Feeling the Crunch
Laboratories grapple with a turbulent economy
Jason Mazda
While economists and financial professionals debate whether the United States is currently in a recession,1 most—if not all—dental laboratories would agree: Negative economic factors both nationally and globally are posing a significant challenge as they run their businesses. The Consumer Price Index, used to measure inflation in the US, reached 8% in 2022 and was still at 3.5% in 2023—higher than at any point from 2009 to 2020.2 Global supply chains have been disrupted by labor shortages, temporary business disruptions linked to COVID-19, and commodity shortages linked to the Russia-Ukraine conflict.3 More than half of dentists surveyed by the American Dental Association (ADA) Health Policy Institute (HPI) in November 2023 said they were "somewhat skeptical" or "very skeptical" of the overall economy,4 and nearly half of the National Association of Dental Laboratories (NADL) members surveyed in early 2023 said their outlook for the next year was either neutral (35%) or pessimistic (7%).5
"US consumer sentiment has steadily risen recently, but we are far from the likes of 2017 to February 2020," says Joe Young, 2024 NADL president and owner of Young Dental Laboratory, Inc., in Philadelphia, Pennsylvania. "Fear that a recession is looming is also a factor. The potential of layoffs and unemployment will certainly affect consumer behavior as it pertains to people's dental health. Coupled with rising healthcare costs expected in 2024, the cost of care may be too heavy a burden to bear. I am sure the Israel-Palestine and Ukraine-Russia conflicts will have some impact as well." Indeed, NADL chief staff executive Bennett Napier, CAE, says those themes are "congruent with calls/emails we received in 2023 from NADL member laboratories."
In light of these challenges, dental laboratories have needed to adapt creatively; raising fees commensurate to the economic impact on their operations is not an option for most, as dentist clients are facing similar challenges. "The days of simply adding an annual percentage increase across the board are over—for me, at least," says Megan Nakanishi, owner and VP of operations for Nakanishi Dental Laboratory, Inc., in Bellevue, Washington, and NADL treasurer.
Impact on Laboratories
Staffing continues to be arguably the most significant challenge for business owners as the workforce grapples with increased costs of living. According to NADL surveys, the mean hourly wage for laboratories' least experienced technicians was $15.44 in 2020 and $18.84 in 2023; the mean annual salary for laboratories' most experienced technicians was $84,500 in 2020 and $96,165 in 2023.5,6 "Wage inflation is a real thing," says Conrad J. Rensburg, ND, NHD, CEO and head of the dental implant division at Absolute Dental Services in North Carolina. "We are paying entry-level apprentice technicians twice what we used to pay them. When we can find a qualified technician, they require six-figure salaries. I have interviewed candidates whose salary requests were such that it would not be profitable for me to employ them."
As staffing costs increase, some states have further challenged business owners with new legislation regarding employee benefits. Minnesota, for example, enacted a "sick and safe time law," effective January 1, dictating that every worker, regardless of status, earns one hour of paid leave for every 30 hours worked, up to a maximum of 48 hours per year.7 "That is in addition to any vacation pay or sick pay employees already receive, so those things add up and impact our overhead," says Pheng Lor, owner of Dental Esthetics by Lor LLC in Oakdale, Minnesota.
Increased costs of goods—hardware, software, materials, and services—has been another major challenge for most businesses during this economic downturn. While measuring these price changes is not as easy in a niche market as it is for groceries—food-at-home prices increased by 11.4% in 20228—the cost of doing business in dentistry undeniably has increased significantly.
Rensburg says his company's costs rose by approximately 2% to 3% from 2022 to 2023, and that conversations with vendors indicate a likely additional 3% increase this year. "That is definitely a bit of a problem, and we will need to offset that," Rensburg says.
For their part, vendors are in a similar position, as manufacturing and transporting products has become more expensive as well. "To navigate the rising costs while ensuring our offerings remain accessible, we collaborate closely and transparently with suppliers, negotiating competitive terms; optimize our operations to enhance cost-efficiency; and maintain inventory of the best products and solutions that help make our customers more successful, and improve patient outcomes," says Mark Palmer, vice president and general manager of Zahn Dental. Palmer adds that Zahn and parent company Henry Schein offer a variety of financing and payment options to assist customers with running their businesses, as well as a merchandise team with vast experience in negotiating, purchasing, and researching alternatives.
Cost aside, simply getting products can be a challenge for laboratories. Whether due to supply chain issues or other factors, many products have been discontinued or are frequently on back order, causing varying levels of distress for laboratories. "We have sourced alternative materials that have replaced those discontinued," Young says. "Discontinued equipment, however, has us on edge until those pieces cease to operate. Replacement with alternative brands comes with a learning curve and a new inventory of consumables." Rensburg says his procurement office has, so far, always been able to find the products it needs somewhere, even when one company discontinues a line, because other vendors have subsequently added products. "We are fortunate enough to have enough good suppliers in this industry that we can almost always find the products we need," Rensburg says. Still, Lor says switching to a new manufacturer can be stressful. "In most cases, finding alternative products is very doable, but it is not ideal," Lor says. "There can be different learning curves in ensuring that you are using the new products correctly. Also, we have loyalties to certain companies, and we feel guilty having backup plans that involve their competitors, but it is necessary."
Countermeasures
Raising fees, of course, is the most obvious way to counter increased costs of operating. According to an August 2023 ADA HPI survey, 47% of dentists indicated that their laboratories had increased fees by 1% to 10% over the previous 12 months, and 34% said fees had gone up by 11% or more.9 In many cases, however, raising fees is easier said than done. Dentists are facing many of the same staffing and overhead challenges, as median practice expenses per dentist have more than doubled since 2000.10 Meanwhile, as of August 2023, insurance reimbursement rates had been stagnant or decreasing for 37% of dentists, and another 51% said their rates had increased by only 5% or less.9 "Laboratories have been pressured by customers to maintain fees as-is or even lower them, as economic issues are impacting their businesses as well," Young says.
Nakanishi says creativity is necessary when managing fees and services. "We need to be strategic in how we increase or decrease fees," she says. "We tie any fee increases directly to products that require hands-on labor, and we decrease where we are able to utilize technology or new materials."
Rensburg raised his fees modestly last year and did not receive much pushback. "We needed to offset the world we are living in," he says. "I did not make a big deal of it. I did not print new price sheets. I included a little note about it in everyone's statements, so most of them probably did not even notice it. With that being said, there is no way my customer base will accept another increase this year."
Lor has been able to raise his fees any time his costs increase, largely because of his boutique model, but he says he has always had a standard response any time one of his dentists cites insurance reimbursement rates in trying to negotiate fees: "I am not included in your discussions with the insurance providers, so I should not need to base my fees around those discussions," he says. "If I were part of the conversation, that would be different. But I have no say, so my fees are what they are. Usually, when I point that out, it puts the onus on them. However, I understand that if a laboratory has built a longstanding relationship that revolves around insurance reimbursement rates, then that conversation can be very difficult."
Of course, dental support organizations (DSOs) often have the leverage via volume purchasing to refuse any price increases, and these entities occupy an increasing segment of the market,11 with DSOs accounting for an average of 9% of NADL members' sales in 2023, and 35% of NADL members saying they do at least some work with DSOs.5 "When you work with a DSO," Rensburg says, "you are not pushing that price up. They simply will not accept it."
Despite demanding low prices, DSOs and larger practices often expect the highest levels of service. "The expectations of fast turnaround times, high-quality customer and technical services, and added-value services such as workshops, lunch-and-learns, etc, remain the same as with non-discounted customers," Young says. Nakanishi says finding the right balance with DSOs is one of the most important challenges laboratories face, especially because the dentists often do not ultimately choose where they send their laboratory work. "All laboratories should have some sort of DSO strategy—even if that means not working with DSOs—and understand how it might shape the future of their business," Nakanishi says.
Rensburg also emphasizes the importance of closely monitoring payroll and trying to implement cost-saving technology whenever possible. "Technology can offset staffing challenges," Rensburg says. "For example, multilayer zirconia reduces the need for hand layering." He also has been able to negotiate with suppliers in some cases; for example, exchanging hardware commitments for discounts on materials.
Outlook
Perhaps the most important countermeasure to economic challenges is increasing volume. Many laboratories have been able to grow in recent years as the demand for dental work remains strong—gross billings for GPs in private practice were up 8% in 2022.10 The same percentage of laboratories reported net profits of 10% or more in both the 2020 and 2023 NADL surveys, and the percentage reporting net profits of 20% or more was also almost identical from 2020 to 2023. Still, there is concern about the future. "In order to maintain profitability or even the ability to remain operational, the laboratory must receive volume—a measurable level of it," Young says.
The dental laboratory profession places a premium on clinical predictability, but the US economic outlook is more unpredictable than it has been in years. Even analyzing the current state of affairs is difficult; forecasting for 2024 with any sort of certainty is nearly impossible. "The question is: What are we looking at?" Rensburg says. "Are we looking at a softer economy? According to Wall Street, we are out of the woods, and we are rocking and rolling. But we do not see that on the street. Dental laboratories are not experiencing all of these positive vibes that Wall Street continues to predict for us. I am cautiously optimistic that the government can pull off a soft landing, but our biggest challenge remains figuring out what is the new normal."
References
1. Curry B. Are We In A Recessions Yet? Forbes Advisor. https://www.forbes.com/advisor/investing/are-we-in-a-recession/. Updated October 26, 2023. Accessed December 23, 2023.
2. 12-month percentage change, Consumer Price Index, selected categories. https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm. Accessed December 13, 2023.
3. Supply Chain Disruptions and the U.S. Economy. Congressional Research Service. https://crsreports.congress.gov/product/pdf/IN/IN11926. Published May 13, 2022. Accessed December 13, 2023.
4. Health Policy Institute. Economic Outlook and Emerging Issues in Dentistry: Week of November 13, 2023. American Dental Association website. https://www.ada.org/-/media/project/ada-organization/ada/ada-org/files/resources/research/hpi/nov2023_hpi_economic_outlook_denitstry_report_main.pdf?rev=78324f1a991c4e1f96e1fa1f2ebd83ed&hash=8004830DDA30DA2AD50512215864D555. Accessed December 21, 2023.
5. Valmont Research. 2023 Cost of Doing Business Survey. Tallahassee, Florida: National Association of Dental Laboratories;2023:3.
6. Valmont Research. NADL 2020 Business Survey. Tallahassee, Florida: National Association of Dental Laboratories;2020:4.
7. Murphy E. Minnesota workers starting in January. WCCO News website. https://www.cbsnews.com/minnesota/news/states-new-law-requires-paid-sick-time-for-all-minnesota-workers-starting-in-january/. Published December 18, 2023. Accessed December 21, 2023.
8. Summary Findings: Food Price Outlook, 2023 and 2024. U.S. Department of Agriculture Economic Research Service website. https://www.ers.usda.gov/data-products/food-price-outlook/summary-findings/. Updated December 21, 2023. Accessed December 23, 2023.
9. Health Policy Institute. Economic Outlook and Emerging Issues in Dentistry: Week of August 14, 2023. American Dental Association website. https://www.ada.org/-/media/project/ada-organization/ada/ada-org/files/resources/research/hpi/aug2023_hpi_economic_outlook_dentistry_report_main.pdf?rev=8240e5e0bd3e4b0687fb74b402c9b9c0&hash=91607F3E9F5F365E3F15CF73CDBD7771. Accessed December 21, 2023.
10. Health Policy Institute. Income, Gross Billings, Expenses, Characteristics: Selected 2022 Results from the Survey of Dental Practice (Tables in Excel). American Dental Association website. https://www.ada.org/-/media/project/ada-organization/ada/ada-org/files/resources/research/hpi/hpidata_sdpi_2022.xlsx?rev=894fe578f0494c908a7544a00d054709&hash=641F7394E8FC11103969D2126A1A4395. Accessed December 13, 2023.
11. Fialkoff S. Finding the Right Formula. Inside Dentistry. 2024;20(1):16-23.
