Dr. Michael Gradeless
Adding value is the foundation of a business. The classic model is manufacturing. A company purchases raw materials and adds value by the expenditure of human capital. Human capital is simply the work that people perform that transforms the raw materials into the finished product. The better the design and the better people are at their jobs, the more value is added. For example, there is clearly more added value in a Mercedes than there is in a Yugo.
When purchasing a dental practice, the "raw materials" are the tangible assets, such as the dental equipment and the real estate or the leasehold improvements. The added value in a dental practice is the patient charts, the quality of the staff, and the systems that are in place. It is easy to evaluate the tangible assets in a practice purchase. However, the components that add value to your purchase have always been more difficult to analyze.
One of the most important ways to analyze a practice is to perform a chart audit. In a chart audit, you examine the charts one by one and look for certain information. You may examine every chart or predetermine a limited percentage. What are you looking for?
• How many active patients are in the practice? Often the selling doctor and the practice broker give an estimate of the patient base. You demand an accurate count of this vital practice statistic. Active patients are defined as any patient that has been seen in the practice in the preceding 18 months. The numbers can fluctuate widely, even in practices with very similar gross production.
• Are the charts user friendly and legible? How are the charts stored? Are they color-coded for ease of filing? Can you easily locate misfiled charts? Do the charts contain complete information and can you read the treatment notes? Inadequacies in these areas may require you to spend thousands of additional dollars to upgrade the charting system.
• Are the diagnostics complete? Is the medical history updated at each exam? Does the hygienist record pocket depths in a yearly periodontal record? Does every patient have a current full-mouth series of X-rays? This can be an added source of revenue for the practice, but it can also quickly drain patients from the practice, as it is often difficult to motivate patients to suddenly increase their expenses for diagnostic procedures.
• Are the treatment plans and financial records written in the chart? Treatment plans should be written in the charts; however, it is best to keep financial records separate. Complete, well-written treatment plans allow you to easily maintain continuity with the patient's treatment. Most medical malpractice carriers advise against including financial arrangements in the charts for legal reasons.
• Is the average appointment for single or multiple restorations? What is the frequency of the various types of restorations? One of the greatest boosts to practice net income results from transitioning a practice from single-tooth dentistry to quadrant dentistry. Get a feel for the types of procedures that are being performed in the practice and decide if that fits with your vision. On a random basis, cross-reference billing records with chart notes.
Patient charts are one of the biggest components that create value in the deal. A chart audit is your protection against misrepresentation or even fraud. Even if it contains no surprises, this undertaking will make you far more familiar with how the practice actually operates. A chart audit can point you to possible profit centers that should be developed and to areas where you may need to continue your education to better support practice production. The chart audit is one of the best tools to use in evaluating the health of a dental practice.
Dr. Michael Gradeless, a 1980 graduate of Indiana University, practices preventive dentistry in Indianapolis with an emphasis on cosmetics and implants. He is an adjunct faculty member at Indiana University where he teaches the Pride Institute university curriculum of dental management. He is also the editor for the Indiana Dental Association. Contact him at (317) 841-3130 or email: [email protected].
