The art of setting fees
Charles Blair, DDS
Editor`s Note: Dental Economics Editor Dr. Joseph A. Blaes interviews nationally known consultant and lecturer, Dr. Charles Blair, about factors affecting the fee-setting process. His Revenue Enhancer Program features both fee analysis and procedure-mix consulting. The results of this program add thousands of dollars to his clients` net incomes. Call (704) 573-5882 for details about Dr. Blair`s unique consultation.
Dr. Blaes: What is the first thing a doctor should consider when setting fees?
Dr. Blair: The self-esteem of the doctor plays a major role in the fee-setting process. Dentists must be comfortable with the fees they set for their services ... and they also must realize that overhead makes up around 60-65 percent of the cost of actually running a practice. Fee-positioning can make a tremendous difference in your overhead percentage and your net income.
For example, if you have a $400,000 practice and your overall fees are positioned at, say, plus 10 percent above average, then that amounts to a $40,000 difference in your bottom line. Also, if you take an average overhead and an average fee and you have a doctor who is charging 10 percent less than that average fee and another doctor who is charging 10 percent more, there`s an 80 percent difference in their net incomes.
Dr. Blaes: What areas should the doctor look at when structuring the fees for the practice?
Dr. Blair: I think that dentists need to examine their practices from the standpoint of their care and skills, their expertise, the facility, the staff - the whole thing - and then make a judgment call on where they want to place themselves out in the marketplace. Naturally, if fees are set too high, you`re kind of like a lightning rod, sticking out like a sore thumb. You better have a "name" in your community for that kind of positioning. But you can position yourself at the high end of fees, and that`s where you should be, because you`re going to generate strong revenues from that positioning.
Some dentists would make a point of looking at expenses and then set their fees. I think the reality is that out in the marketplace, the industry over the years has set its own fees in these different areas. So, there`s some tradition here.
Insurance companies have their own individual UCRs, which have influenced fee-setting in terms of a given fee and a given fee range. However, I think many doctors come up with a fee schedule simply by asking a few of their colleagues in the community, "What do you charge?" Then, set their own fees with that input in mind. However, I don`t think dentists as a group ever get together and say the fee for `x` procedure in Atlanta is going to be `x` dollars. The Federal Trade Commission would not be happy with that.
In some articles, the consultant recommends looking at your costs and the time needed for each procedure in setting individual fees. What I`ve found is that most dentists don`t spend that much time examining their fees. A large number don`t even read the survey information available. However, the bottom-line difference on charging, say, $82 for a service versus $87 or $88 for that same procedure is very significant percentage-wise. In the eyes of the individual patient, though, the difference between an $82 fee and an $88 fee really is just a few dollars. For example, if you`ve got a $400,000 practice, that difference in fees works out to a $30,000 swing either way ... and that $30,000 goes right to the bottom line!
I`ve seen doctors struggle with whether they should charge a crown fee of $510 or $521. Yet, from the patient`s perspective, the fee is too high whether it`s $510 or $521! The difference between the two is miniscule. If Dr. Low charges $500 for a crown, Dr. Average charges $550, and Dr. High charges $600, all of their patients would tell you "the fee`s a little high," if asked.
In other words, there`s not a bargain here - whether it`s the high-fee dentist or the low-fee dentist - from the patient`s point of view. But, from a business perspective and in a fee-positioning connotation, it`s extremely important where that doctor is on the curve. Some doctors might say, "Well, even though I charge less in fees, I`m a little speedier, so I still have a good income." The problem with this is these doctors are not being paid fairly for their superior skills.
In other words, you could be charging a lower fee to me and say, "I`m OK; my overhead`s OK, and so I can make money at $400 a crown." But what would you make if you charged $550? Have you ever calculated that? So, doctors should spend more time on establishing the fee schedule.
Some doctors feel like fees in the hygiene area are market-sensitive - i.e., that patients utilize these services more frequently, that this usually is the entry point into the practice, and so patients are more aware of and sensitive to these fees. Our feeling is that hygiene should be "an average plus fee." That means you should charge a fair fee for hygiene services, but not try to necessarily make these procedures your highest profile.
One way you can raise your fees to a reasonable level for hygiene is to add value to the services. We recommend that you give your hygiene patients a detailed printout of what services were actually performed. While you only can file for reimbursement for typically three of these services (prophy, exam, and X-rays) with a patient`s insurance company, the extra procedures that you do really make it a comprehensive service. Include on the statement such items as medical update, oral cancer exam, blood pressure exam, oral health audio visual education, home care instructions, toothbrush, floss, and toothpaste if you provide all of these at "no charge". So, position your hygiene fees toward the upper end and include an explanation of what you`re really doing for this fee. The patient then has this "hit list" of the separate services included in the total hygiene fee. Then, your patient might have a conversation like the following if a co-worker inquires about what was done:
Co-Worker: "Hey, I understand you just went to your dentist. What did you have done?"
Patient: "Yeah, I went for a checkup. It cost $90."
Co-Worker: "Gee, my dentist only charges $50. That`s a whale of a difference! It must be a rip-off or something."
Your patient then can show this co-worker the printout of all the things you did for that $90. And the co-worker would look at that and say, "Wow, your dentist includes more on his checkup than mine does."
So, in your true positioning, do all that you can do in terms of added value for your services, to distinguish your office from other offices.
Dr. Blaes: How often should dentists raise fees?
Dr. Blair: Probably once a year. We typically recommend that dentists raise fees January 1. You want the staff looking forward to those fee increases, because in terms of running a business, the only way for staff and the doctor to get an increase is for you to (1) increase your volume, (2) cut your expenses, and/or (3) raise your fees to some degree. Even in the face of managed care, discounting fees, and some of the things that are entering into dentistry, it`s still important to maintain a fee increase on your regular services. There`s also the psychology that you should raise the staff`s wages maybe 30 days later - in other words, have your salary reviews, etc., in February. The reason for the delay of 30 to 45 days is to let the fees kind of "kick in," so there is not a lag in cash flow.
Secondly, we want the staff to look forward to the fee increases, because they know their pay increases will come later as a result of the fee increases. We also want the staff to realize what it takes for them to get an increase in their pay. You certainly need to have a fee increase equal to or greater than (hopefully) a salary increase - at least comparable to the cost of living. A staff that is more outstanding and productive deserves a cost-of-living increase plus some extra.
Dr. Blaes: I would assume that this also is a way to get your staff`s support of the fee increase.
Dr. Blair: This gets the staff involved in the reasons for the fee increase. I think another thing is to review with the staff that a fee increase is coming, and what are we going to say to patients about the fee increase? This needs to be thought out ahead of time and discussed. You need to be ready for the patient who says, "I see your fees have gone up" or "I must be buying the doctor`s new car."
Staff members shouldn`t hang their heads or wince when that happens. They should say to the patient: "Thank you for asking about that. We are proud of the services we offer our patients. We are proud of our fee and we try to keep them in line with the level of services that we provide. And, yes, we do have small fee increases just to keep up with inflation." That`s the same response customers would get if they commented on prices going up at a better restaurant. That is the correct response, not something like, "We`ve got to buy a new building." The staff also needs to emphasize, "This is a quality office, and the doctor gives you individual attention. Our fees reflect this level of service."
Dr. Blaes: Will raising fees hurt your practice?
Dr. Blair: If you`ve got a 70 percent overhead, and raise fees 5 to 7 percent, you tend to bring that overhead back down to the national average on a percentage basis. So, a 5-to-7-percent fee increase would help your bottom line more than a practice that only has a 50-percent overhead rate.
As another example, if you have an 80-percent overhead, that`s only a 20-percent profit margin. So, if you raise fees on an 80-percent overhead practice by 10 percent, it would increase the doctor`s take-home pay by 50 percent. With an overall lower overhead rate, the increase in take-home pay is not as great. With a 50 percent overhead, that same increase in fees would result in only a 20 percent increase in take-home pay.
Doctors also need to be reminded to not let a few patients influence them and intimidate them from making a fee change. As an example, if your practice has a 70-percent overhead rate and you raise fees by 10 percent, you could lose 25 percent of your patients and still have the same take-home pay. And, by doing that, you might get rid of some of the complainers you would like to remove from your practice rolls.
We recommend that you have a staff member keep a log of patient complaints - especially those related to fees - so that you have an exact count. Then, when the front-desk person says, "Gee, we raise fees and everybody`s complaining," you can refer to the log to find out who is everybody and exactly how many patients are complaining!
Dr. Blaes: When I got out of dental school, most dentists set their fees at three times their lab fees. I understand that some dentists still do that today. What other methods are utilized?
Dr. Blair: Actually, today, you need to be up in the five-to-seven-times-the-lab-bill range, at least for crown and bridge procedures. Then, if you have a $100 lab fee, you know you`re going to need a crown fee in the $500-$600 range. You will not get that multiplier for partials and dentures, however; that`s more in the four-times-the-lab-bill range.
I guess, too, as far as your fees, you can monitor your EOBs coming back from the insurance companies and get some sense of your fees! As far as actual fee information, you could check the fee surveys that are published, but be sure you check how old their data is. In our consultations with doctors, we consider their percentile positioning for each service.
Why is this important? If you are in the 30th percentile and you charge a $40 fee for a service, that means 30 percent of the dentists from your area are charging less than you and 70 percent are charging more than you. If you`re at the 75th percentile, then 75 percent of the dentists are charging fees below what you charge and 25 percent are charging higher fees. If you are at the 95th percentile, then only five percent of the people in your area are charging higher fees.
What`s interesting is, if you took 100 fees for various procedures and plotted them, what usually happens is that you`ll find that the fees for any one service are all over the board - what we call a "schizophrenic fee schedule." There`s really not a consistency of where the fees are in the marketplace. What we recommend is that the doctor "rebalance." What we mean by rebalancing is that you set a mark and, on a one-time basis, move your fees to where they are more consistent. You might decide to raise the fees for one group of services by 20 percent. For another group of services, you might decide on a very small increase, if any.
That`s where looking at fee-survey results come in. What you want to do is establish where your practice stands in the community. As an example, let`s say you`ve got a nice facility, you do good work, but your fees are in the 40th percentile, according to various fee surveys you examine. You have a wide range of fees all over the place. You can find out from the fee surveys where you are in the marketplace and then determine where you want to go.
Some might say that you should charge a fee based on how much time you spend on a procedure. But the problem is, whatever that number might come up to, it might be a lower number than what you need for improved profitability. Then again, you might come up with a much higher number than the majority of dentists participating in the survey. In that case, you know that if you raise your fees much higher, you might be out of the ball game.
Of course, specialists have a given fee schedule and GPs have another schedule. If you plotted specialists? fees, you might find that some specialists are off the scale in cases where you provide similar services. With some services, you will see a pattern based on the region of the country. Having looked at that pattern, dentists on the low end of the scale would know that, relatively speaking, their fees are low. So, you can come up with some shifts, with some knowledge, by merely plotting your fees this way.
Most dentists basically use their computers for filing insurance and sending out bills. But, there?s a tremendous amount of power within the computer for really running your business. One such function is to print out your fee schedule and the number of procedures you do. If you have a fairly mature practice, those numbers are going to fall into place fairly well from year to year. So, if you are running a hygiene department four days a week and you did 1,500 prophies last year, then you probably are going to do plus or minus 1,500 prophies the next year. With this information, you can forecast your fee changes and say Owhat ifO ? i.e., what if I raised my prophy fee by $2 and we did 1,500 prophies? That?s $3,000.
So you can go in and play Owhat ifO with these things. Then, if you?re rebalancing your fees, you can forecast how those changes will affect your bottom line.