Opening your practices profit window

"For success in dentistry, it`s not the time you spend in your practice, it`s the time you spend on your practice."

Aug 1st, 1996

An innovative program is aimed at combating rising overhead costs and workplace inefficiency.

Duane Schmidt, DDS

"For success in dentistry, it`s not the time you spend in your practice, it`s the time you spend on your practice."

Charles Blair, DDS

Because I have recently committed to writing a monthly column on dental office computerization for Dental Economics, Editor Dick Hale asked me to attend a Blair/McGill workshop, not to promote the workshop, but to write a feature for this special computer issue to show how computer analysis can enhance practice profitability. I have taken great pride in having a "paperless" dental office. We utilize the latest technology and the staff is totally trained and up-to-date on how to take advantage of automation. What could I learn by attending? I soon discovered that our computerized wealth of information, while marvelous for the day-to-day operation of a dental practice, also contained the information that, when properly analyzed, opens the window to even greater profitability.

So I attended the workshop with a somewhat jaundiced eye. After all, my 20-chair dental practice didn`t occur accidentally.

At the outset, I was pleased to learn that we did some things right. But it pained me to see how bad some of my numbers were. In 6 1/2 of the best hours I`ve spent in dentistry, Dr. Charles Blair guided our class of seven dentists into a new level of practice awareness.

Here is my report and experience on this innovative program, which helps dentists across the country combat rising overhead costs and workplace inefficiency.

The Four Steps to Profit

Step One: Data Submission. Weeks before the session began, workshop participants-all of whom must own a practice of $300,000+ annual production-submitted hard numbers. Our numbers came from hard copy, computer printouts, profit and loss (P&L) statements and photocopies of actual tax returns.

In our class, practices ranged from $400,000+ to over $2,000,000. However, the elements that produce profit work much the same at all production levels, so the size of the practice did not matter. The small class size, limited to no more than 10 practices, allowed individualized coaching, plus interaction among participants. True overheads ranged from 45.49 percent to 69.49 percent, illustrating the wide variance.

Step Two: New Insight. Prior to the opening session, a state-of-the-art computer analysis generated over 90 financial and production measures for each practice. The analysis, developed by Blair/McGill, surprised me with its depth.

For example, some of the 90 reported benchmarks were: hygiene labor costs, labor cost per visit, lab costs as a percentage of doctor revenues, percentage of revenue from doctor, hygiene average expense per visit and doctor facility cost per visit, not to mention 84 other measurements.

The course documents and workbook, at first glance, looked like information overload. Not so! Dr. Blair walked us through each number and ratio and explained its relevance.

When I saw my practice`s investment in certain aspects of patient care, it didn`t take a genius to figure out that something was seriously wrong. Had I not seen those relative values, I would have continued to believe we were more profitable than we really were, a fatal mistake.

Step Three: Benchmarking. Once specific numbers in the 90 categories were defined, they were presented in two ways: 1) in a master benchmark list of present class members, discreetly protecting privacy; and 2) in personal breakdowns, benchmarked against a Blair/ McGill database (developed from hundreds of practices). I learned that our clerical costs, supply costs and lab costs were tightly in line. However, I also learned that chairside salaries and hygiene costs per visit were excessive.

Step Four: Prescriptions for Success. After seeing all of my excessive chairside labor costs, the solution jumped out. In addition, we were given a tour of strategies to solve specific problems.

Gaining Profit- "Ability"

Profit is the one word that brings dentists to the Blair/ McGill workshop. The uniqueness of their approach to engineering more profit comes from the use of real numbers, the high-tech manipulation of them, finding hidden practice flaws and the "What if?" programs that create "decision-based profitability re- sults."

The in-depth analysis of each practice allows doctors to spot an extraordinary drain on profits. A smart physician detects diseases before they sap the organism. The shrewd dentist detects destructive elements in his practice before they zap the organization.

Going through the Profits Plus+ experience, I reflected on four decades of managing a dental practice with bromides, old saws, guesstimates, blind telephone calls (to learn fees in other dental offices) and useless empirical data. Those methods are as out-of-date today as typewriters.

The Master List

Because excessive overhead bleeds off important dollars of profit, this study consumed a large share of our workshop day. Lowering practice overhead impacts profits more slowly than increasing efficiency or raising fees.

Some of the category analyses were headed by a "benchmark" range. For example, chair-side labor expense (chairside labor divided by doctor collections) was benchmarked at 6-9 percent. When our numbers exceeded the benchmark, a Code Blue for overhead sounded. The 10 reports that follow were presented to each participant:

Report #1

Examine the True Overhead Analyzer. This 12-page document stems from the P&L statement. We were shown a new chart of accounts. Most accountants alphabetize various cost categories broadly, starting with accounting and ending with utilities. That common accounting method makes the collection of specific cost categories-and the development of cross-comparisons-difficult.

The summation page of the overhead analyzer listed six major and various sub-account categories of expenses: labor, supplies, lab, facility and equipment, administration and marketing. All listings are in percentages of collections.

My lab costs came in at 9.51 percent of collections, which included the lab technicians` compensation; the typical range was 6-11 percent. That put our lab costs a bit on the high side,. By measuring services and the units produced in our lab, against costs of an outside lab for the same volume, we measured profitability.

We decided to adjust fees rather than costs. The reason? The convenience of shade selection, adding a contact, performing a one-day denture, doing a three-hour reline and a half-hour repair contribute too much to our market position to consider getting them off-site.

Report #2

Examine Cost of Labor. This three-page document analyzes labor efficiency as a percentage of total collections and the various labor department ratios-clerical, chairside and hygiene. For example, we learned that we invest $5.11 of clerical cost in each patient visit, $22.03 of hygiene labor in each hygiene-patient visit and $18.55 of chairside labor in each patient visit.

I saw that my clerical costs are in line, while chairside and hygiene labor costs are relatively high. Re-engineering fees will lower both costs, but there are other solutions: we could be more clinically efficient by downsizing the clinical staff, making operatories interchangeable, lengthening appointments (quadrant dentistry) and grouping the "run and gun" appointments later in the day, possibly with part-time staff.

In the hygiene department, we can increase the focus on more tissue-management programs, bonus high-ticket procedures and tighten the appointment interval by classifying patient difficulty through grading patients according to the level of their needs.

Under the grouping strategy, an easy recall is coded A, an average recall is coded B and a difficult one is coded C. The A patient-requiring less than the allotted time-is appointed back-to-back with a C patient; who requires slightly more than the allotted time. The result? On-time hygiene ap-pointments.

I saw that doctor compensation as a percentage of total revenues was low. Fee engineering will help bring that number in line. Improving productivity and lowering costs also must accompany that scenario. A key point to note is that by knowing current profitability, progress can be monitored and new strategies assessed.

Dr. Blair recommends that a dentist spend four hours weekly on the management of the practice: grouping data, generating new numbers, evaluating and then responding to these numbers managerially, plus staff training.

Report #3

Examine Doctor`s Lab Report. This one-page analysis compares fees for lab-related procedures, lab expense, total practice revenues and doctor (only) revenues. One number presented was the ratio of lab-related procedure fees to lab costs. For example, a fair crown and bridge fee should be five to seven times the lab fee. Commentary that accompanied this report advised what effect higher production, changed fees, in-creased hygiene production and lowered lab costs might have on the mix.

One way to increase relative profits, Dr. Blair noted, was to increase higher-ticket, non-lab procedures (oral surgery, periodontics and endodontics) that do not require a lab expense.

Report #4

Examine Practice Revenue Analysis. This one-page report analyzes the dollar production per provider, the average dollar production per visit per provider, production per employee, production per patient seen by both doctors and hygienists, and revenue-per-square-foot efficiency. An entire book could be written about this single report. It is a true eye-opener. Our office covers 8,000 square feet and produces $264.28 of annual income per square foot. Not bad, but surely not great ($300 is a minimum goal). The point is, we now have our personal benchmark goal to shoot for.

Our revenue per employee was lower than the benchmark measures (a rule of thumb is that $80,000-$120,000 should be generated per full-time em-ployee, excluding doctor/lab labor).

This finding again points toward corrections we need to make in our clinical and hygiene departments.

Report #5

Examine Cost-Per-Visit Data. This three-page report produced both costs per visit and profits per visit for all patient visits. I learned that doctor revenue per visit was $87.23, which, after overhead allocation, yielded $34.48 of profit per visit. However, after allocating overhead costs to hygiene per patient visits, the overall number was less.

Next, we examined the philosophy of our practice. Would we rather see fewer patients, perform more and higher-level services for them on a quadrant basis, thereby increasing our profit margins, or continue as is? It`s a judgment call that only we can make. Now that we have measures that can help us devise sensible strategies, we know where to begin our work.

Further portions of this report evaluate costs per visit in all major categories. For example, by knowing our marketing costs of $3.05 per doctor-patient visit and $1.28 per hygiene-patient visit, we have tools to assess how well our marketing programs work.

Report #6

Examine Fee Analysis. Dr. Blair points out that there are three ways to increase profitability in a dental practice: increase productivity, reduce overhead or raise fees. While reducing overhead costs opens the window of profit a crack, raising fees throws open the sash. "Rebalancing" fees (as Dr. Blair calls it) is the "fairest, quickest and easiest way to boost profits," he says.

Before we raise our fees, we must know how we fit in our market. Blair/McGill works with real numbers, compiled from their dentist-student database as well as from claims-processing profiles for each zip code (first three digits) in the U.S. This data positions each doctor`s fees, using percentile rankings (25th, 50th, 75th, 85th or 95th).

Each doctor determines his own desired profit percentile, based on his practice expenses, perceived quality of treatment, clinical expertise and self-esteem. For instance, say the doctor feels that his practice is in the top 25 percent or at the 75th percentile. Virtually all fees then would be set at the 75th percentile. Invariably, the various fees in a practice might range from the 50th percentile to the 95th percentile. By rebalancing fees at low percentiles, some low fees might rise 20-30 percent. Others, currently on target, might only rise 5-7 percent annually.

Based upon fact, not rumor, we examined our market-relative fee positions and saw that our fees needed rebalancing. Our prosthesis fees needed the quickest rebalancing act; i.e., raised. Even with raised fees, our market position was preserved. The point was, I made a decision based on fact, not speculation.

Our class saw that certain low fees then could be rebalanced to a competitive level on a case-by-case basis, rather than, "Let`s raise fees 5 percent or 7 percent or whatever." To show the influence of changing various fees-based upon the actual number of those procedures performed in our dental practice-computer software re- vealed concrete "What if?" options at various percentiles.

After decades of changing fees by the seat-of-the-pants method, I was in awe of the precision that comes from the intelligent use of accurate fee data coupled with the number of procedures performed.

Changing fees is one thing, while the strategy of changing fees is quite another. First, fees are rebalanced to a percentile that is comfortable. Some suggestions were: raise fees at least annually (in January), don`t make an announcement per se, and keep initial exam fees competitive. It is important to print a list of "no charge" procedures for the patient at recall, which adds value to the fees charged.

Report #7

Examine Fee Adjustment Analyzer. This report shows what happens to profits if fees had been 10 percent higher or lower. The profound impact of fee adjustments on profit is nailed home like no other visual could do. The additional production required to produce the same profit with lower fees is structured into the numbers.

"What does a patient say when coming out of a dental office and has just been charged $400 for a crown? Or $500? Or $600?" Dr. Blair asks. Not one of those patients thinks he/she got a "bargain." In their eyes , all of our fees are a little "too high."

Report #8

Examine Discount Economics. For dentists involved in discounted (CAP/PPO) programs, or contemplating such a move, the "what if?" scenarios that Dr. Blair computes are an absolute must. These reports compute the financial impact of discount programs on a doctor`s practice. The numbers reveal how dentistry is impoverished-both clinically and financially-when these forces enter our operatories.

One cannot help but wonder how these programs find anyone willing to sacrifice the fee-for-service concept, if the doctor can attract full-fee patients by employing marketing savvy and make a decent profit by employing Profits Plus+!

Report #9

Examine Accounts Receivable Analysis. This one-page report analyzes receivables and collections, drawing various ratios from them. Total receivables factored over collections per month gives a revealing statistic that can be compared to industry benchmarks.

Most practices` total receivables are between one and three months of collections, although we have held at the .75 to .86 level for years, so we know that it can be done. Your money in your patient`s pocket is not satisfactory.

Report #10

What If? Analyzer. This 12-page report plays with many "what ifs?"-then shows the economic effect. What if doctor changes his hours to 8.75 hours per day and works 10 days less per year? What if fees are rebalanced by 8 percent? What if collections improve by 0.5 percent? Ten profitability strategies are given the "what if?" treatment; then, succeeding pages reveal how these various strategies would impact the economics of our practice.

I saw where a mere 0.5 percent increase in our collection ratio would mean an additional $11,206 of income. Certainly, pocketing an additional $900+ each month is OK.

What does it mean? If our patients tended to their oral-health needs in the same way dentists often address the management of their practices, the major share of dentistry might be disaster dentistry.

Dental profit margins are declining and, for many practitioners, discounted fees will comprise a portion of their practice, further lowering revenues. This means that only those dentists who approach their practice from a businesslike perspective will survive and thrive.

In "User-Friendly," my monthly computer column in Dental Economics, I advise that the modern dental practice cannot afford a computerless existence. During the Profits Plus+ workshop, that belief was reinforced, for I gained another level of appreciation for my computerized practice.

The profit window now is open. Let the breezes flow in.

Postscript: The preparation of this report has taken three months of writing and rewriting. During that quarter of a year, the changes we made immediately in our dental practice have produced more profit than our office earned all of last year. The program works better than advertised!

Our dental office owns the profit to prove it.

The author practices dentistry in Cedar Rapids, IA, in an electronic dental office. He has written three best-selling, practice-building books. He also lectures frequently on profit-building with dental computers. His column, User Friendly, appears each month in Dental Economics.

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