 65%.