by James R. Pride, DDS, and Amy Morgan
By now you've heard about the increasing number of dentists retiring, the closing of more dental schools, the decreasing pool of new dentists available to buy practices, and other worrisome trends. The talk is not just supposition. Evidence of significant shifts exists that could affect every dentist for better or worse. Dentists need to understand and prepare for these changes in order to benefit from new trends.
Demographic shifts
The ADA's recent report, "The Future of Dentistry," asserts that the United States population is outdistancing the number of dentists that serve it. The number of dentists per 100,000 persons declined from 60 to 59 between 1995 and 2000, and is expected to decline more dramatically — from 59 percent to 54 percent between 2000 and 2020. This decline could result in a shortfall of 16,046 dentists by 2020.
Another trend is exacerbating this decrease in dentists. Between 1982 and 1999, when the overall number of dental graduates decreased by 24 percent, female dental graduates increased by 73 percent, and this trend is projected to continue. This is fine news for dentistry; however, the percentage of female dentists working part-time has been two or more times that of males. Therefore, the projected shortage of dentists will include many more working a limited schedule for at least part of their careers. The shortage has already begun in rural areas and is expected to worsen. To add to the concern, aging baby boomers — the largest segment of the U.S. population — are expected to desire and require more dental care than any previous generation.
Trends could harm dentists
• It will be harder to sell a practice. Most dentists depend on the sale of their practices to fund a majority of their retirement income. However, the growing shortage of dentists already is affecting the value of dental practices in areas such as North Dakota. The shortage also has reduced practice values nationally from a median of 62 percent to 60 percent. In fact, it is not uncommon to hear that some dentists are unable to sell their practices at all for lack of buyers. We will eventually see the effect even in the most desirable areas of the country.
Many dental schools are now recognizing this problem and are developing programs where retiring alumni can donate their practices to their alma maters.
The inability to sell their practices for an expected value will cause many dentists to fall short of their retirement needs. Sellers also will have to compete with new dentists who want to start a practice from scratch.
• "Busyness" actually may diminish production and quality of care. Some dentists are celebrating the impending shortage, concluding that their services will be in greater demand. Indeed, many leaders in the industry believe the shrinking pool of dentists per capita can meet the growing demand for care by increasing hourly production. But it is an alarming misconception to believe that an increase in hourly production will result in additional access for new patients.
As more emergency and new patients knock on the office door, the dentist may feel obligated to accept the callers as patients. This places more pressure on the dentist's schedule. The restricted time could, for example, prevent the dentist from performing a comprehensive new-patient examination and from establishing a strong doctor-patient relationship. The result may be that dentists will be unable to maintain a comprehensive care practice and will have to revert to single-tooth care, which leads to undertreatment. Treating more patients and increasing production may sound good on the surface. However, the typical outcome for the doctor treating more patients per hour is a decrease in production!
Increasing case acceptance can significantly increase production, but this results from doing more dentistry on the same or fewer patients. The comprehensive care practice is marked by fewer patients who are seen for longer appointments that result in a greater production per hour. Undertreatment is a real problem in dentistry today; increasing production per hour is a a valuable means to solve this problem. However, increasing production does not address the looming shortage of dentists and may well exacerbate it. If patients are having more treatment performed, then there is less time to assimilate additional patients.
Therefore, the impending shortage of dentists may lead to the following undesirable consequences:
! Devaluation of the dental practice
! More stress from an increased caseload, along with lower production, quality of care, and access to care.
Dentists should not view a decrease in their ranks as beneficial, but rather as a problem to address and solve. To protect practice value and profitability, dentists must determine what stage their practice is at in its lifecycle and what to do at that stage to prepare for the demographic shifts. Let's examine what we mean by the "stages" of a dental practice and how they define the action required to prepare for new trends.
Practice stages
The first step toward carving the future is to recognize where you are today. A panoramic view of your current situation is essential to weather the coming devaluation of practices and other challenges. Now more than ever it is critical to run your practice like a finely honed business. This means knowing in detail the condition, status, statistics, and goals of your practice. To do this, you first will need to identify at what stage your practice lies in what we call the "life cycle of dentistry."
There are four stages in the life of a solo dental practice:
• The growth stage (the first five years) — This is the stage in which you are developing your practice. This stage is usually characterized by:
• An active patient base of less than 1,000
• High debt and low cash flow
• Lack of organized office systems
• A high degree of chaos; i.e., "growing pains."
The decisions you make at the growth stage about the location and direction of your practice, the kind of people to hire, staff training, and which systems you will integrate (financial, scheduling, and others) will profoundly affect the production, collections, patient base, customer service, cash flow, and income derived from the practice for many years to come. All of these decisions should align with your long-term goals and position you to deal successfully with changing trends. For example, the growing shortage of dentists in rural areas could mean an excellent opportunity to establish a practice. The office can be designed for production efficiency during future, busier times. Your choices will mold your practice as one that focuses on quality care, emergency-centered treatment, managed care, or fee-for-service. It also is essential to focus on maximizing savings and practice value from day one for future financial security.
• The maintenance stage (years five to 25) — After the practice matures, the maintenance stage emerges. Here is where dentists spend the bulk of their careers. This stage is characterized by:
• An active patient base of 1,000 to 2,500
• A higher cash flow than in the earlier years, but one that may still be inconsistent
• High creativity and continuing improvement in clinical techniques, office design, and technology
In the maintenance stage, dentists have the resources to focus on expanding clinical skills, introducing the latest technology, remodeling, improving systems, motivating their teams, and achieving an ideal cash flow and a fully funded pension. Your decisions at the maintenance stage can profoundly affect your ability to cope with demographic shifts and to realize your long-term goals.
Dentists who begin saving for retirement early in the maintenance stage benefit from long-term compound interest. They achieve financial freedom sooner than colleagues who delay addressing retirement. Those who save early also decrease their dependence on a practice sale for retirement income.
Dentists who develop a plan to afford their new offices and technology will more likely realize a return on their investments. Dentists who develop a target profile of their ideal patients — be they retirees needing significant restorative care, growing families requiring basic care, professionals wanting cosmetic care, or other groups — will be less likely to get buried with too many patients or lose their direction than the dentist who accepts every patient. A solo dentist can comfortably handle up to 2,500 active patients. Going beyond this number can compromise the 90-minute comprehensive examination and consultation and move the practice toward single-tooth dentistry. In general, everything done in the maintenance stage needs to support your ideal practice values.
• The conversion stage (the last 10 years of your practice) — This is the time to transition toward your exit. You may need to take on an associate or partner, or reduce your work hours. This stage is characterized by:
• An active patient base of more than 2,500
• "Busyness" issues
• A focus on exit strategies
• The desire to achieve a balance between personal and professional pursuits
• The need to maximize cash flow to make the practice more desirable to buyers and to secure your financial freedom.
In the conversion stage, dentists are concerned with maximizing the value of their practices for a profitable sale. This is done by streamlining systems, enhancing the staff's skills, and developing an exit strategy. Planning your exit should ideally begin in the maintenance stage and continue into conversion. Your wealth accumulation in the conversion stage should be stepped up through interest compounding on an already significant amount of savings from your maintenance years. Questions to ask yourself at this stage include: Are my patients fully restored? How much managed care do I have? Is my practice going to sell when I'm ready to retire?
A mature practice may be running out of dentistry to perform on its patients of record. In that case, the dentist who wants a viable practice to sell in a buyer's market needs to recruit new patients. Managed-care patients decrease the value of a practice because of reduced fees and the short-term nature of the contract with the insurer. Therefore, dentists preparing their practices for sale need to consider limiting managed care.
In the mature practice, the team should be managing the systems, and the systems should be finely honed to produce outstanding customer service, a skilled hygiene department, a variety of payment options, excellent collections, and efficient scheduling. In the mature practice, practice statistics are generated, discussed with the team, assimilated, and acted upon to make improvements. In the conversion phase, your practice statistics will be invaluable in correcting any shortcomings with systems and staffing and will help make the practice more attractive to buyers.
If "busyness" issues are a concern, hiring an associate with a buy-in agreement upfront could be the right solution. An ideal arrangement would be to build a practice-within-a-practice for the associate while still maintaining a practice to sell to an outside buyer upon retirement. In five years, the associate likely will be ready to buy the practice that he or she has helped to build. Then, the associate becomes a partner, sharing space and possibly some staff with you. Keep in mind, however, that with an ever-increasing patient load, more new dentists will be starting practices from scratch; therefore, your practice will need to be very desirable from a clinical and management standpoint to attract buyers.
Another issue to examine during the late-maintenance and conversion stages is: How large do you want your practice to be? For example, we have a client who produces $160,000 per month (yes, one phenomenal dentist!). The value of such a big practice could be daunting to a single purchaser. The dynamo-dentist needs to scale down in the exit years, divide the practice for multiple buyers, or maximize income during the maintenance and conversion years so that she will not depend on the practice sale to fund her retirement.
• The exit stage (five to zero years left) — This is the stage at which you're planning to retire within five years. This stage is characterized by:
• An active patient base whose size will vary, depending on whether you have slowed down or another dentist has entered the practice
• A plan to reduce hours or to exit completely
Concerns that begin in the conversion stage and continue into the exit years include updating your practice appraisal annually; deciding whether to sell outright or to phase out through working part-time; developing a smooth transition to a new owner; and determining what to do in retirement.
Dentists with abundant retirement savings will have more options than those who are caught unprepared. Dentists with the forethought to save for retirement survive the absence of buyers due to a demographic shift, and will walk away from dentistry whenever they choose. However, if you are a dentist at the exit stage who has not yet saved sufficiently for retirement, do not despair! There are excellent opportunities to catch up by saving substantial amounts, tax-deferred, in defined-benefit retirement plans. Contact a retirement specialist for more information.
Coming out ahead
No matter what stage your practice is at, you can prepare for the changing demographics and secure your financial future. Don't allow the clouds on dentistry's horizon to discourage you from sailing ahead. Note the varying winds, identify your location, and plot your course. A careful journey, mindful of the hazards, will ensure a safe passage to your destination.
The authors thank Hy Smith, Director of Pride Institute's Transition Services and president of Professional Transitions, for his contributions to this article. For more information and for course offerings on how to position your practice for success in a changing future, call Pride Institute at (800) 925-2600.
