How to Set Practice Service Fees

The better the veterinary team knows the practice’s fees, the easier it is to present them to clients with confidence and without anxiety. Following is a brief journey into the methods and mechanics of setting veterinary service fees. 

Opinions vary regarding the best way to evaluate and set fees, but in the author’s experience, the amount it costs the practice to provide a service, including the desired profit, is the integral knowledge needed. From this baseline, an actual fee can be determined so the practice makes money after special pricing (eg, temporary discounts and promotions), loss leaders (eg, services priced well below both cost and market value to attract clients), and profitable services are combined. 

Calculating Costs 

How are a practice’s costs calculated? Two methods are recommended: 

• An Excel workbook using data the practice team creates.

• Profit Solver, a fee-setting program sold through Zoetis, which essentially creates the same data as a custom Excel workbook. For some readers this method may take less time, as many of the manual calculations needed to create the Excel workbook are already built into Profit Solver. While Profit Solver may seem expensive, it comes with a money-back guarantee if the practice investment is not doubled in the first year of use.

Regardless of the system chosen, begin by listing the practice’s 50 to 75 most frequently provided services and then follow steps 1 through 5 for the calculations (see Service Calculation Process). Use the costs calculated in the spreadsheet (or Profit Solver), including built-in profit, as a baseline for determining fees charged for individual services to ensure the practice’s overall profitability. A profit buffer is created by some fees having a profit margin higher than normal to offset the service fees that, for a variety of reasons, are priced too low to cover costs or profit, such as elective surgery and high-cost laboratory tests. These types of procedures are the reason the profit margin on some items needs to be higher, to balance the service fee income and practice profitability.

Equipment cost-per-use should also be calculated to completely capture costs. Manual calculation of equipment cost is based on the equipment’s life expectancy divided first by replacement and maintenance costs and finally by the expected number of uses over time. Equipment cost-per-use considerations are built into the Profit Solver program.

 Service Calculation Process

1. Minutes the practice is open each month: Multiply the number of hours the practice is open each week—first by 60 and then by 52 weeks—and divide by 12.

2. Overhead costs: Add annual facility costs (eg, rent or mortgage, utilities) and administrative costs (eg, marketing, office supplies) and divide by 12 to get the monthly overhead. Next, calculate overhead costs per minute by dividing the monthly overhead by the monthly minutes the practice is open (from Step 1).

3. Per-minute employment costs:

   1. To accommodate the difference in cost per minute between veterinarians and all other team members, calculate each employee group’s total employment costs (wage, employer tax, benefits, and workers’ compensation insurance) separately. Divide the respective cost by 12 to determine each group’s monthly costs. Divide the monthly cost for each group by the monthly practice minutes for each group’s cost per minute (from Step 1).

   2. Separately add the weekly hours worked by all team members and all veterinarians and divide each by 40 to determine the practice’s full-time equivalent (FTE) count of team members and veterinarians. Divide the per-minute cost per group by the number of FTE members per group to determine the per-minute cost for 1 FTE person in each group.

4. Service costs:

   1. Determine the number of minutes veterinarians and team members need to complete each service.

   2. Multiply these minutes by the respective veterinarian and team member per-minute costs.

   3. Determine the supplies needed for each service and their cost and multiply by 2 to determine a 100% markup.

   4. Determine the desired profit per service (eg, 10% to 30% according to the specific service [eg, the profit margin on a wellness examination may be higher than the profit margin on an orthopedic surgery]).

5. Add the results of steps 2-4 to determine costs for each service.

Comparing Costs 

Fees should not be set in a vacuum and should be compared to other practices. In the United States, examples can be found in Benchmarks, Chapter 2,¹ and the American Animal Hospital Association’s Veterinary Fee Reference.²

Also, practices should look at the fees other area practices charge for elective care and shopped services (ie, those services for which clients are apt to “shop around” to get the best price, such as examinations, vaccinations, wellness testing [heartworm, tick diseases, intestinal parasites], spay and neutering, dental cleanings) at least every 2 years. Other countries have their own resources; for example, in the United Kingdom, the Society of Practicing Veterinary Surgeons conducts an annual survey of fees charged by members.³ Cost comparisons can ensure confidence that fees are appropriate for clients and the practice’s long-term health. 

Managing Costs

Once set, fees need to be regularly managed, which is best done by following the consumer price index (CPI) guidelines that reflect the inflation rate and can be found for each country at globalrates.com.⁴ In the United States, CPI for all urban consumers (CPI-U) is the recommended data point.⁵ 

Nonshopped service fees (eg, laboratory tests, surgery, anesthesia, hospitalization) should be increased by twice the yearly CPI. For example, Canada’s current annual CPI is 1.03; therefore, nonshopped fees should be raised by 2% (2 x CPI) to increase overall revenue.

Note that fees for shopped and price-sensitive items, such as examinations, vaccinations, elective surgery, boarding, and grooming, are excluded from annual service fee adjustments. A simple Excel worksheet can provide the indicated percentage increase needed to achieve the practice goals. Shopped fees, which may be increased by a specific amount rather than a percentage, should always be included in the overall cost calculations. 

Conclusion

Sounds like a lot of work, right? It’s not—once set up, the system takes little work to maintain and provides confidence that costs and profit are covered. However, remember 2 important points: Every practice has different payroll and overhead costs, and depending solely on published references or local fees is not sufficient to ensure practice profitability.

This article originally appeared in the January/February 2016 issue of Veterinary Team Brief.