Supersizing Practice Value

By Allison M. DiMatteo, BA, MPS

The Economics of Productivity—

What Do the Business Models Say?

Everyone wants to know the formula for the magic bullet—the perfect equation of total number of patients and daily production, plus less overhead, to yield maximum profitability. There isn’t just one, and any equation is difficult to solve because each practice, the geographic area it’s in, and each area’s potential patient demographics are different.

Even trying to base an equation on average billings by region is challenging. Standard Metropolitan Statistical Areas (ie, areas of consistent density, whether rural or urban, throughout the country) are tied to economic factors affecting multiple areas, not just a specific region. According to Tom Limoli, Jr, president of Limoli and Associates, a company that assists dental offices in streamlining the insurance reimbursement process, what’s occurring with billings and collections is happening in all regions of the United States as a reflection of economic patterns.

What other variables are at play? The number of hours dentists and their teams work per week, as well as the number of team members and the type of dentistry that the practice provides (eg, general, family, cosmetic, implant, full-service). It’s also important to understand that the only producers in the practice are really the dentist(s) and the hygienist(s), notes Roger Levin, DDS, founder and CEO of Levin Group.

“I have three full-time hygienists and one assistant, and my associate has one assistant, and together we have one full-time front desk and one part-time front desk team member,” says Robert C. Margeas, DDS, a private practitioner in Des Moines, Iowa, and editor-in-chief of Inside Dentistry, who tries to run his practice with no more than 50% to 55% overhead. “My overhead is much lower than another practice that has two dental assistants, two or three front office staff, an implant coordinator, a treatment coordinator, and a finance coordinator. Every practice’s overhead is different.”

Keys to Profit Optimization

Considering that starting up a dental practice—depending upon location—can require an investment of between $350,000 and $500,000, managing overhead and ensuring sufficient production to not only survive, but thrive, is essential. However, when taking into account investments in technology and equipment, as well as how many chairs/operatories will be incorporated, Levin says the startup investment could be as high as $800,000.

According to Lisa Philp, chief visionary officer for Transitions Group North America, the largest expense that practices incur is generally salaries, which should not run higher than 30% of production. “Overhead reduction can be achieved by managing salaries,” Philp explains. “High overhead is often indicative of insufficient production on the top end.”

But, as every practice owner knows all too well, some weeks and months are busier and—more importantly—more productive than others. It can be a numbers game of how much production is needed per hour of a day to run a profitable practice (Table 1).

“I’ve never had a production goal within my practice,” Margeas explains. “How do I know who’s walking in my front door? I don’t know how many patients are coming in, or what type of care they’ll need. We’re not selling widgets; we’re providing healthcare. Some days are slow, and some months are busier than others, but it all evens out at the end of the year.”

In other cases, profitability is about how many new patients must be added to the practice each month. According to Levin, the average production per new patient should be two to three times the average production per active patient.

“We average about 30 new patients per month that come in for hygiene, and we have a 3-month waiting period,” Margeas says. “I don’t think that’s good, because if a patient wants to get in for a cleaning, you need to be able to schedule them within a week or two, or they’re going to go elsewhere.”

Does that mean bringing in more team members? When the practice’s current doctor(s) are over-scheduled, that’s the only time to bring in an associate, advises Franklin Shull, DMD, a private practice owner in Lexington, South Carolina. Ultimately, doing so is all about timing and having both current dentist(s) and team members on board.

“The perfect associate may come along, but the practice may not be ready to keep another dentist productive,” Shull says. “On the other hand, the practice may be ready, but the right person cannot be found. Forcing either of these situations to occur creates an uncomfortable and difficult environment.”

Shull explains that successfully bringing in a new associate requires constant effort from all parties to make the professional relationship work. Practice team members, who know and understand the practice “feel” and often see things the owner dentist might overlook, should be an integral part of the timing and decision process. The owner dentist must be ready to relinquish some of the spotlight. In other words, the new associate must have opportunities to grow and work through a variety of cases, not just the leftovers.

“All parties should do their homework and be ready to work on a relationship that will benefit everyone involved,” says Shull, who along with his partner, have brought in three associates over the past 20 years, with positive results.

Though the long-term impact of bringing on an associate is an increase in practice productivity, Shull cautions that owner dentists need to realize that practice profits usually fall in the first year an associate is hired. However, to minimize negative impacts to the practice’s bottom line when recruiting and retaining team members, demonstrating respect and fostering a good work environment are key.

“Pay your team what they are worth, and constantly remind them that they are part of the practice ‘family,’” Shull says. “Allow your staff to be creative, provide input about how to increase the level of patient care, and offer an incentive—even if it is small—to let them know you appreciate them.”

Every staff member that an owner dentist has to replace costs the practice money, Shull advises. Therefore, retention of great employees is essential for success.

The Cash-Flow Conundrum

Limoli says that a general rule of thumb is having at least 60 days of cash on hand and 90 days in receivables to cover immediate operations. From a general business perspective, practices need to have at least two payrolls in the bank, he advises.

“It all depends on the practice and is really a question for their accountant,” notes Limoli. “Factors to consider include the practice’s fixed versus variable expenses, their payroll, and whether the practice receivables are largely coming from someplace other than the patient’s pocket (eg, insurance).”

However, purchasing habits, as well as fixed and variable expenses (see Table 2), do affect a practice’s overhead, profitability, and cash flow from month to month. For optimal profitability, the practice’s purchasing manager should plan orders and stay on budget, manage inventory, and take advantage of dealer offers and promotions, Philp says.

“The practice budget should be 5% to 7%, and an assigned purchasing manager should manage the budget with online programs from the dealer,” Philp suggests. “Many dealers will consult with the purchasing manager and assist them with setting up their budget, online tracking, and ordering.”

Levin explains that the way to begin reducing overhead is to first break it out by category (eg, supplies, laboratory fees, labor—which can be further categorized into salaries, bonuses, benefits), then compare the practice to regional national averages. If the practice’s expenses are high, it’s for one of two reasons: waste, which needs to be eliminated, or low production based on the practice resources.

“The way you bring overhead down is either by eliminating waste, which actually directly lowers overhead, or by increasing production, which lowers the overhead percentage,” Levin says. “Because overhead is expenses as a percentage of revenue, when revenue goes up, overhead goes up less, and the overhead percentage goes down.”

As far as receivables, the experts are close in their ratios, with some saying that having 1.5 times the practice production in receivables is healthy, while others prefer to see it below that. According to Kirk Behrendt, founder and CEO of ACT Dental, most of his clients carry receiveables of 75% to 80% of their production. And, when it comes to collecting those receivables, there is no reason ever, he says, to extend payment beyond 90 days. The only exception might be instances of phased treatment. In those instances, receivables, and therefore payments, would be based on the treatment phase.

“I would love to have zero accounts receivable, but they usually equal about one month’s production,” Margeas observes. “Our financial arrangements are that patients pay for 50% of their restorations up front, and 50% at the seating appointment. If they have insurance, we’ll bill the insurance company first.”

The Expense Headache (and Heartache) of Insurance Billing/Coding Issues

Simply stated, as participatory benefit plans (eg, PPOs, EPOs, etc.) dominate the marketplace, dentists will continue to have their usual and customary fees challenged. In essence, the days of annually raising fees by a certain percentage are dead and gone, observes Limoli.

If practices are “out of network” but willing to accept the patient’s network fee discount, then they cannot list their full fee on the claim; they must list the discounted network fee they are willing to accept as payment in full. Further, it doesn’t matter if they are in or out of network: the claim must tell the truth, and the numbers must speak for themselves.

“The numbers can’t say one thing and a narrative say something else,” Limoli explains. “Taking the patient’s insurance, logistically, is no different than taking a credit card in a true retail environment. You charge for what the patient has received, the same way you would charge a customer’s account for exactly what they purchased.”

He admits that as the economy tightens, unscrupulous advisors search for new and creative ways of dancing around the fact that without insurance, many patients wouldn’t seek even basic preventive dental care. However, insurance billing and coding must be as simplified and streamlined as possible to avoid headaches and heartaches, he says.

“Medical billing for dental procedures is but one example,” Limoli suggests. “Some ‘advisors’ teach using a medical billing code when taking a CBCT—as if you’re searching for potentially clogged arteries—when in fact you’re actually placing an implant.”

Easing the heartache can be as simple as shifting from the overall concept of “production” to “collection,” Limoli says. The write-off is an emotional number that means nothing other than manipulative heartache.

“When a service’s full fee is $100, but the participatory agreement says the maximum allowable charge is only $80, you did not lose $20 doing the procedure because you never had it in the first place,” Limoli explains. “Instead, you have to balance total plan collections to the percentage of chair hours sold to the plan. If Delta Dental patients are giving you 30% of your total revenue, then they cannot consume more than 30% of your total chairtime. The management answer is in your scheduled appointment book, never the operatory.”

The advent of electronic claims with electronic attachments—along with payer direct deposit—has shortened the average time of collections on claims from where it was 5 years ago. Collections on routine diagnostic and preventive services, as well as some basic restorative services, are between 7 and 10 days, Limoli says. With some participatory plans, it’s even shorter. However, out of network claims could be longer.

The good news is that technology has essentially allowed insurance claims processing and collections to take care of themselves. Doctors can go online, know exactly what’s payable and what’s not, at what rate it’s payable, and what the patient’s co-payment is. A relief to dental practice administrators, it will likely—in the not too distant future—enable nearly instantaneous payment of dental claims, particularly for in-network dentists, Limoli says. So, for example, a dentist could perform diagnostics, preventive treatments, or basic restoratives; the claim is filed; and the funds could be in the bank that same day.

Impacts of Legislation

Fortunately, the American Dental Association’s (ADA) Care, Access, and Prevention committee has spearheaded efforts to streamline the credentialing methodology when dentists join networks, explains Allen L. Finkelstein, DDS, chief executive officer of Bedford Healthcare in New York City and former chief dental officer of AmeriChoice/United Health Group. Not only does this alleviate insurance billing and coding headaches, but it also helps to remove barriers to care. With the ADA as a central clearinghouse for credentialing, dentists can provide all of the required information and identify the dental insurance networks they want to join. They can examine the fee schedule and determine which will be best for them.

“Rather than look at fee schedules that suggest what is or isn’t worth taking, dentists should look internally, see if they have down chairtime, and realize that the fee schedule is secondary to the patient’s care,” Finkelstein says. “If you’re not having production, then your overhead is just being divided over fewer patients. If you are productive, even with a lower fee schedule you can turn that into profitability.”

Although it’s simple economics, the manner in which commercial dental insurance benefits dentistry compared to how it benefits medicine is anything but simple. Finkelstein, a long-time proponent of integrated dental and medical care, says very few insurers have dental coverage in-house, instead hiring a third-party administrator or dental benefit manager to oversee coverage. This prevents a truly integrated healthcare coverage program that realizes cost savings to the medical aspect that are derived from dental insurance usage.

For example, patients who go to an emergency room for dental treatments—which are episodic and non-specific in nature—typically receive an analgesic for pain and perhaps an antibiotic. The outcomes are limited, and the care is not definitive. The patient will still need to go to a dentist for treatment, after having received a “dental treatment” that wasn’t actually a treatment at all, Finkelstein elaborates.

“When you build a model that combines dental and medical, we can start to look at those dollars and wonder why we are paying such high fees for a questionable outcome in an emergency room,” Finkelstein says. “The patient could have been treated in a dental office environment and have a more sustainable outcome.”

Overall, legislation with implications for the dental profession presents dentists and those in the dental industry with opportunities for changing behavioral patterns. In the end, they’ll be doing better for the public and themselves by making relevant and required modifications associated with such legislation as the Sunshine Act and the Affordable Care Act (ACA).

According to Finkelstein, the Sunshine Act is needed legislation that basically mandates audits and oversight. Similar to how healthcare providers gradually adjusted to Occupational Safety and Health Administration and Health Insurance Portability and Accountability Act compliance, adhering to the Sunshine Act is a matter of time and getting used to the requirements.

However, the most significant—and potentially profitable—behavioral changes in dental practice will stem from the impact that the ACA is having on dentistry. With the number of individuals now covered by dental insurance increasing incrementally state by state, dentists will need to become more efficient and focus their practices on value-based outcomes in order to benefit from ACA reimbursement.

All Things Considered…

Despite the economy and its implications for the dental profession, Behrendt asserts that dentistry is one of the most stable professions in the country. In fact, he says that only one half of 1% of dental lending notes in the United States fail, suggesting that it’s very difficult as a dentist to go bankrupt. Those odds are seldom seen with other small businesses, he adds.

“I truly believe that if your patients trust the care you provide, you live within your means, and you save your money, dentistry should be stress-free,” Margeas concludes. “I’m looking at practicing another 20 years not because I have to, but because dentistry is what I enjoy doing.”

The DSO Model

Over the past 5 years, dental service organizations (DSOs) that have focused on the clinician and patient have continued to grow and thrive, and there are now more than 1,000 DSOs throughout the United States. While some may not evolve to meet changing professional and patient demands and, therefore, not survive, it is clear that more and more dentists are finding success in the DSO model, observes Joe Feldsien, senior vice president of professional partnerships for Pacific Dental Services.

Among the reasons dentists may gravitate toward the DSO model is an ability to maintain their autonomy while benefitting from the support of a veteran operations team that understands what execution of the best practices of dentistry are, Feldsien explains. For example, DSOs are excellent at negotiating continuous improvement, which eliminates waste from day-to-day processes.

From a higher-end business perspective, Feldsien adds that DSOs have demonstrated their abilities to use their scale for negotiating excellent pricing on supplies and equipment, as well as driving down benefit costs for their employees. Likewise, their financial stability facilitates acquiring the most attractive lease rates at the best real estate sites.

“If dentists weren’t being successful in the DSO model, the concept would have died long ago,” Feldsien says. “Supported autonomy is real and it works.”

Feldsien acknowledges that for dentists who want to remain in an unsupported environment and oversee all practice aspects—including those areas they may not have been trained in—those opportunities certainly remain. Not every dental practice business model is right for every dentist, whether a new dentist, an associate in an existing practice, or a solo practitioner.

“When dentists are considering whether the DSO model is right for them, the key is in the questions (Table 3) they ask and the answers they are looking for,” Feldsien advises. “They need to think about and articulate in writing what is most important to them, and author questions that they believe will best elicit answers that confirm fit or demonstrate the lack of fit.”

Dentists who are intentional in this process will realize a great fit and a foundation for development and growth. Dentists who take a casual approach will likely end up with a less appealing outcome, Feldsien cautions.

Digital Technology

Every industry, everywhere, is going digital. It’s no longer a matter of “if”; rather, it’s a question of “when?” Despite some challenges with adopting technological processes (eg, integration, equipment compatibility, learning curve, team member buy-in, financial investment), there are systematic benefits for dental practices and their patients when digital technology replaces conventional processes. Additionally, at a time when dental practices face increasing pressures to remain competitive, profitable, and relevant to patients, investing in technology can be the solution.

“Investing in equipment and technology can lower a practice’s overhead,” explains Keith Dryer, vice president of Henry Schein Financial Services. “If you look at the abundance of easy-to-obtain, long-term, and relatively inexpensive financing, acquiring technology and equipment with affordable monthly payments is an economic enhancer to the practice that outweighs the costs.”

One example Dryer readily points to is the use of in-office dental computer-aided design/computer-aided manufacturing (CAD/CAM) that can be used for everything from treatment planning to digital impression taking, and from restoration design to restoration fabrication. Examining how many crowns are needed each month, as well as the chairtime, staff time, and materials involved with conventional procedures (ie, analog impressions, stone models, temporaries, laboratory fabrication) typically demonstrates that the break-even point is very achievable, Dryer says.

“Dentists also enhance the practice’s value proposition by being able to diagnose and propose complete treatment plans more efficiently, and expand the services that a practice can offer today,” Dryer explains. “There’s always a cost/benefit analysis involved, but the benefits to patients, staff, the practice, and the doctor usually win out.”

Realizing and maximizing the return on investment, however, requires consideration of the technology from the customer’s point of view. In this case, Dryer notes that dental practices, like all business, should consider the staff as their customers.

“Having dental team members who are happy at work and satisfied with their jobs affects production, and that ultimately benefits the patient experience,” Dryer says. “Therefore, consider whether the equipment or technology will help the dental team do a better job, be more productive, and/or work in a better environment. If the answer is yes, then the time is right to invest in technology.”

“I’ve never purchased equipment necessarily to ensure I make a great return on my investment, one being a CBCT, which was really more of an investment for better diagnostics, not necessarily to make more money,” says Margeas. “I do think it’s prudent to do that, but there are times when you invest in technology to make your life better and easier—such as with an electric handpiece, and hopefully the return on investment is good.”

Interestingly, because acquiring equipment and technology is good for the long-term success of the practice and quality of patient care, the decision about “when” shouldn’t be dependent on a financially good or bad month. Any time of the year is the right time to seize opportunities for technology integration that can help a practice become more efficient, effective, and more profitable, Dryer emphasizes. Regardless of what month they’re in, if it makes sense for a practice, it makes sense to acquire the equipment.

Yet, there are caveats to the timing technology investments. Current attractive low-rate financing rates are not guaranteed to be available in the future, but practice owners should feel confident locking in a good rate, with affordable monthly payments, for 3- or 5-year terms. Additionally, although the Section 179 benefit of $500,000—which enables practitioners to lower their taxable income each year—is now permanent, it is a use-it-or-lose-it benefit. However, with year-end incentives offered by manufacturers being much better, dentists can receive the same tax benefit, regardless of whether they acquire equipment later in the year rather than earlier.

“Because every situation is unique, dentists and practice owners should check with their own financial and tax advisors,” Dryer advises. “For the overwhelming majority, investing in technology is really a win-win situation that increases the practice’s standard of care and benefits the practice owner by lowering their taxable income.”