Affordable care and financial success: you can have both (Proceedings)

For more than a decade, the rule of thumb for setting fees in veterinary medicine was simple: Raise 'em! The corollary to this rule of thumb was: don't worry about clients not wanting to pay; if you communicate the value of the procedure, they will gladly open their pocketbooks.

However, the recession has forced all businesses to re-evaluate how they operate. Not only are businesses having to deal with the current impact, they must look forward to what will likely be a changed post-recession environment. It is unlikely consumers will return to their free-spending ways. Some simply won't be able to and others are reducing spending out of choice. Many practices have not increased fees during the last two years at the rates they had previously. There is also evidence in the recently released Bayer Veterinary Care Usage Study and in other reports to indicate that fees may have been impacting the frequency with which pet owners visited veterinary practices even before the recession hit.

In the Bayer study, 53% of the survey respondents completely agreed or somewhat agreed with the statement "The costs of a routine visit to the veterinarian are usually much higher than I expected." Only 44% of pet owners disagreed (either completely or somewhat) with the statement "I am always on the lookout for a less expensive option for veterinary services or products." The study indicated that both the absolute price as well as the escalation of veterinary fees was a concern to pet owners. During one of the focus groups, one of the pet owners said: "All of a sudden, the price just skyrocketed. You could go when it was 60 bucks, now I can't get out for less than $150."

There isn't a precise definition of "affordable care;" what is affordable to one person may not be affordable to another and affordability is tied very closely to the concept of value and the availability of financing. Pet owners aren't generic in their makeup; i.e. in their attitudes towards veterinary care and their ability to pay. One of the things veterinarians need to do is identify the market niche they are trying to capture and focus all of their pricing and customer service efforts into what is right for that niche. For example, if your niche is a client base with a high amount of disposable income that is willing to pay for great service, then you can charge more as long as you are providing the kind of high tech, high touch service they want. But not all clients want that or can afford it and it is possible to have a very profitable veterinary practice with lower prices as long as you also control your costs and see a lot of patients. The general approach in our profession towards pricing has been that every practice should charge high fees but we've put less emphasis on the idea that if you're going to do that, you also have to have high benefits to the client. There isn't one right price for a particular veterinary service; you won't be able to get away with charging the same high prices as the practice down the street unless you offer the same kind of value to the clients. And we don't seem to take into account as often as we should that there is a large group of pet owners for whom high end veterinary care will never be an option, no matter how much they love their pets or how much value we demonstrate. The average household income in the US is about $50,000 for a household of just under 2.5 people; $5,000 veterinary services are not going to be possible for many of those households.

Fee setting strategies will always be part of the management of a practice but before you just automatically increase the prices charged to clients, step back and look at your overall financial position and what you are trying to accomplish. The first piece of information you need to know is your practice's operating profitability; this is the most comprehensive indicator of financial success in any small business. Unfortunately for veterinary practices, this is a difficult number to get because it doesn't show up on any report a practice regularly receives, even when those reports are properly prepared. Neither the "net income" figure on a practice's financial statements nor the "taxable income" line on the tax return represents true operating profits, due to personal accounting choices, the use of non-GAAP accounting, differences in tax regulations for the preparation of tax returns of different kinds of legal entities and the influence of debt. In the small business arena, these reports are simply not designed to determine true operating profit figures. You will need help in calculating your true profitability—talk to a veterinary financial expert or use the NCVEI/VetPartners Profitability Estimator available at www.ncvei.org. Increasing fees is only one way of improving profitability and shouldn't be used to cover up operational inefficiencies.

If you have a highly profitable practice with reasonable growth in revenue driven by real growth in the numbers of clients seen and the services they buy, then the fees you charge are probably just fine for your market niche. But if your practice isn't as profitable as it could be, you aren't attracting new clients, and your visit and transaction numbers are declining, then pricing (or its related issues—value and financing) may be an issue.

Currently, most practices increase fees for two reasons:

     • To hold profits stable against rising costs

     • To increase profitability

It is important to think about these concepts separately. Annual fee increases may make sense if the costs of the products or providing the services have increased. Raising fees to "keep up with inflation" means your costs of doing business have gone up (rent, staff costs, drugs, etc.) and you need to raise fees to stay even; i.e. if you have the same number of transactions as last year and don't have any changes to your cost structure, you would still make the same level of profits even though your costs went up. The increase in fees offsets the increase in your costs.

Since the recession started, inflation has been low—about 1.58% for the last two years combined. Prior to that, it ran 2-3%/year from 2000 to 2008. Many practices have raised their fees 3-5% each year to keep up with inflation; this is probably a true inflationary raise for some practices and not for others. The key point, however, is that any increase above this amount is not an inflationary increase and it should be thought of differently.

Increasing fees is one way of improving profitability but it's not the only one and raising fees may have unintended consequences over the long run. Owners and managers need to understand the drivers of profitability. In addition to the fees charged to clients, key drivers include the number of clients in the practice, the frequency with which they visit the practice, the quantity of services they choose to accept each time they visit, the amount of discounts or missed charges, and whether or not the amounts charged to clients are actually collected. All else being equal, fee increases will increase profitability but those same fee increases may also cause declines in some of the other profitability drivers (i.e. number of new clients or the frequency with which pet owners visit the practice.) The expected impact of all the changes must be understood before determining if the fee increases are truly beneficial to the practice. For example, if increases in surgery fees cause pet owners to decline care or choose a less expensive treatment option, the fee increase may not help the practice as much as anticipated.

Beyond adjusting for inflation, automatically increasing fees each year is not a sustainable business strategy. Fee increases simply to increase profits without a concurrent increase in the value of the product or service to the client can be made to a point but will become increasingly hard to justify to clients. Fee changes (increases or decreases) need to be made strategically with a particular goal in mind.

Practices sometimes increase fees to compensate for a lack of business—"my business is down 20% so I'll just have to raise fees 20%." While this might sound like an easy answer, this strategy can have bad long-term ramifications. It is more important to understand WHY business is down and address those issues rather than penalize the loyal, "good" customers who continue to patronize the practice.

It is also not uncommon to hear practice owners say "We're just too busy so we'll raise fees." Again, is this really the best way of dealing with the problem? And what are the long-term consequences? If the practice keeps raising fees, will the client base erode as pet owners drift off to more affordable alternatives? If there are inefficiencies in the practice that need to be dealt with so that more clients can be accommodated, that should be done directly instead of discouraging clients from coming in.

There are many things a practice can do to improve profitability without raising prices, but three key ones are:

     • Education of pet owners about the need for veterinary care

     • Increased offering of financing alternatives

     • Increase the number of cats seen at your practice

In the Bayer Veterinary Care Usage Study, 36% of pet owners agreed that were it not for shots, they would not take their pet to the veterinarian. Similarly, 24% agreed with the statement that routine checkups were unnecessary. The willingness to forego routine examinations was more pronounced among cat owners than among dog owners. According to the online survey, only 60% of cat owners had taken their animal to the veterinarian in the past year, whereas 85% of dog owners had done so. Among those who said that they were taking their pet to the veterinarian less often now than in previous years, 63% of dog owners and 68% of cat owners said they did not see a need to take their pet to the veterinarians often; that is, they saw no need for an annual examination.

Pet owners also perceived that some animals needed routine veterinary care less frequently than others. For example, study respondents with pets that lived primarily indoors were less likely to have taken their animal to the veterinarian in the past year. Likewise, pet owners with older animals were less likely to have taken their animal to the veterinarian in the past year. The idea that older animals need less care than younger ones obviously makes no sense; yet many pet owners appear to believe that.

Consider the following actions to educate your clients about the need for regular veterinary care:

     • Develop standards for care within your practice and turn them into a mantra similar to "twice a year dental cleaning" or the USDA "Five a Day" fruit and vegetable campaign

     • Set up systems to communicate this information to every client that walks in the door—assign roles to individual staff members, use checklists, posters, and handouts

     • Educate clients about WHY exams and wellness care are so important—prevention of future problems, longer life for pet, happier/healthier pet now

     • Educate clients about WHAT the exam includes and how this helps you help their pet—one of the best ways to do this is through communication of everything you do—"I'm taking Fluffy's temperature now; its normal" or "I'm looking at Fluffy's teeth—they have some plaque on them—let's set up an appointment to clean those so her breath will be good and an infection in her mouth won't lead to other problems"

     • Develop client friendly communication materials in multiple media formats—people take in information differently (hearing, reading, seeing) so provide information in different formats—brochures, your website, podcasts, posters & models

     • Provide your clients with a list of veterinary websites you trust for good quality information and link to these sites from your own website

     • Collect and update email addresses and regularly send your clients information about the care their pets need

     • Train doctors and staff members to talk in a pet-owner friendly manner about common recommendations and conditions—make sure you're all communicating the same message

     • Expand your reminder system to include more clients and more types of reminders—use benefit and value oriented language

     • Use multiple formats for reminders and communications: email, texts, phone calls, mail

As noted above, pricing is a complicated issue and isn't just about the absolute dollars charged for a service. Pricing is also related to the value perceived by the client for the care provided. But even if the price and the value are acceptable to the client, if they don't have the money in their checking account, they aren't going to be able to afford the services. Therefore the availability of payment options is also critical. In addition to the recession, clients are dealing with the increasing costs of veterinary care resulting from the availability of more sophisticated medical options, the extended life span of pets which results in more routine care spending as well as an increased likelihood of the pet developing a serious and/or chronic disease, and fee increases well above the rate of inflation. Even clients who are fully committed to providing quality care are looking at payment alternatives. Payment options for clients generally fall into three categories: in-house delayed billing of various types, third-party payment plans and pet insurance.

While practice owners don't want either themselves or their staff to function as insurance sales people or credit card vendors, those who work in practices already regularly recommend to clients products and services not carried in the practice. Examples include obedience training, pet day care centers, groomers, pet sitters and a wide variety of dietary and other products. Doctors and staff take the time to understand those products enough to be comfortable with the recommendations and help clients understand the options because they think they are of value to the client in taking better care of their pets. Why is it any different with financial products that allow clients to provide more comprehensive care? Not only do pets benefit from the improved care; veterinary practices benefit because clients who have the financial ability to pay for better care help us practice the kind of veterinary medicine we want to practice and improve the profitability of the practice. A sophisticated study conducted by Veterinary Pet Insurance, one of the largest pet health insurance companies, showed that the company's clients with pet health insurance on average had 41% higher stop-treatment levels, scheduled 40% more veterinary visits, and spent twice as much on veterinary care over the life of their pet. A cardholder survey by CareCredit, one of the leading third-party medical financing companies, revealed that 71% of cardholders said that having this financing option affected their decision as to the level of treatment they can provide their pet.

In order to effectively recommend these payment options, veterinarians and their staff must first of all understand the products themselves. Recommendations to clients are most helpful when they include not only a general recommendation for a kind of product but a recommendation for a specific brand along with the reasons why the practice thinks this product is the best one and a company the practice has had a good experience with. This is no different from medical products; clients don't just want to know that their pets should be on heartworm preventative; they want to know which brand your practice recommends and why.

The last area to be focused on in this paper is that of feline resistance. During the Bayer study pet owner focus groups, it became evident that cat owners found taking their animal to the veterinarian highly stressful for the animal and themselves. They indicated that their cats hid when the cat carrier appears; aggressively, physically resisted being put in the carrier; cried during the car or bus ride to the veterinary clinic; showed signs of stress and fear in the waiting area, particularly when dogs were present; displayed physical signs of tension during the examination; and acted remote and unfriendly for several days after returning home. Results of the online survey highlighted the importance of this problem. Only 83% of cat owners who responded to the survey said their animal had a primary veterinary clinic, compared with 91% of dog owners. Of those animals taken to the veterinarian, dogs had visited a mean of 2.3 times during the preceding year and cats had visited a mean of 1.7 times during the preceding year. In measuring pet owner attitudes toward taking their animal to the veterinarian, cat owners had more negative ratings than dog owners for every attribute, including such items as "Would not take my pet to the vet if vaccination not needed" and "My pet hates going to the vet".

A critical area for practices to focus on is increasing their Cat Friendly Practice quotient by taking some of the following actions:

     • Identify all the cats owned by your clients, put them in the reminder system and talk to them about the care needed

     • Train doctors and staff about cat issues and healthcare—AAFP/AAHA Feline Life Stage Guidelines are a great starting point

     • Help cat owners understand the need for care—a booklet called: CATegorical Care: An Owner's Guide to America's #1 Companion from the Catalyst Council is an excellent resource

     • Promote cat-friendly handling—train staff members who don't have experience with cats

     • Help owners learn how to acclimate their cat to a carrier & properly transport it to the practice

     • Offer kitten kindergarten classes

     • Set aside part of your reception area as cat-friendly

     • Consider separate cat and dog entrances