Easing the Impact of Inflation by Being Proactive
Brad McKeiver, CPA, MBA
In June 2020, Sarah Kliff of The New York Times wrote that many economists consider dentists to be a solid barometer of the health of the economy. Kliff was right in this sentiment, and it is the same reason why so many banks consider dental practices to be trustworthy lenders. Dental practices are some of the most stable businesses in the economic marketplace: practices transcend decades and generations, and dentists provide an essential service that simply can't be found anywhere else. As it's been said, "Every day, someone is born with a new set of teeth."
On the whole, the dental industry is poised for continued growth. According to Precedence Research, the US dental services market is estimated to grow to $196.18 billion by 2027, with an annualized growth rate of 6.24% between the years of 2021 and 2027. With dentistry serving as a bellwether for the economy, it is important to examine how current and future economic trends will continue to shape the space. Certain trends will create both opportunities and potential challenges for dentists over the next few years, so practitioners should understand what they can do today to prepare.
The Effects of Inflation and Macroeconomics
Probably the biggest economic "headline" that has permeated the airwaves in recent months is inflation. Developed economies are experiencing inflation at levels not seen in more than three decades. Moreover, experts expect inflation to remain high over the next 12 months, meaning high prices for consumer goods and services will stay put for a while longer.
Inflation affects dentists in many ways, but the three most important points of impact are: (1) increases in labor costs, as wage growth escalates in light of the tight job market; (2) increases in supply costs, as inflation drives up the cost of dental tools, supplies, and equipment, as well as office supplies; and (3) higher cost of debt, as a result of rising interest rates.
Inflation, however, is not the only factor shaping dentists' economic reality. Due to COVID-19 relief programs like the Paycheck Protection Program, Employee Retention Credit, and Provider Relief Fund, many businesses had extra liquidity to work with between 2020 and 2021. Many practitioners also saw an increase in new procedures like cosmetic dentistry and an uptick in cleanings with the advent of remote work, which gave employees increased flexibility and led to a rise in virtual meetings. These factors helped drive growth in dentistry and enabled many practices to notch some of their strongest months ever, performance- and revenue-wise.
Now, here in the first half of 2023, most of that liquidity has been used up and dental practices are returning back to pre-pandemic production levels. Combined with high inflation, interest rate hikes, economic tightening, and some anxiety over an impending recession, many practice owners are spending more time analyzing their cash flows and budget projections for the remainder of the year.
Losing revenue in an inflationary market can reduce margins, so dentists are being conscientious about their practice investments and focusing on their unique, key differentiators to boost value.
Utilizing an Inflationary Playbook
Dentists can take proactive steps to ease the impact of inflation on their businesses and overcome cost barriers and challenges. The following four steps should be made priorities:
Manage revenue and expenses-Revenue leakage is a true risk during inflationary periods. Dentists can strive to boost case acceptance by introducing a new and more diverse mix of procedures that emphasize capturing gross profit dollars. On the expense side, increased supply costs should not be deterrents to growth. Set realistic budgets for key investments in capital maintenance and equipment funding.
Make creative investments in your people-Dentists can mitigate compensation inflation by focusing on increasing employee retention and offering more nonfinancial benefits to prospective employees to boost the practice's image as an employer. Automation, software, and technology should be leveraged to identify efficiencies and reduce excess work, which will help offset high labor costs and also take cumbersome tasks off of team members' shoulders.
Practice active tax and financial management-If needed, dentists can protect their balance sheet through fixed-rate debt and financing before rates increase further. It is also important to aggressively manage cash flow by focusing on receivables and tax savings when opportunities present themselves. As input costs change, practices should update their financial models and scenario plan more frequently so they are prepared for any unexpected economic curveballs.
Monitor key performance indicators (KPIs)-There are several KPIs that every dental practice owner should track on a regular basis. The most critical metric to monitor during times of economic uncertainty is profitability as a percentage of collections (income before dentist/specialist compensation). Other KPIs that can help dentists get a better sense of their practice's financial and operational health include: (1) collections and accounts receivable, a metric that includes collections to daily/monthly goals, collections as a percentage of net production, over-the-counter collection percentage, and aging accounts receivable; (2) hygiene, which comprises average daily hygiene production, percentage of total production, hygienists' daily patient schedule, and the hygienist-compensation-to-collections ratio; (3) new and active patients, which encompasses the number of patients appointed, number of patients seen, number of cancellations, refilled canceled slots, and case acceptance; and (4) production, which includes total production, doctor production, hygiene production, production average per patient, and available chairtime.
Looking Ahead: Opportunities for Growth
Although trends such as inflation and high interest rates present challenges for dentists, plenty of opportunities are also on the horizon in the dental space.
Invest in technology-New technology may cost a lot on the front end, but with the right tools, a practice will benefit from impactful long-term efficiencies and profit margins. Cutting-edge technology allows a practice to better serve a wider patient population while helping to improve case acceptance and proactive treatment planning. Many popular and reputable tools available today enable greater transparency (for instance, the ability to show patients new cavities or issues via video technology) and create more opportunities for practice growth.
Seize opportunities for both buyers and sellers-Practice valuations remain high and corporate dentistry and private equity interest in the market has driven prices up, which has created appealing opportunities for sellers. Today's sellers are benefiting from greater visibility into practice financials as well, which instills confidence for the buyer, who can be assured they are getting a great product at market.
Besides sellers, opportunities are abounding in the current economic environment for buyers as well, particularly dentists who are just starting their careers. Conventional wisdom has perpetuated the idea that student loan debt presents a risk and prohibits aspiring dentists from pursuing a path to ownership right out of school. But in the author's firm's experience, that couldn't be further from the truth. In reality, lenders still see dentists as solid, stable investments and are ready to loan to them in the event of a practice purchase. Financially speaking, dentists stand to generate more wealth from ownership than from pursuing a career in corporate dentistry, so young dentists should run the projections and explore both avenues as they contemplate their next steps.
Consider alternative insurance options-Insurance reimbursement rates are putting increased stress on practices in the face of inflation. When practitioners are forced to reimburse a little less per procedure, they run the risk of profit margins slipping and reduced cash flow.
To combat insurance reimbursement issues, dentists are increasingly moving toward adopting membership plans, which can serve to attract more patients who are out of network with typical insurance providers. Membership plans are usually billed at a certain subscription rate per month and provide subscribers with services typically included under basic insurance plans, such as two cleanings per year, x-rays, fluoride treatments, and other staple services. Some plans may even provide subscribers with a 10% to 15% discount on specialty services such as crown placement. For practitioners concerned about the impact of insurance reimbursement on their bottom line, membership plans could be very beneficial and well worth exploring.
Consider the changing demographics of dentists-While dentistry as a whole is growing robustly, the average age of dentists is increasing, indicating that many practitioners are on the brink of retirement and may eventually exit the profession. When thinking about the next generation of practice ownership, diversity will be a leading factor. More women and people of color will be entering the profession and serving as a reflection of a diverse patient population. This should be top of mind for those practitioners who are planning their exits and considering potential successors.
Stay focused on your strategic plan-To manage current and future economic trends and prepare the practice for continual growth, practice owners need to make long-term strategic planning a consistent priority. A financial plan should be put in writing on an annual basis, and it should be one that accurately reflects the practice's operational plan. A process or platform should be implemented that allows crucial KPIs to be tracked seamlessly, as these findings will be needed to inform the strategic plan and enable adjustments as needed.
Enlisting Help
Above all, practitioners should know that they do not have to go it alone. They can enlist the help of a qualified dental certified public accountant (CPA) who can help them manage their strategic plan, keep them abreast of economic trends and changing tax laws, and empower them to make optimal decisions for the future health of their practice. A professional financial team can be the guidepost a practice needs to thrive, regardless of the state of the economy.
About the Author
Brad McKeiver, CPA, MBA
National Dental Practice Leader, Aprio (aprio.com); Mr. McKeiver oversees the firm's staff of dental CPAs and accountants and serves as a strategic business advisor to dentists and owners of dental practices
