by Dr. Gene McCormick and Bob Fitzgerald, CPA
You can buy my practice ... but you can't look at my patient files! Any takers?
Pending legislation in the "Patient Privacy Act" may prohibit a potential buyer from examining the seller's patient files. Who wants to buy a practice without knowing the number of active patients? The major portion of the price paid for a dental practice is attributed to patient records. The expected repeated collections from those patients is critical to the value of a general dentistry practice.
How can you calculate the number of patients a practice has if you can't examine the files? A mere physical count of the file folders (without looking inside) may be allowed under the new legislation. However, that doesn't tell you how many of those files are currently active or provide you with other important data, such as the types of treatments in process or completed.
So, what's a buyer to do? Here are a few suggested alternatives that may help.
1. Summary reports from the selling dentist — Most dentists do not really know how many active patient files they have. However, a good practice broker or practice consultant can instruct the selling dentist on how to compile valuable patient information without violating new legislation restrictions. A step-by-step procedure for gathering accurate information from a specific practice can be created. For example, the parameters for an "active patient" can be carefully defined. A sample of the files can be examined for information about treatment plan status. By following those guidelines, the selling doctor can provide the much needed data desired by the buyer. A contract agreement also should be drawn up stating that if the selling doctor significantly misrepresents the information in his summary report, he may be liable for damages to the buyer.
2. Computer reports — Most dental software packages can generate yearly procedure reports. If you take the periodic oral exams plus the comprehensive exams and divide that total by two, you can obtain a fairly good estimate of active patient files. This approach assumes an "active patient" is defined as one who has received treatment within the last 12 months. If a longer period is used to define an active patient, a factor would need to be applied that increases this number. Since no names are associated with this report, no invasion of privacy issues are involved.
3. Mathematical approach — Simple math can be used to check the alleged number of active patients for reasonableness. Divide the yearly collections (as verified by tax returns) by the number given for patient files. This will give you the average income per patient for the year. In many regions, you can expect this number to be between $285 and $385. If your answer to this math problem is less than that, there may be more patient files than reported. A higher answer indicates fewer patient files.
The seller should explain any deviations from the average yearly collections per patient.The fee schedule may be high, driving the average up. A high average also might indicate that patients want quality dentistry that simply costs more. Either of these explanations means good news. But, a lower average may indicate the patient base does not desire good dentistry or that the patients just cannot afford it. Although there may be more patients in terms of actua numbers in the latter situation, you'll have to work harder to get the gross collections desired.
Until the law changes, use any method available to find out all you can about the patient base. The exact restrictions of the Patient Privacy Act and its impact on information available to a practice buyer are yet to be determined. We recommend that you watch for updated information from the ADA as further developments on this legislation unfold.
Dr. Gene McCormick has practiced dentistry for the past 34 years. Bob Fitzgerald has been a practicing CPA for the past 26 years. Together, they make up a unique team effort in practice transitions and appraisals in Oklahoma and Arkansas. McCormick and Fitzgerald Dental Practice Transitions is a member of American Dental Sales. Dr. McCormick and Mr. Fitzgerald can be reached at (800) 475-1228 or (918) 245-1333.
