Some Veterinarians Use Activity-based CostingIn our article, in the December issue of Trends Magazine, published by the American Animal Hospital Association, we outline the dilemma and various resources available to practices to manage pricing. In three previous blogs we’ve outlined the challenge and described several references and continuing education resources that can be helpful.
Some veterinarians have turned to a strategy known as activity-based costing.
Wendy Hauser, DVM and founder of Peak Veterinary Consulting, exclaims that you must know your costs before setting prices. Because each hospital is unique, she believes a study of the hospital’s unique costs is more relevant than looking at what other hospitals charge.
This means that practices must do the hard work of what is known as “activity-based costing – reminiscent of the “time and motion” studies done in the 19th century by Frederick Taylor, who recorded the time required for a given task, and Frank Gilbreth, who analyzed the work process.
Hauser suggests starting by looking at “turnkey” costs. What are the fixed costs of turning the key to enter the practice every day? This means knowing the cost of items such as rent or mortgage, taxes, insurance, and labor. She’ll add in everything except inventory and doctor’s costs. In The Veterinarians’ Guide to Healthy Pet Plans, which Hauser authored with Debbie Boone, BS, CCS, CVPM, she outlines how you can use this data to calculate the cost per minute of a given service, like blood work. This is far more precise than merely taking the blood work panel cost and tripling it, which is what many practices do. The analysis of prices then turns to a focus on a metric called “annual revenue per patient.
Lindsay Peltier, LVT, is the Hospital Administrator at Centerville Animal Hospital in Chesapeake, VA. She is one veterinarian who attempted to determine all of her costs. She says:
“We developed a program in Excel that allowed us to calculate to the penny what a service costs our practice and then to assign a profit margin that allows for growth…. If a client asked for a discount, we typically responded with something along the lines of “Mrs. Client, our prices are based on what it actually costs to provide this service, and the discount you are asking for would put us in a position where we would receive less than the cost to our practice to perform Fluffy’s electrocardiogram. We do, however, have some other options we can discuss.…When clients ask for a discount, we know that they are venting their frustration…. By knowing the real costs, [our staff members] can speak with confidence. Our program in Excel prepared them for the conversation.”
When Julie Breher, DVM, purchased the La Jolla Veterinary Hospital in La Jolla, CA, she wanted this kind of detailed information, so she hired consultant Terry Roberts, BS, DVM, of LAJ, Inc. to assist her. They began by getting the inventory costs under control. Roberts provided the staff with equations that assisted them in making appropriate updates efficiently. Then they set about analyzing services. Breher and her staff calculated to the minute what procedures cost, taking into consideration all costs, including rent, water bills, salaries and supplies. Sometimes she compared her prices to recommended fees in AAHA’s Fee Reference Guide or published veterinary salaries. With that information she then felt confident in providing a treatment plan with a fair price.
A new service that can assist practices gathering this kind of information is Profit Solver®, based on software developed by Fee Technology. Profit Solver® and Fee Technology work in partnership with Zoetis, which markets this service. They bring technology to activity-based costing.
The Profit Solver® lists about 80-90 different services offered by 90% of practices. The software then enables your clinic to insert your own data. At the end of the analysis, Profit Solver® provides your practice with a Price Adjustment Worksheet and works with your staff in a Price Strategy Session. There they will consider which services are competitive (like your exam fee, vaccines, routine labs, spay, or heartworm prevention) in your practice’s area and which are not. Some items will admittedly be a loss leader, meant to bring recurring business. The intent is to provide you with information to make better pricing decisions, identify profit leaks, and to know what is profitable and what is not. The outcome is a more accurate and informed list of costs. The practice knows the exact profit or loss in each fee charged and can make informed decisions. Then the practice adjusts its costs with known data. To date they have helped about 1000 (of the 23,000) practices in the U.S.
One of those practices is the Dublin Animal Hospital of Colorado Springs, CO, owned by Marcus Roeder, MBA, CVPM, who also serves as a professional pricing strategist for Profit Solver®. As opposed to across-the-board pricing increases, he finds this activity-based costing method to be more rational. He worked with the Dublin staff for two-to-three months, getting “deep into the weeds,” he said. At times, they found the data overwhelming, but they learned a lot. In the process, he got buy-in from the staff, and now, instead of traditionally emphasizing the cost of inventory, the staff sees that the biggest cost of the practice is its people. Knowing and appreciating what everything really costs, the staff is no longer inclined to want to discount services.
Sacramento Animal Hospital, in Sacramento, CA also has used the services of Profit Solver®. Prior to using the service, the hospital had relied on a straight percentage markup by individual category. After analyzing 74 services, they understood which services were profitable and which were not and where markups were appropriate. They made 21 price adjustments, and realized a new annual profit of $100,362. The hard work was worth it.
Depending on the skills and experience of your internal staff, you may find it useful to go outside for consultation. Boone, BS, CCS, CVPM, of 2ManageVets works with practices using a blend of fees suggested by Benchmarks, The Veterinary Fee Reference and the fee survey from the Veterinary Hospital Managers Association along with overhead and competition. Louise Dunn, of Snowgoose Veterinary Management Consulting, directs practices to discussion boards where sharing among veterinary professionals is encouraged. She also suggests you look at what pet insurance companies pay for reimbursement. This will give you ideas about what is being charged across the country.
Hauser recommends you work with a CPA who specializes in the veterinary industry. Roeder recommends a consultant who is a CVPM. VetPartners.org is a useful place to find a consultant.
That’s all for today.
Check in our next blog for discussion of special circumstances when setting prices for pharmaceuticals.
Or read the entire rticle in Trends Magazine.
John and Carolyn
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