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Few people I know like to be involved in a legal dispute. However, avoiding such disputes is not a luxury that everyone can afford. As a consulting economist, I have seen that dentists cannot always afford that luxury either. An economist can fruitfully assist dentists in financial disputes of significant importance to their practices.
Wreck on the highway
For those of you familiar with old Roy Acuff songs, "Wreck on the Highway" is one of the most popular. But a wreck is more fun to sing about than to experience. A car wreck can cause injuries that deprive a dentist of the ability to work, either temporarily or permanently. A common suit is for reimbursement to cover medical treatments and lost earnings, and it is in the latter area where economists can be of most help.
A dentist is usually an entrepreneur. That is, his or her earnings are often not from an employee paycheck but from a self-owned business. Earnings can consist of a monthly income supplemented with business profit.
Without the ability to work, a dentist can accumulate debts for services already rendered by others, supplies purchased, and commitments to staff. Without the ability to work, a dentist can lose monthly income and benefits of the business, and profits can be replaced with substantial losses. Whereas some lost earnings cases are relatively simple calculations, lost earnings for dentists tend to be more complicated business losses. A simplistic look at the losses might lead to an easy settlement, but one that ignores all damages and leaves the dentist still incurring unnecessary hardships.
An economist experienced in dental matters and commercial damages calculations can potentially help restore lost earnings in legal disputes, including disputes with insurance companies.
"How high's the water, mama?"
"How high's the water, mama? Three feet high and risin'." (Johnny Cash, "Five Feet High and Risin'")
One never knows when the waters may rise. The worst type of "waters" for business, one dentist found out, was sewage. A break in a major city sewage pipeline from a construction mistake during a renovation caused a contaminating flood of the entire office. Yes, it was that bad.
There were disputes with the insurance company about what could be "cleaned" and what had to be replaced. As is often the case with the one with the monetary obligation, the insurance company was not in as big a rush to settle that dispute as the dentist. Lost business began to be a serious problem, so serious, in fact, that the dentist's attorney contacted our firm for assistance.
Although an economist cannot solve the issue of what has to be cleaned vs. what has to be replaced, an economist can impress upon the insurance company the value of lost business due to unreasonable delays in settlement. A rigorous report on the subject not only demonstrated to the insurance company that it had a knowledgeable client on its hands who might be a formidable opponent, but it clarified what was at stake, and a settlement was promptly reached.
Working on a building
Have you ever witnessed a city evolution that made it very clear that you needed to move your office to be at the forefront of quality development? This was the case for several dentists in an area near a major U.S. city. Two dentists decided to merge their practices, build a new office in a prime location with an expanded number of operatories, and reap the benefits of growth in an as yet underserved high-income, high-growth area. The best laid plans of mice and men …
Land was acquired. An architect was hired. Construction and permanent loans were lined up, and a contractor began construction. A date was set for the building's completion. The date approached. One of the dentists closed his office a little early to avoid signing a new extended lease and to get ready for the move. The other waited in anticipation for the completion date, which was moved back and back and back due to "unforeseen" problems with the contractor and between the contractor and architect. Each blamed the other for delay. A new contractor was finally hired.
As time elapsed, interest accumulated on the construction loan. Prices of building supplies rose quickly due to price increases during the period of delay. One dentist's existing practice was in jeopardy, even though he saw patients in his partner's old office. Long-term interest rates rose, rendering the permanent loan more expensive — the one that was needed to pay off the construction loan. And to make matters worse, another dental practice was the first to open and begin serving the "growth" clientele. A legal dispute followed.
Economic analysis documented with hard facts found that more than a quarter of a million dollars was lost simply due to cost overruns, higher interest rates, and interest charges directly attributable to the delay in construction for one year past the contract completion date. Lost earnings from lost business related to the delay were compounded by a permanent loss of first-mover advantages in the market area. First-mover advantages have been shown in economic and marketing literature to persist in the form of higher market share that is hard for later entrants to match.
How are lost earnings calculated?
Simply speaking, the task of the economist is to first paint a picture of earnings in the absence of any damaging event — as if the damaging event did not occur. This is to be compared with actual earnings (either negative or positive) in the presence of the damaging event. The difference is lost earnings.
As with many other challenges, the devil is in the details. The implementation of the analysis must be carried out in a nonspeculative way. This means that every major step in the analysis must be supported by evidence. When one is dealing with the future, evidence from sources outside the immediate business must often be gathered. For example, how old is the dentist? What is the pattern of lifetime earnings for dentists? The latter becomes particularly important in assessing the economic losses to a family due to a car wreck that proves fatal for the working dentist.
In general, a lost earnings analysis for dentists should examine the potential for losses in several categories. One is extra expenses that did not have to be incurred. These can take the form of extra interest costs, repair costs, labor costs, and a host of other expenses depending on the problem. The key is that these expenses must be shown to be directly related to the allegations of harm.
Another category is earnings. Evidence on lost incomes and profits involves several key issues. Do changes in the existing financial data match in nature and timing with the alleged harmful event, and if not, why? If an office is temporarily closed, what will the revenue path look like once the office is reopened? Can the old level of business be attained, or has the closing been of sufficient time to cause a permanent loss of some clientele? Have there been major shifts in income levels and/or numbers of potential clientele in the market area during the closing? What is the likely pattern of future income and expenses? How does one discount future lost earnings to arrive at a present value, which is the measure of the amount of money that must be paid to the dentist now to compensate for economic damages?
A dentist's accountant can sometimes assist in computing losses. This is a practical approach in some simple legal disputes. Accounting data, however, even though helpful to the economist, only tell you "where you have been" and not "where you are going." More importantly for the damage calculation, accounting data will not tell you what the practice would have looked like in the absence of damage, for by its very nature the accounting data documents that which is in the face of damage. Accounting data can help document expenses. But the expense data do not identify which expenses are solely attributable to the harm inflicted. Expenses yet to be incurred and recorded are often an important component of the loss, and future lost income and profit are often important parts of business damages.
If you have experienced unavoidable financial loss due to the actions of another, economic analysis can be used to calculate the amount of money required to make you "whole." If testimony on damages is required through deposition and/or a court proceeding, one experienced in damage analysis testimony is desirable. The nexus between the dentists and litigation economists at this point is fruitful.
Dr. Clifford L. Fry is co-owner and executive vice president at RRC, Inc., an economics consulting firm located in Bryan, Texas. Dr. Fry has assisted dentists in litigation disputes. RRC has worked continuously for more than 25 years as a consultant to the American Dental Association. RRC's survey and forecasting division collects primary data on dentists for the ADA. RRC's economics staff conducts special research projects for the ADA concerning regulatory issues, dental fees, and market economics. Dr. Fry is a graduate in economics from Texas A&M University. Contact him at [email protected].