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Are PPOs for you ? Chosing the road to long-term sucess

March 1, 1999
Like it or not, managed care in its many forms is becoming a fact of life for dentistry. Whether HMO or PPO, it`s here. How to deal with it is something we all need to learn. Philosophically, many of us reject these innovations and throw their promotions in the trash - perhaps not a bad idea. Others struggle with fee schedules and forms found in the mailing, trying to figure out whether or not the managed-care plan is a good deal.

Richard A. Pena, DDS

Like it or not, managed care in its many forms is becoming a fact of life for dentistry. Whether HMO or PPO, it`s here. How to deal with it is something we all need to learn. Philosophically, many of us reject these innovations and throw their promotions in the trash - perhaps not a bad idea. Others struggle with fee schedules and forms found in the mailing, trying to figure out whether or not the managed-care plan is a good deal.

Articles abound in the literature about managed care, some extolling its virtues and our need to come to terms with it, others decrying its evils. Some maintain that managed care inevitably will dominate the marketplace and, to cope, we will have to become better practice managers. Unfortunately, few of these authors offer concrete, measurable guidelines for evaluating the plans.

Most plans provide us with fee schedules to help calculate whether we can make a go of it with their discount level. The problem is that, with hundreds of procedure codes to consider, it is confusing to determine the average degree of discount a plan really offers. It is all but impossible, on casual inspection, to figure out just what effect a plan will have on the bottom line.

Doctors usually look at several big-ticket items and rationalize that if, for example, their usual crown fee is $650 and the plan is offering $500, they can live with the loss of $130. After all, the plan draws more patients into their offices. Greater market share is a good thing, they tell themselves. They`re giving up $130, but still getting $500. That`s not bad! If this is your thinking, look at what really happens when you discount your $630 crown fee by $130.

To begin with, your gross production has dropped 20.6 percent. What has happened to your cost of producing this crown (your overhead)? Nothing. It`s essentially the same. What effect does reducing your gross have on your net, or take-home pay? That depends a lot on your overhead.

To decide whether or not to participate in a PPO plan, you must know your overhead percentage and the discount percentage of the plan.

You probably already know your percentage overhead or have a good idea of what it is. Add up everything you take for your personal benefit: income, continuing education, retirement plans, insurance - everything. Divide that number by your total collections, multiply by 100, and subtract that number from 100 to derive the percentage of your production consumed by overhead. You get to keep whatever`s left . . . after you pay taxes. Not exactly rocket science, is it?

Let`s say your overhead is 60 percent, not an uncommon figure these days. That means it costs $600 to produce $1,000 worth of dentistry, leaving $400 as your total compensation. In the example above, it you discount your fee by 20.6 percent, your $1,000 in production would generate only $794. Your overhead, however, still would be $600. What happened to your net income? Instead of taking home $400, you`d be left with $194 ($794 - $600). While your gross has shrunk 20.6 percent, your net has shrunk 51.5 percent ($400 - $194 = $206 / $400 x 100).

Table 1 shows what happens to your take-home pay if you participate in programs that discount fees from 0 percent to 40 percent. If you agree to a reduction in your usual and customary fee greater than 40 percent, you`d better stay in bed because it`s going to cost you more to treat your patients than the insurance company is going to pay. Not a bad deal for the patient or the insurer, but not so good for you.

"All well and good," you say, " but how do I tell how good or bad a plan really is? How do I calculate the overall level of discount a plan is going to produce?" All you have from the carrier is two pages of CDT codes with fees that probably are lower than yours, some more so than others. If your practice is computerized, the task may not be so daunting. Most software programs for dental practices will generate a procedure-code analysis. It may be called something else, but basically this report lists by CDT code every procedure you can perform, your normal fee for that code, the number of times you performed that code, and the total number of dollars produced. If you look at a printout for an entire year, certain patterns will strike you. While the total report lists several hundred codes, you will find that 75 to 80 percent of the total revenue produced by your practice is generated by perhaps 25 to 30 codes. Using a spreadsheet program and this handful of codes, it is a relatively simple matter to calculate the effect a PPO program will have on your particular practice.

Table 2 is a spreadsheet you can generate to calculate what happens in your practice with different plans. It was prepared using Lotus 1-2-3 for Macintosh, but any program should be suitable. Shown is a review of the fictional XYZ PPO program. Once formatted you can save the spreadsheet, rename it, and use it for different programs. It takes only a few minutes to plug in the fees offered by a plan, which can be saved for comparison.

Let`s look at the spreadsheet.

* Column I lists the various CDT codes.

* Column II describes the various procedure codes.

* Column III lists your customary fee for that procedure.

* Column IV lists the total number of dollars produced by that particular procedure.

* Column V lists the percentage of total dollars generated by the practice that are produced by each procedure.

* Column VI is the PPO fee for that procedure.

* Column VII is the percentage of your normal fee represented by the PPO fee. Program the spreadsheet to divide the PPO fee by your normal fee and multiply by 100 to obtain this number.

* Column VIII is the number of dollars you would expect to produce at the PPO fee, assuming the same number of procedures was performed. It is calculated by multiplying the percentage in column VII by the dollars generated at your normal fee in column III.

Moving to the bottom of the spreadsheet, the total of column IV is the number of dollars produced only by those codes analyzed. When this figure is divided by the total office production (the total of all procedures reported in the procedure-code analysis) you derive the percentage of the total office production contributed by the codes in the analysis. The higher this percentage (i.e., the more codes included) the more accurate the projection will be.

The total of column VIII is the number of dollars anticipated from the PPO fees, assuming the same number of procedures was performed. Dividing this amount by the total from column IV and multiplying it by 100 tells you the percentage of revenue formerly produced by your usual fee that will be generated by the PPO fees. Subtracting this percentage from 100 gives you the percentage reduction in gross revenue that you can anticipate if you participate in this plan.

In the example provided, if your fees were discounted by 28.44 percent, $1,000 of production would yield $715.60. With overhead still running at $600, you are left with $115.60 to take home instead of $400. This $284.40 reduction in revenues equates to a pay cut of 71.1 percent. It`s not hard to understand why the PPO didn`t include this information in its promotional materials.

You will notice that several plan fees, those for posterior composites and bleaching, are underlined and in bold. They are the same as your normal fees. These represent procedures not covered by the PPO plan, for which you would be allowed to charge your usual fee. The analysis assumes that the same number of these procedures was performed for the PPO subscribers as for your fee-for-service patients. If the PPO does not cover posterior composites, will patients choose the service and pay the difference out-of -pocket? Some will and some won`t. Assuming that the same number of these procedures will be performed at the higher fee may be overly optimistic, thereby distorting the results to the benefit of the plan.

So, how do we cope with these new ideas? The buzzword seems to be manage . . .control costs, cut waste. Sounds good, but what were you doing before PPOs came along? Was your choice of the things that determine overhead based on trying to produce the best dentistry you could, consistent with good business sense, or were you motivated solely to cut costs? Why did you choose the laboratories you use . . . because they do good work or because they are cheap? Do you want the best available supplies or do you want to get by with the cheapest you can find? Are you willing to pay fairly to hire and retain quality employees who enhance your practice, or are you looking for the cheapest workers you can find? Most of us have been trying to provide our patients with the best service we can provide, and our business decisions reflect that goal.

So, what can you do? Use cheaper impression material? Pay your staff less when you treat PPO patients? Send the case to a discount lab? Maybe you just won?t spend as much time with these patients. All of these things will reduce your overhead, but why were you working the other way before the PPO came along? Were these legitimate costs, dictated by your goals and philosophy of practice, or were you just wasting money on things that weren?t necessary? If those costs were incurred because they were necessary to produce quality dentistry, can you reduce them significantly without damaging the quality of the final product? Probably not. Over the course of a year, things average out. For any large number of procedures, the amount of time needed to do it right averages out; the same principle applies to the cost of materials and laboratories. That?s why they?re called averages. If the average rainfall in your area is six inches per month and you?ve only had two, get ready; it?s probably going to rain a lot pretty soon.

Is there room for belt-tightening? Unless you?re going to significantly alter the character of your practice you can cut costs only so much. For a general practice, supplies account for about 6 percent of production, on average, and laboratory costs run about 10 percent. Even if you cut these costs by 25 percent, how much money can you really save? Assuming an annual gross of $500,000, perhaps $7,500 could be cut from supplies and another $12,500 on labs, for a total of $20,000. Not pocket change, but also not very significant if you?re trying to offset a 30 percent cut in your gross (see Table 1).

If you?re going to use cheap labs and cheap materials, you?re going to get cheap dentistry. I?ll leave it to you to muse about asking your staff to work for less so that you can join a PPO. If you?re tempted to dabble with discount plans by trying to maintain a practice in which one group of patients gets your best dentistry while the group in managed care gets something less, you?re going to end up with a nightmare that is all but impossible to manage.

Two forces are at work there, each pulling in an opposite direction. For the dentist, any discount greater than 10 percent may cause an unacceptable drain on net income. From the carrier?s point of view, the greater the discount offered the easier it is to sell the program to employers. Plan discounts of 30 to 40 percent are not uncommon, and anything less may not be marketable. Are PPOs a bad idea that you should avoid? That?s up to you and what you?re trying to do with your practice. Hopefully, this article will give you the tools you need to evaluate your choices.

Bare in mind, these plans are conceived and run by people with business backgrounds probably superior to those of the average dentist. Don?t try to beat them at their own game. If you?re tempted to manage your way through steeply discounted programs, it might be good to remember the words of Chris Sager, executive director of The Pankey Institute, ODon?t try to out-Kmart Kmart.O

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