The big switch-is it right for your practice?

Moving from fee-for-service, private-practice, general dentistry to a capitated, managed-care practice is a multifaceted decision. At first glance, it may look as if the only real difference is the method of remuneration for your services. Indeed, if a capitation program were funded adequately, that would be close to the truth.

Feb 1st, 1996

The decision to move a practice from fee-for-service to managed care requires careful study.

Susan Smallegan Holtrop, DDS, MSBA

Moving from fee-for-service, private-practice, general dentistry to a capitated, managed-care practice is a multifaceted decision. At first glance, it may look as if the only real difference is the method of remuneration for your services. Indeed, if a capitation program were funded adequately, that would be close to the truth.

The words "managed care," however, can be used almost synonymously with "managed costs" or "controlled costs" for the benefit purchaser. It is unreasonable to assume that if the reimbursement of a product or service declines, all other aspects of the product or service will remain the same. If, for example, your favorite fast-food restaurant discounted all its menu items by 20 percent, you might not be surprised to wait in a longer line, clear your own tables or drive through pot holes in the parking lot a year later. Likewise, in dentistry, as reimbursement levels decline, dentists strive to maintain high-quality treatment while, perhaps, sacrificing patient service factors and/or other practice systems.

Let`s study the economics of both fee-for-service and capitated practices from a managerial accountant`s (rather than a dentist`s) perspective. In the fee-for-service practice, the profit center might rest solely in the dentist`s ability to produce billable services-in other words, the dentist`s hands busy in the patient`s mouth. The hygiene department is another story. While many dentists claim their hygiene department is profitable, it would not be able to stand alone-independent of the rest of the practice-and remain profitable. The overhead incurred in the average hygiene visit, compared to the average fee-per-hour of hygiene services, usually reveals a break-even point or a small profit, at best. From the accountant`s perspective, the hygiene department functions more as marketing opportunity to convert potential sales (the patient`s dental needs) into billable services at the dental-treatment appointment. All other departments, systems and office spaces operate as cost centers in the practice. We call this "overhead."

Looking at the capitated practice from an accountant`s perspective is easier. The fee-per- head (often referred to as pppm or per person per month is `in the mail` to you each month. Now the practice income is fixed. Thus, every expenditure diminishes the income and every department becomes a cost center-including dental services. As an economic model, the capitated practice is a flip-flop of the fee-for-service model. A pure capitation practice sees its greatest profits before any dental patient is treated and the profits decrease as more patients are treated. Again, this can have a profound effect on service factors and on each system used to manage the practice. To change from one practice of dentistry to the other, without studying the effect on these systems, could spell disaster.

Collections: The more capitated a dental practice becomes, the fewer the practice`s collection headaches. Unless the parent company is financially troubled, your pppm payments are mailed monthly. Financial arrangements, bad checks, false promises and collection calls can be virtually eliminated.

Cash-Flow Management: While the collection percentage may be close to 100 percent, a capitated practice may inherit some cash-flow problems. If fixed expenses are truly fixed and variable costs cannot be altered substantially, the decreased capital will result in significantly lower (or negligible) profits. Thus, healthy cash flow in a capitated practice means reducing variable expenses wherever possible. If a dental practice already has tried and failed at significant reduction in variable expenses, the move towards capitation might be devastating or even fatal.

Advertising and External Marketing: Again, as the practice becomes more capitated, the necessity for attracting new patients from "outside" the managed-care plans decreases. The cost of any high-profile external marketing is incurred directly by the managed-care company who has the ultimate responsibility for gaining the public approval. A practice ultimately could suffer by decreasing its efforts to be known in the community if it decided to move back toward fee-for-service delivery. If capitation programs are attempted as "experimental" or are to remain less than 20 percent of the practice, it might be best to continue efforts to appeal to the private-care, target market and underplay the importance of the managed-care segment.

Laboratory: Lab costs are a highly-visible and variable expense that, in a capitated practice, need to be analyzed significantly. Lab services are one of the few variable expenses a dentist may be able to control, keeping in mind that "clinically acceptable" restorative dentistry has a broad range of quality factors. Shopping for less expensive laboratory services, or the dentist completing more of his/her own lab work, are a couple of alternatives.

Payroll/Personnel: Payroll expense is arguably the largest, most significant variable expense in the total overhead. Thus, the financial health of the capitated practice might require a drastic reduction in payroll expense. Possible indications include down-sizing, hiring less-experienced staff, reducing wages or benefits, reducing hours, reducing fringe benefits such as paid continuing-education time, etc. In terms of team morale and motivation, this is potentially the biggest threat to a practice during the transition from fee-for-service to capitation. Hiring an organizational-development consultant may be advisable in the attempt to avoid long-term problems such as anger, mistrust, duplicity among the team and more importantly, employment litigation. There are strict laws involving implied contracts that can be violated easily when all or part of an employee`s package is taken away from him/her.

Inventory/Ordering: Both office supplies and clinical supplies are a variable expense that tend to be less controllable than ever before. Clinically, we are bound by strict federal and state regulations that have driven the costs of supplies up in recent years. One way to reduce this cost center is to resist the urge to purchase new materials and instruments in favor of the "old standby." For the "technophyle" or "gadget-happy" dentist, this suggestion might be incentive enough to remain a fee-for-service provider.

Continuing Education: Reduc- ing variable expenses in continuing education for the dentist and staff suggests completing the minimum requirement in CE credits, and employing the least expensive methods in doing so. Focus, perhaps, on reducing travel, paid continuing-education time and high-tuition courses, while increasing study from audiovisual tapes, journal articles and local or less expensive courses.

Individualized Treatment-Planning: Herein lies a significant difference between the fee-for-service and managed-care practice. Managed-care contractors seem clear that the emphasis rests on reduced variation in treatment, based on protocol development and application. The quality-assurance factors are measured by consultants who study statistics and might suggest that your treatment patterns do not match those of the norm. In other words, managed care focuses less on individualized treatment-planning and more on conservative, cost-containment measures that some believe are better for the covered population. All dental care provided is reviewed by an administrator and the practice is guided toward more "normal" trends in utilization. This is, perhaps, the largest paradigm shift asked of a managed-care dental practice. Dentists are trained to create and institute highly-individualized treatment plans, based on the physical, emotional and economic needs expressed by the patient. The shift in focus from the good of the individual to the good of the population-at-large can leave a dentist questioning his or her entire philosophy of practice.

Regulatory Compliance: As- sume, for a moment, that all existing regulations are here to stay. Managed care brings a new set of regulations all its own. The larger the plan and the closer it is linked with the government, the higher the regulatory activity. Luckily, much of the hassle is incurred by the managed-care company itself. The managed-care dental practice, however, fits into the regulatory red tape in as much as a hand fits into a glove. The statistics generated by the participating practices must be gathered in detail in order to provide adequate treatment statistics for the parent company.

Recall: Every dentist realizes that there is no fool-proof recall system. Any patient who wants to "slip through the cracks" and exit the recall system can do so. With a capitation practice, there will be little financial motivation to improve a patient`s compliance to a suggested recall frequency. The patient, however, may be more motivated to attend to his/her own prescribed prophy appointments, because there is no out-of-pocket expense involved. Both these factors may contribute to relaxing the energy that most practices currently spend on patient recall.

Scheduling: Scheduling treatment in a traditional practice has at least two objectives. One is to allow the dentist`s, staffs` and patients` day to run smoothly. The second is efficiency-to improve the production potential of the dentist`s chairside time. In a capitation dental practice, the second objective may disappear. Producing more dentistry increases the variable costs of treatment, thereby reducing the bottom-line profit. Increased costs, coupled with the tremendous personal energy required to complete a "tightly" scheduled day, will drive down the incentive to schedule so efficiently.

In summary, the decision to gear a practice from traditional fee-for-service to managed care requires almost a complete change in practice paradigms. A dentist considering such a transition must study the effects carefully to decide how he/she wants to practice dentistry. To create long-term satisfaction, the changes imparted by managed care must be fully aligned with the dentist`s values, vision and philosophy of practice.

The author practices general dentistry in Holt, MI. Dr. Holtrop lecturers on practice management at the University of Michigan School of Dentistry and will become a five-year member of Dental Economics` Editorial Board in May. This article originally appeared in the September 1995 issue of the Journal of the Michigan Dental Association.

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