Opportunity cost: Making the right choices to keep your practice in balance
Scarcity is at the heart of all economic theory. We make choices every day about how to spend our money and use our time.
by Jean A. Sagara and Arnold G. Rosen, DDS, MBA
Scarcity is at the heart of all economic theory. We make choices every day about how to spend our money and use our time. In these busy days of the 21st century, nothing seems scarcer than the commodity of time. We never seem to have enough of it, even though we have all the time there is. For dentists, whose every hour represents a billable opportunity, resource allocation becomes paramount. As one economist, David Henderson, put it, "Every choice involves a cost." Who among us has a perfect score?
I have heard so many colleagues dismiss a problem with a lab fabrication in the following ways:
"If it doesn't fit, I'll redo it. It's only my time."
"If the shade isn't right, the lab will assume the cost. It's only my time."
"If the patient isn't satisfied, I'll just redo it. It's only my time."
Not understanding the value of our time becomes particularly important in our relationships with our labs. This series focuses on lab-to-dentist communication and on how we can improve our outcomes and our incomes, which are fundamentally linked. Better and higher quality outcomes produce higher incomes. At their core is the concept of opportunity cost.
Many dentists may think they know what an opportunity cost is; however, there is little evidence for this in the way we run our practices. Few dentists use the concept of opportunity cost to improve their efficiency and effectiveness. The daily focus of running a busy practice becomes all-consuming. The more sophisticated appreciation of what resource-allocation decisions really mean to balanced, rich lives usually is not a consideration.
Opportunity cost: a definition
Let's take a look at what an opportunity cost is and the impact it can have on a dentist's income - that paycheck that goes home at the end of the week. According to www.xrefer.com, an opportunity cost is "the income or benefit foregone as the result of carrying out a particular decision, when resources are limited or when mutually exclusive projects are involved." Economists generally agree that opportunity cost is "the next highest valued alternative foregone in the pursuit of an activity." (David Henderson, www.econlib.org) Simply stated, an opportunity cost is the cost of doing one thing instead of another. We either have a direct, incremental cost or we lose the opportunity for additional revenues because we make certain choices.
Opportunity cost can be measured in dollars or nonmonetary values. For example, when the crown didn't fit and had to be redone, the dentist lost the opportunity to capture additional revenue from those hours. Perhaps the scene played differently with a personal opportunity cost to that same dentist: When the crown didn't fit, that same dentist added more billable hours to make up for his lost time. However, he lost the chance to go to a child's baseball game. Missing the game was an opportunity cost. The activity lost was something that contributes to the balance of work and recreation for that dentist. Sacrifices to wholesome living are absolute opportunity costs; we all make them in our lives.
Professional consequences of opportunity cost
Let's track the consequences to a dentist when opportunity costs begin to erode productivity and revenue.
Sources of revenue - These typically come from fees generated by clinical activities. If a dentist generates fees at an average rate of $250 per hour and works 30 hours a week on clinical activities that carry associated fees, the average gross revenue will be $7,500 per week. This same dentist will have $7,500 to use for bills and office expenses, and the rest will be the take-home paycheck:
Revenue = 30 hours @ $250 per hour per week = $7,500 gross revenue per week.
Uses of revenue - Uses of revenue typically fall into two categories: fixed costs and variable costs. Fixed costs, or overhead, are the costs that are incurred to run the practice; i.e., staff salaries, rent, and utilities. In a week where no fees are generated, such as when the dentist is on vacation, fixed costs are still incurred. Variable costs, on the other hand, vary according to production. They are generated from clinical activities based on the cost of the goods or services consumed.
For example, a crown generates supply bills and lab bills. The more crowns a dentist completes, the greater these bills become. The fixed costs, on the other hand, will not change, regardless of the number of crowns completed.
When dentist-to-lab communications break down, opportunity costs begin to erode the dentist's earning power. Let's assume the following:
- The lab assumes the cost of all remakes (not always the case).
- The dental office, doing a modest number of prosthetic procedures, may use 65 percent of full production revenue to service the overhead and lab bills. For purposes of this example, we will assume a full production revenue of $7,500, with overhead equal to $4,875.
Now, to restate what has been illustrated so far:
•Revenue = 30 Hours @ $250/hour/week = $7,500
•Expenses = $4,875
•Income = $2,625
Note: The dentist did not start to generate fees for his own paycheck until the 21st hour of practice for the week. In a 30-hour week, this means that the remaining nine hours must have no additional opportunity costs or income will be further compromised.
The first outcome/income compromise
Let's see what happens in reality. Last Monday, a one-hour appointment for insertion of a single anterior crown was scheduled. The shade was not satisfactory and the crown had to be remade. Therefore, it was necessary to retake the impression and have the patient return for another insertion. Your time required to take the impression and place the crown was two hours, assuming that the second crown was satisfactory. The two hours of your additional time is scheduled for the next week. The income for that week now will look like this:
•Revenue = 28 Hours @ $250 per hour = $7,000
•Expenses = $4,875
•Income = $2,125
You lost the opportunity to generate $500 for those two hours. That money came out of your pocket, because you still had to cover the practice's overhead. Thus, your opportunity cost for the week was $500.
The second outcome/income compromise
That same week, a patient showed up for a prosthesis insertion. A miscommunication occurred with the lab, so the prosthesis was not in the office when the patient arrived. The patient was unhappy and suffered an opportunity cost of valuable personal time that would have been spent at her grandchild's school play. The fact that the patient loves to visit your dental office becomes irrelevant. Notably, you lost an hour of productive time. The income for the week now looks like this:
•Revenue = 27 Hours @ $250 per hour = $6,750
•Expenses = $4,875
•Income = $1,875
Your productivity for the week was reduced by $750, or 10 percent. Your income was reduced by 29 percent, an even greater consequence. The opportunity costs are mounting!
The third outcome/income compromise
You decide that it is better to cancel outside activities to make up the time. In that case, you have determined to sacrifice the opportunity to do something that may have been important to you and your family. Every decision can seem right at the time it is made. If this sort of behavior becomes a habit, the opportunity cost to your quality of life may over time be far greater than the 29 percent reduction in your paycheck.
Most practice-management systems are designed to ensure generated fees carry a high likelihood of collection in a reasonable time period. These systems are not concerned with case-management issues that support your effectiveness as a clinician. None focus on ways to maximize outcomes and incomes. There is nothing unexpected about this fact, but it does underscore the need for smarter decision-making and resource allocation on the dentist's part to minimize opportunity costs.
Lab communication is a principal area where opportunity costs can erode profit. How many phone calls a week do you make to your lab technician to clarify what you mean on a prescription? Is this simply the cost of doing business? If so, have you calculated that cost? Are you satisfied with the results? Could you use your assets better, particularly your own time? Could technology lend a hand with digital images, improved shade-matching systems, and online lab scripts? Could these investments and their release of more resources to be applied elsewhere make a difference? With an industry remake rate of 6 percent, this question begs to be considered. We all should be looking for ways to improve on production and reduce our opportunity costs. Reducing redundant production will bring us more revenue and more free time.
In the end, every decision you make carries a cost. Economist David Henderson offers a concluding thought: "ellipse The cost of using a resource arises from the value of what it could be used for instead." How are you doing in your practice?