Discounts: Manage them well to protect your bottom line

To discount or not to discount — that is the question. But what is the answer?

Your practice may have the highest prices around, but if discounts aren't logical and controlled, all the fee increases in the world won't help cash flow.

Gray areas include client discounts, employee discounts and charitable giving. We will discuss why practices discount, when fee considerations are relevant and strategies for using discounts effectively.

Discounts and profit in conflict

As an owner/manager, you soon appreciate that, for each level of service, every dollar that can be eked out means more profit for improving the practice. Theoretically, all fixed and variable expenses already have been covered (unless you give away so much that you come up short).

Management must control how and when any fee is reduced. Every service or product given away compounds the effect of poorer economic performance.

Without control, a practice can evolve into a discounting culture, where any staff member finds reasons to discount. This dilemma stems from the caring persona of the profession itself. Doctors and staff want to help as many people and animals as possible, but aren't always willing to charge for their valuable time, knowledge and expertise. This becomes problematic because everyone expects to be paid well and receive periodic raises, bonuses and ancillary benefits.

Discount strategies

There's room for discounts within a good practice strategy, but management must have logical reasons for them. If the discount strategy is to entice more client acceptance of various services, then you need to know your baseline service usage and measure the gains attributed to discounts.

If discounts are part of an advertising program to attract clients, the discount may be a promotional cost rather than a provision-of-service cost. Managers should discourage discounts as part of a marketing regimen unless there is a specific goal or logic to them.

Identify all the places discounts can occur, then establish policies to control them so that practice activity growth is in balance with profitability.

Discounts as part of policy

All fee and collection policies should be in writing; then make sure that staff is educated and trained on them, including the provisions for setting and using discounts. Here are examples:

• All discounts, refunds or write-offs exceeding predetermined amounts must be approved by a doctor or the hospital manager.

• Require a dated sign-off by the authority on every such discount, refund request or write-off, typically on the patient chart.

• Predetermine the authorized representative and response for requests for free care for alleged ownerless animals.

• If multiple pets are seen during a visit, are clinicians and receptionists billing correctly for any group discounts? While group discounts may be part of practice philosophy, arbitrary decisions by staff could cause problems on subsequent visits by that client and lead to loss of income. Make sure everyone knows how multiple pets will be handled, and that they follow the standard consistently.

If you bundle services and goods, and provide a discount for the sum total:

• Periodically (at least once a year), unbundle the package to identify every service, decide the value of stand-alone services and re-price accordingly.

• Question and debate whether the client would object if any of the bundled services were offered separately at a fair price.

• Question and debate whether the bundle entices clients to purchase more than they would otherwise.

If you bundle multiple visits for a single discounted fee, such as for a new kitten or puppy wellness package:

• Evaluate compliance of those who don't buy the package, and revenues generated without the discount as compared to those who do choose it.

• Define exactly what is included in the bundle.

• Periodically evaluate whether the bundled visits should exclude some service, or add others as "standards of care" change and then re-price.

If you choose to offer coupons because they are a tangible item clients may place on their refrigerators or carry with them, then assure the following:

• Discount an explicit service or good that is likely to bring additional contacts that were not expected.

• Discount an item or good that will generate other activity or revenue at the same visit.

• Provide an expiration date.

Present the practice professionally. As for all marketing material:

• Check all spellings.

• Have a clear, crisp, up-to-date logo.

• Have a professional name.

• Provide address and brief directions.

• Provide a phone number with area code.

• Provide a Web site.

• Give an e-mail address, if you know that messages will be promptly answered.

Controlling, tallying discounts

It becomes a challenge when all discounts are not recorded. Some DVMs give away services intentionally or accidentally that don't show on the records, so the practice doesn't know the true effect of the discounts. That leads to another problem: no recorded history of care provided to a patient.

Auditing of records shows where opportunities for better care could be attained. Monitoring records and providing feedback to doctors and other caregivers on a regular basis improves record-keeping.

Once services are recorded consistently, more reliance can be placed on comparing the record with invoices. Gaps between the patient record and the invoice illuminate giveaways that otherwise might go unchecked and unmeasured.

As with all practice activities, "what is watched is tended." Simply monitoring, reporting and asking questions brings all staff into alignment with fee policy.

Contemporaneous invoicing

Delayed patient record and invoice preparation increases the incidence of unstated discounting via giveaways. The greater the gap between recording patient care and invoicing it, the more likely something will be omitted, and unintended discounting grows.

Excessive discounting of inpatient care often occurs. Poor enforcement of service invoicing when patients are hospitalized results in excessive discounting.

We recommend updating the patient chart and the invoice at least twice a day during hospital stays. The number of services dropped or discounted will decrease. As a bonus, a close approximation of the full tally of cost is known when the client calls, and an informed client is more likely to pay the bill without a fuss or a write-down.

Client appreciation of subsidy

Often clients are unaware of the financial benefit to them from lost charges. But if your goal is to buy loyalty through discounting, then make sure you inform the client.

Well-designed computer software that allows service bundling and multi-visit packages will create invoices that show the client's dollar savings. The client sees the total value of the package and the discount.

Frequent and recurring discounts, though, can become expected. So at some point the client's loyalty and appreciation begin to diminish with each discount.

There is a good argument that excessive discounting increases perception and suspicion that services are overpriced.

Measuring impact of discounts

As long as a discount truly promotes the sale of a product or service, it should be classed as marketing or promotional cost in your financial reports. When coded as promotional, cumulative market-strategy discounts don't affect the ratios of other expenses compared to gross fees charged.

Recall that gross revenue is the practice's total operating income, before any deductions for discounts, write-offs or operating expenses, and without adding other sources of cash, such as sales tax collections and non-operating income.

In the veterinary profession, the level of discounting can be relatively significant and ubiquitous. When it becomes a consistent fact of net income realization, rather than a strategic promotional activity, then discounts are recorded as a debit directly offsetting operational revenues.

At this point, the top line number is no longer gross fees collected, but rather gross fees net of discounts. All expenses are measured against net fees, so that management has an improved awareness of discounting's impact on all costs of operations. When offset against gross revenues charged, discounts reduce the total operating figure used to calculate each expense as a percent of it. Thus, all expense ratios, including those used as KPIs, will increase.

As a separate expense line item, we find the range of discounts among veterinary practices extraordinary, ranging from negligible to as much as 10 percent of gross revenues. You can see there are many reasons for this. Some don't measure lost charges at all and don't have a way of showing "free" care to clients. Others meticulously capture all bundled-service discounts and other discounts and report them.

Most practices fall somewhere in the middle, with a typical range of 1.5 percent to 3.5 percent of gross revenues recorded as discounts. This doesn't mean they necessarily are doing a good job of managing discounts, only that this is what the computer happened to capture.

If they really wanted to know the extent of discounts, they would conduct regular audits of patient records against historic invoices and record the discount amount in the financial statement.

They would also review the detailed list of every service code and track at least two more occurrences:

1. The number of transactions that have no fee associated with them, and their value if a fee had been charged.

2. The number of write-downs of transactions with a set fee, and the value if the correct fee been charged.

Employee discounts

If your practice is like most, your team members' homes may be a managerie of adopted strays, some even rescued at work. It's natural they would look to their co-workers when those animals need veterinary treatment.

Employee discounts are a common fringe benefit. Some 50 percent of practices in one survey treated employees' pets at cost, and 25 percent treated them at no charge.

But the IRS isn't as lenient, so practices need to bone up on tax limitations on employee fringe benefits. Some benefits may legally be excluded from a worker's gross income, but others may not be.

In general, the law requires you to include fringe benefits in workers' taxable pay. But under Section 132 of the Code, you may be able to exclude no-additional-cost services, de minimis benefits and qualified employee discounts from gross income.

Although it may seem kind to offer employees discounted or free pet care, the wisest owners simply pay workers well enough that they can afford the services they need.

Charity

Like most community-minded business owners, you receive your fair share of charity requests, but veterinarians face a double, and even a triple, whammy.

Let's consider the generosity you quietly provide each year in the community. Because each act of charity tends to present a hidden financial burden, we believe it should be fully recognized and even budgeted as part of your overall business plan.

Why not review all the acts of kindness your hospital provided in the last year? If you totaled all the donated supplies, no-charge Good Samaritan services, deep discounts to organizations, you might be amazed at the total.

Why not celebrate the generosity of your practice with your employees and clients? The large retail chain Target does so, advertising that a certain percentage of all profits goes to charity.

By proactively budgeting for client discounts, employee discounts and charity, you can help protect your profit margin.

Unfortunately, your vendors and service providers (like health insurers) may not be nearly as generous as you are with your own clients, employees, friends, neighbors and family.

But through proper budgeting, at least you can go to the checkbook with your eyes wide open.

Dr. Heinke is owner of Marsha L. Heinke Inc., and can be reached at (440) 926-3800 or via e-mail at mlheinke@aol.com