Discounts that don't kill the practice (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.

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 studies to indicate that fees may have been impacting the frequency with which pet owners visited veterinary practices even before the recession hit.

53% of the survey respondents in the Bayer study 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."

Setting fees intelligently is not an easy task. Before a practice owner or manager can make a good decision about what to charge for individual services, he/she must first understand the true financial position of their practice, the goal of the fee change, some of the general approaches to setting fees, the importance of communication, how to monitor the impact of changes and the impact of financing alternatives. Discounting is one strategy.

"Discounting" is the deliberate reduction of fees charged to clients from what is stated in the fee schedule. It may be a partial discount or a 100% discount - either way the practice owner, the doctor on the case or a staff member is consciously deciding to reduce the fee for the services that the client received.

"Discounting" is not automatically a bad thing. Many businesses effectively use discounts to bring in clients for a particular service or during a slow time of the day or year. Discounts to clients who would have come in anyways and paid the full amount of the fee don't make sense as a marketing strategy. However, discounts that bring in clients who wouldn't have come in anyways or entice them to buy services they wouldn't have bought otherwise can be beneficial.

Veterinary practices generally have three kinds of discount programs: employee benefits, marketing programs, and charitable contributions to the community. In addition, they often have a large amount of random, unplanned discounts that doctors or staff gives simply because they are uncomfortable with the fee structure or are just nice people. These can add up to a surprising amount. It is critical that the practice periodically review all discounts and make sure they are still accomplishing the intended goal, if there was a particular goal in the first place.

The first step in the review of the practice's discounting activity is to identify all of the discounts. According to AAHA's Financial and Productivity Pulsepoints, the average dollar amount of discounts in both 2009 and 2007 was 2.6% of total gross revenue, up from 2.3% in 2005. Unfortunately, the amount captured by the practices' invoicing system is almost always understated and sometimes by a significant amount. The software system can only capture discounts that are entered as such. Ideally, if the practice is giving the client a discount it would show up on the invoice in some fashion similar to that shown below:

CBC          $40

Discount    $15

Net fee     $25

However, if the fee was just changed in the computer for this particular invoice or put in as a miscellaneous or onetime charge of $25, no discount will be tracked by the system. And, of course, if a charge is accidently left off the invoice entirely, the software system can't capture it as a discount.

A medical record audit is the only way to insure a practice finds all discounts not recorded in the invoicing software. To start, pull the medical records for 40 cases per doctor—this should be a mix of initial appointments, rechecks, and hospitalized cases. Compare the services provided to the client as documented in the medical record with what was charged on the invoice. Capture the results of the audit on a chart or a spreadsheet with the following items included: patient name, date and time of appointment, amount of invoice, type of appointment (surgery, hospitalization, outpatient) doctor, date, technician (if known), receptionist (if known) and information about the discounted or missed charges (procedure performed, correct fee, actual fee charged, amount missed or discounted). Once the amounts discounted or lost are calculated for this sample, they can be extrapolated to the total practice revenue for an estimate of the total lost in a month or a year.

After calculating the amounts lost, the types of cases where money is lost should be reviewed. Some of the dollars lost may be due to discounts the practice has chosen to allow; for example, senior citizen discounts. A decision needs to be made as to whether the amounts lost through the discounts are worth the benefits of the discount program. Most practices find a certain number of discounts in this audit that aren't part of any particular program.

Look for patterns in these random kinds of discounts. Is the same doctor involved in all of the transactions? The same receptionist? Do these things happen on the same day of the week? Same time of day? Same type of appointment? Patterns will help identify the root of the problem. For example, is one doctor primarily responsible for most of the discounts? Are there certain kinds of fees that are regularly discounted? Once the root cause has been identified, steps can be taken to correct the problem. The corrective action depends on the problem identified.

Once the dollar amounts are known, the next step is to review the effectiveness of these discounts in accomplishing the practice's goals. Start with listing the kinds of discount programs being used in the practice. Common ones include those for senior citizens, multiple pets, breeders, and bundled services. Then take a look at each program individually; for example, if the practice gives a free exam to everyone who purchases a puppy at a local pet store in order to build its client base, is this really working? Is the practice actually getting and keeping these people as clients? These clients should be tracked over time to see if they remain with the practice and if they brought in enough revenue to warrant the discount. Similar analysis should be made for all programs. Also review the discounts regularly given to certain individuals and the random discounts that have not been specifically approved by the practice. Should these continue?

Once a practice understands the effectiveness of its current discount programs and has eliminated the discounts it doesn't want, it should consider whether other forms of discounts may be effective as a marketing strategy. The idea of discounting tends to be unattractive to many veterinarians and 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, you may not need to consider this pricing strategy. But if your practice is seeing a decline in transactions, new clients, active clients, or # of visits to the practice in spite of well thought out marketing programs and good communication of value, then the fees you charge may be an issue and some specific, well thought out discounting programs could be a good business strategy.

Discounts could be offered to certain groups of people in order to attract them to the practice. Examples include senior citizens or cat owners. Let's say, a practice doesn't currently offer a discount to senior citizens but many other businesses in the area do. The practice could run a trial program in which a certain discount is offered to senior citizens; it could be a % off total services or a particular service offered free or at a reduced rate. Of course, the practice must market the program; if the discount is just given to current clients who were going to buy the service anyways, it won't be effective. It needs to bring in new clients. The use of the discount must be tracked over time to see if it was effective in bringing in new clients and/or enticing old clients to come in more frequently or buy more services. It can be effective to limit these discounts to slow times of the day or week; for example, the discount is only good from 2-4 pm on Tuesdays, Wednesdays or Thursdays. If, after a trial period, the discount isn't accomplishing its goal, it should be phased out.

A practice could also consider a discount on a service it wants to promote. Perhaps the practice owns a Tonopen that is little used. Doctors all agree that patients that need this service aren't getting it but are reluctant to recommend it due to price, and clients are reluctant to accept the service even when it is recommended. Consider establishing a new, lower price and focus on consistently making this recommendation to appropriate clients. Track the results over six months and see if more tonometry is performed since the advent of the discount. If more revenue is coming in at the lower price than did before, the practice may consider establishing the new price as a permanent one. The practice loses nothing in this kind of discounting program—the equipment was already paid for and more money is coming in than was previously. And, even more importantly, pets are getting better care.

Discounts or permanent fee reductions have generally been considered a "bad" thing in veterinary medicine but used judiciously, they can be helpful in allowing clients to provide better care for their pets and the practice to bring in more revenue.

Don't forget, however, that price may not be the only reason clients are reluctant to accept your recommendations. Communicating value is critically important. A client's dissatisfaction with the price charged for a service may be about the price but it may be because they didn't understand the value of the service. In order for clients to accept the practice's pet care recommendations, they must first understand them and value them more than the other things they might choose to spend money on.

Why is this particularly important now?

     • Clients continue to be nervous spenders

     • Fewer pet owners are visiting veterinarians; transactions are flat in many practices

     • It is an increasingly competitive marketplace

     • Veterinary care is complicated and difficult to understand

     • Hospital visits can be frightening

     • People take in information in different ways

Communication takes many forms. It's not enough for the doctor to just silently examine the pet; the results of this exam must be clearly articulated to the client along with the doctor's recommendations, the treatment options, and the prognosis. Many clients do not understand the need for a physical exam and are barely aware it is being done. 43% of pet owners in the Bayer Veterinary Care Usage Study did not complete agree with the statement "My veterinarian communicates with me using language I understand." 46% of pet owners did not complete agree with the statement "My veterinarian clearly explains when I should bring my pet in for various procedures or tests."

Clients judge value through other ways as well. An article in the Harvard Business Review studied the communication of value at the Mayo Clinic. The Mayo Clinic happens to do this extremely well while spending little money on traditional forms of advertising. The authors noted that "When a company's offerings are hard to judge, customers look for subtle indicators of quality." Translated, this means that clients can't judge the quality of the medicine but will look at the aspects of your practice that they CAN understand to make a judgment about the medicine. The things they can understand are generally about the service experience and communication. In order to get your message across, every activity, person, place, document, interaction, transaction, and communication should tell the same story.

The last thing to remember is that even clients who are fully committed to providing quality care are looking at payment alternatives. In order to effectively recommend payment options such as pet insurance, third party payment plans or internal financing options, veterinarians and their staff must first of all understand the programs 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 just that their pets should be on heartworm preventative; they want to know which brand your practice recommends and why.