Ignorance of true costs doesn't make profits bliss

I have a drinking problem!

When I dine out, I order two glasses of water or diet soda with the initial table service so as I finish one, another remains while the server runs back to refill the empty glass.

I cannot tolerate an empty glass on my table without a backup! Very often I can drink close to a gallon of fluids at a meal. I tell the server that the bottom of the drink is too close to the top!

A polygraph test of our profession would reveal a straightforward group with a high score for truthfulness. The truth, however, can be disfigured by lack of insight. When it comes to our true costs for the individual services we provide, most practitioners are blissfully ignorant. The bottom of their glass is too close to the top!

If our hospital average transaction fee is $100, and we consummate 5,000 transactions, we bring in $500,000. That's easy, isn't it? How is it then, that so many take home as little as $100,000 (before taxes)? That's only 20 percent of receipts. Haven't we heard that 40 percent is possible? How do some practices do it?

There are only two reasonable reasons for lower than ideal net (40 percent). The first is simply not enough clients coming in to overcome the fixed expenses of rent, minimum staff, utilities, basic supplies and taxes. In today's world for a basic practice, fixed expense is seldom less than $425,000 per veterinarian per year. Yes, the first $35,416 coming in each month is just visiting us as it passes right back out the door to pay vendors, landlords and the IRS.

Veterinarians are paid by leftovers; that is, any money left over after all other obligations have been satisfied.

There is often little left over because their net incomes are too close to their gross incomes. The dollars coming in are insufficiently higher than their costs. Somewhere, somehow, most of our colleagues seem to believe the myth that fees are governed by the lowest common dominator among neighboring practices.

Read that last sentence again; I did not say denominator. Someone is always the "highest-fee practice in town." It's a dubious distinction that should leave that practitioner reviled, shunned and otherwise damned for all eternity. The reason is simple. This owner sets the pace for all others to follow. Quite honestly, their fees are usually too low as well. Subconsciously, they know that they have the highest prices in town and don't feel comfortable in that position, so they actively avoid increasing fees. In this process, they hold back all the other local practices from raising fees enough to succeed at becoming the new highest fee practice, themselves. They also decrease the difference between the bottom and the top of the economic glass.

As practice management consultants, we know that the only way we can break a practice owner of following the disastrous "follow behind the leader" syndrome is in two parts. First, we make darned certain that our client veterinarian knows the true costs of producing services they provide, and then prove that their clients will pay higher fees without an exodus from the practice.

For example, a pill might cost a dime to buy. Some masochistic practices are still doubling or tripling their costs and selling 30 (10-cent tablets) that cost them $3 for $9. They still think they made a $6 profit, when nothing could be further from the truth. They actually lost money in that transaction. Why?

Overhead is a real cost. Your pharmacy space(s) may constitute 4 percent of your facility. The pharmacy then is responsible for 4 percent the total cost of the construction, 4 percent of the mortgage, utilities, maintenance and taxes. Now add in 100 percent of the cost of your time spent with distributor representatives, your staff time spent stocking and restocking shelves, computer entry, doing inventory, counting out pills, typing labels, vials, add in the cost of the time to explain use to your clients, and time to re-explain use when they call back having forgotten your previous instructions. Then, there is the cost of expired drugs, broken pills and those abandoned medications for BID use after the once-a-day formula comes out.

Fortunately, practices dispense a heck-of-a-lot-of prescriptions because if there were only one prescription per day, then the overhead for only 300 prescriptions per year would certainly be well over $285 each. To break even, you would have to charge your client $294 for those 30 10-cent pills. For the average small animal practice today, the overhead per prescription comes to about $18.85 per prescription. Now double the pill cost of $3 for those 30 pills, and you charge your client $24.85, which they will pay readily, and you have recovered your total costs ($18.85 plus $3) and made a grand $3 or 12 percent profit.

Looking at radiographic film and lab reagents, as the total overhead in radiology, will get you in the same trouble, when you examine the shortfall to your bottom line.

A two-view radiographic study (published data) costs you at least $71 in 2005. When you need to do chemistry in-house, you need calculate your true costs, and you need to tack on a STAT fee of $30 to begin to earn profit.

And ... profit is what is sorely lacking in our hospitals. We certainly have enough equipment to service the medical needs of a very large village of humans in an underdeveloped country.

Now, if we could just charge enough to justify our investments, then the top would rise further off the bottom, and we could satisfy our thirst for owning a practice that might even be sellable at our retirement.

Dr. Snyder, a well-known consultant, publishes Veterinary Productivity, a newsletter for practice productivity and is available for in-practice consultation. He can be reached at PO Box 189, Hebron, KY 41048-0189; (800) 292-7995; vetprod@bellsouth.net Fax: (772) 220-4355.