A recent Veterinary Hospital Managers Association survey revealed:
- 12% of the responding practices will not increase their fees in 2021.
- 16% will increase fees on non-shopped services only.
- 64% will increase fees on both shopped and non-shopped services.
I found the results a little surprising. Your fee schedule is the lifeblood of your practice. Your profit will be affected if you do not adjust your fee schedule when the cost of doing business goes up — think rent increases, higher utility costs and employee pay raises.
The Consumer Price Index for All Urban Consumers (CPI-U) is an economic indicator used by many experts to determine U.S. inflation. For December 2020, the CPI-U showed a 1.4% increase over the previous 12 months. Raising your fees by the cost-of-living percentage allows you to keep pace, but most veterinary practices increase their fees by at least double the CPI-U. Not raising your fees annually or every six months is not a sound business decision.
Before you go into your computer and implement a percentage increase, let’s talk about how fees should be determined. You need to:
- Review your shopped fees.
- Review your in-hospital fees.
Shopped Fees
Shopped fees are what clients discover by calling around. In small animal practices, these would be fees for vaccinations, wellness exams, spays and neuters, etc. In large animal practices, these might be trip charges, vaccinations, palpations and dewormings.
The school of thought on shopped fees is to have someone at your clinic call other practices in the area, determine what they charge and price your fees somewhere within that range. If you do this, be aware that it’s legal. It would be illegal if we all decided to set our fees at a specific amount. That’s price fixing. Calling other practices is not illegal.
You also need to consider the niche market of the practices you call. If you are a “Marriott” practice, don’t price-shop a “Motel 6” practice. Contact practices that serve the same niche as you; otherwise, you are setting your shopped fees based on irrelevant information.
Rather than call around, some practices prefer to set fees according to what they feel their services are worth. If your fees are higher than what nearby niche clinics charge, your team members need to do a great job of educating clients about the value of your services.
In-Hospital Fees
A better methodology exists for in-hospital fees. These should be based on:
- Overhead costs per minute.
- Direct costs (inventory costs).
- Return on time to the veterinarian.
Let’s go over them one by one.
1. Overhead Costs Per Minute
It’s not complicated. To determine your overhead costs per minute, first take all the expenses listed on your year-end income statement and subtract the inventory costs. Next, subtract from that amount the compensation paid to all the doctors in your practice, including owners and associates, along with any related costs attributable to those doctors, such as dues, license fees, continuing education, health insurance and the like. Once you have done this, take the resulting number and divide it by the total number of hours for which doctors were scheduled to provide professional services during the same period. Lastly, divide the resulting number by 60. You then have your practice’s overhead costs per minute.
That number might be the most important one you ever calculate in your practice. The normal overhead cost per minute per DVM runs from $3 to $4. If what you compute is too much more or less, recheck your numbers.
Suppose your practice’s overhead cost per minute per DVM is $3 a minute. It means that just to break even, your doctors must generate $3 a minute for every minute they are scheduled to provide professional services.
2. Direct Costs
The next part of the formula requires you to add in your direct, or inventory, costs. The formula further requires that you double those costs. The reason is something known as the costs of ordering. When we order inventory, we pay someone to place the order. When the order comes in, you pay someone to unpack the shipment, place the goods on the shelf, enter it into the computer and pay the bill. These are known as the costs of ordering. If we add only the cost of the inventory item, we affect the profitability, so most practices double the cost of the inventory item to offset the costs of ordering.
3. Return on Time to the Veterinarian
Of course, we need to pay our veterinarians, and so far, we have covered only overhead and inventory costs. Most professionals are reimbursed for their time. Think about a lawyer, accountant or dentist. Naturally, they charge for their time and expertise. The same applies to veterinary medicine.
The following figures are based on the 2019 Well-Managed Practice Benchmarks Study regarding what veterinarians should charge for their time.
- In-hospital procedures: $5 to $6 a minute.
- Soft tissue and general surgery (skin to skin): $8 to $9 a minute.
- Orthopedic and specialized surgical procedures (skin to skin): $9 to $10 a minute.
Because the study is from 2019, I suggest that you increase all the numbers by at least $1 to $3.
Do the Math
Now, let’s put everything together. Suppose we need to determine the client charge for an IV catheter. The first question is, how much time is needed to place the catheter? The answer will vary, but let’s say the procedure takes six minutes. If your overhead costs are $3 a minute, then six times $3 is $18. We then need to add the inventory costs: IV catheter, tape, injection and cap. Once again, these vary depending on the catheter and technique, but let’s say the costs are $6.50. You double that amount (due to the cost of ordering) and get $13.
Next is the return on time to the veterinarian. Well, does the veterinarian place the catheter? The answer would be no in most practices, so there would not be any return on time to the doctor to add to the equation. Now, we have $18 in overhead costs and $13 in direct costs for a total of $31.
What would happen if you charged $31? You would break even on the service. But you’re not in business to break even. Therefore, you take the baseline fee and double it, making the charge for the IV catheter $62. In doubling it, you now allow for profit so that you can give employee raises, purchase new equipment, remodel your clinic and fund fringe benefits. You certainly can raise or lower the markup on the baseline fee, but the industry average is a 100% markup.
When there is a return on time to the veterinarian in a service such as radiography, you still need to determine the overhead costs per minute. So, let’s say with a digital X-ray machine that 10 minutes are needed to position the patient and verify two views. At $4 a minute, that would be $40. No direct costs are involved unless the machine is new and you wish to amortize it. Now, double the $40, giving you $80 (and some profit). Then, add the return on time to the
veterinarian. If reading two radiographs takes five minutes and if we use the industry average of $6 a minute for in-hospital procedures, that is $30. You get $110 by adding $30 to $80. That’s the minimum fee you should charge for two radiographs.
In-hospital fees do not need to be a mystery. They should be based on your costs of providing services. I am amazed that when I calculate fees for my consulting practices and show the methodology, a veil of secrecy is seemingly lifted. The doctors and team members now know why the fees are priced that way. The team becomes much more comfortable in explaining fees to clients, and the doctors are more comfortable in charging for their services.
How to Explain Fee Hikes
Many practices have asked me how they should inform team members and clients about fee increases. The answer is fairly simple. The team needs to know about fee increases before they happen. Nothing is more frustrating to a team member than to be caught unaware that fees increased. You can explain to your employees that the cost of doing business went up and that the fee schedule needs to keep pace. If necessary, you can show your team the increased cost of living — Google it — or share year-over-year utility bills.
With regard to clients, the answer is easier: Don’t say anything. Just raise your fees. When was the last time you walked into a business and saw a sign reading, “We increased our fees”? Never.
If a client asks, the response should be, “We have updated our fees to offset the increase in our expenses. This allows us to continue to provide the quality of care you and your pet deserve.”
Most veterinary practices are surprised to find that clients do not react to fee increases. Practice owners and team members seem to be more sensitive to price hikes than clients are.
AS EASY AS 1, 2, 3
Asked how much they would raise shopped fees in 2021, just over a third of clinics participating in a Veterinary Hospital Managers Association survey answered “3%.” One in four of the respondents planned a 5% price hike, while about one in 10 anticipated an increase of 6% or more.