Fee setting: Product pricing is a balancing act

In the past 10 years, the veterinary profession has worked hard to be proactive. In response to the KPMG study that found we were the poorest profession, the National Commission on Veterinary Economic Issues was formed to educate practice owners and employees.

Then came the AAHA compliance study that showed how much better we could do in communication. Interviews showed a gap between clients' desire for clear recommendations and veterinarians who thought they wanted less information.

Industry factors such as huge student debt, were increasingly recognized as a requirement to raise fees. Rapidly increasing compensation packages added to the pressure to do a better job of managing fees. Advances in technology added yet another ingredient to the recipe for profit degradation and cause for top-line adjustments.

Microeconomics

It is clear that successful practice economics is driven by sensible revenue management. Fees are the lifeblood of any professional service. Proactive, sound, equitable reasons for prices benefit not only individual practitioners but also the profession as a whole. If practice fees are too low, the hospital director cannot maintain a profit margin adequate to sustain a standard of living for owners and employees. Financial pressures can compromise a code of professional ethics or even state practice statutes. Inadequate fees hinder the hiring and training of competent staff. If fees are too high, or are perceived as too high, clients may feel that charges do not reflect the value of services received. Client perception of high fees may result from employee miscommunication based on personal beliefs and experience or market constraints.

Macroeconomics

A balance between opposing and shifting demands must be struck. Costs of operation teeter against consumer demand. Fee structure is crucial to maximizing profit, credit management and personal income. Unfortunately, no one-size-fits-all standardization of fees is possible. Too many variables exist in any particular practice situation. Nevertheless, we are all smart enough to adjust to market forces and internal considerations of veterinary care. Improving a fee structure — while never perfecting it — continues to be both possible and attainable.

How fee schedules are built

Before a practice manager grasps at straws while trying to establish fee-setting protocols obtained from other sources, he or she should have a good insight into the particular practice's history and goals. Some of the most common variables that affect fee setting are in the chart below (Figure 1). Managers will soon learn to identify even more variables that will cause fees to be different in one practice compared to another.

Figure 1 Common variables that impact fees

Pricing, bundling, practice culture and philosophy, market pressures, and the effort of team members all play crucial roles in realizing adequate income. Good client communication results in client compliance with recommendations. Individual veterinarian productivity and success in generating revenue directly affects the compensatory arrangement. The collection of fees is the concluding measure of the profit cycle.

The practice manager considers and weighs the foregoing factors proactively to budget expenses and plan for fees charged. The practice's medical philosophy predetermines the type of clients attracted to the practice because of the nature of services and products offered.

Key to pricing individual procedures is intimate knowledge of service sophistication and client demand. Most veterinary practice work is service-oriented, which equates to labor cost. As the level of medicine practiced by a particular clinic increases, so does the cost of labor for an individual patient. As more procedures are added to the invoice, so increases the average transaction fee.

The practice manager reasonably segregates two major areas for pricing. The first is product or inventory sales. The second is fee setting for professional services.

Inventory and product sales

Before worrying about price, we must examine expense management. In the competitive online market, lower markups are the norm. But veterinarians should be aware of how much product is wasted, lost to missed charges and outright stolen. Spend some time securing your valuable inventories before worrying about competitive pricing strategies.

Pricing product for sale has been discussed in the practice literature ad libitum. Generally, these methods revolve around a markup of 50 percent to more than 300 percent over cost, plus an added fee for "dispensing." The markup percentage varies even within a practice because of the type of product, availability elsewhere, prepackaging or lack thereof and competition. Some practice managers divide their inventory into three to five separate pharmacy categories that recognize big variations in markup because of a variety of factors.

A big factor is that of doctor pay. When a doctor's compensation is based in "production," he or she may be paid a percentage of the total sale price of an inventory item. If the percentage is the classic 20 percent to 22 percent of the gross sale price, the item must be marked up at least 50 percent to maintain break-even on an "out-of-pocket" costing methodology. On a full absorption-costing base, the markup must be 150 percent to reach break-even without any profit included in the budget.

Computers simplify total cost calculations and updating inventory prices. A good software program ensures that a minimum base cost as set by the practice manager is charged even when only a small amount of drug is dispensed. The dispensing fee is calculated to take into account labor for unpacking, marking and storing product, as well as pricing prepackaged OTC items. Labor and materials used in counting pills, reconstituting drops, repackaging in child-proof containers and labeling in accordance with federal and state regulations must be covered by the dispensing fee and/or the markup.

The costs of complying with controlled substance regulations must be considered in addition to the costs of collecting sales taxes and remittance to the state. Compliance with the OSHA Hazard Communication Standard should be considered, too.

The first step is establishing inventory codes and correlating cost in the computer system. The second is continued vigilance of incoming order cost. The ideal system is fail-safe integration of purchase orders and vendor data with practice management software. Until then, mandatory human intervention at the keyboard is the only way to keep up with perpetual inventory pricing.

As new inventory is received, the price should be adjusted in the system. Generally, the price should not be reduced, even if there is a temporary savings from the supplier due to bulk purchase or manufacturer price reduction. Old inventory still on the shelf should be sold at the price calculated for new items of the same kind.

Prescription diet, pet foods and supplies are difficult areas to price depending on Internet competition and practice philosophy. Desire to move more product and increase volume of sales may dictate reduced fees. However, be aware that the sale of such products may transplant sales of veterinary services having a much higher profit margin. This is especially critical in practices where staff, doctors or clients have a total invoice "comfort level." If this upper comfort level is violated, additional services that might have been offered will not be sold. Dog food and pet supplies with a low profit margin may have displaced these additional, more profitable veterinary services.

Dr. Heinke is owner of Marsha L. Heinke Inc., and can be reached at (440) 926-3800 or by visiting www.vpmp.net..