Most dentists simply don`t understand the impact that raising fees has on their profitability. Dr. Charles Blair explains why increasing volume alone doesn`t translate into increased profits.
John McGill, MBA, CPA, JD
Now`s the time to finalize your decisions for fee increases in 1999. Over the years, dentists have fared rather poorly in raising fees to keep pace with inflation, largely due to fear and ignorance. Over the past 25 years, practice-management consultant Dr. Charles Blair has worked with thousands of dentists dealing with fee decisions - first in discussing fee matters with colleagues during his 10 years of practice and later advising clients during 15 years of practice-management consulting.
"By and large, dentists have done a rather poor job of adjusting their fees, both in relation to keeping pace with physicians and inflation," says Dr. Blair. "This resulted in a dramatic increase in practice-overhead percentages and a related decline in profitability during the 1980s," he adds.
While dentists have done a much better job in confronting the issue during the 1990s, there`s still a lot of ground to make up, says Dr. Blair. He cites a recent study revealing that physician fees increased more than 7 percent a year from 1988 to 1990, 5-6 percent from 1991-1993, more than 4 percent in 1994 and 1995, and around 3 percent in 1996 and 1997, with a projected 1998 increase of 4.1 percent. That makes for an average annual fee increase of over 5 percent annually, while dental fees have lagged behind, increasing only 3-4 percent each year.
Dental fees also have been a big loser in the war against inflation. Dr. Joe M. Creel of Melbourne, Fla., recently wrote Dr. Blair stating, "I opened my orthodontic practice in 1969, charging a fee of approximately $1,100 for a case requiring 14-20 months of treatment, and a $1,500 fee for cases requiring a longer-treatment term. Adjusting these fees by the Consumer Price Index from that point on through 1997 would have resulted in a current case fee of $5,047 for short-term treatment and $6,915 for longer-case treatment. My fees are nowhere near that." In fact, the 1997 Journal of Clinical Orthodontics (JCO) survey showed the average child-case fee now is $3,645, well below the inflation-adjusted figure.
Planning for 1999
In his Revenue Enhancement Program, Dr. Blair works with a multitude of doctors nationwide to help them set fees. As the first step in the process, he recommends a detailed fee analysis, showing percentile, and localized for the doctor`s own zip code (first three digits only). Based upon this information, the doctor then can determine where to position his practice fees in relation to colleagues in his area, says Dr. Blair, based upon the quality of care provided.
Virtually every doctor`s fee schedule that he has reviewed is "schizophrenic,"according to Dr. Blair, with fees varying across the board. While some fees are over the 95th percentile, other fees are under the managed-care line of demarcation (the 50th percentile). The remaining fees are scattered somewhere in-between. Doctors should determine where their practices are positioned in their area, based on the quality of care provided. Dr. Blair then suggests selecting the appropriate fee percentile for your zip code (reflecting the quality of care you are providing), and then immediately adjusting all fees below that percentile up to that level. The only exception to this rule is hygiene-related fees, which Dr. Blair recommends adjusting in two installments.
Practices participating in Dr. Blair`s program have seen an average increase in gross collections and profitability of over $60,000 annually. Yet, most doctors continue to be reluctant to raise their fees, and when they do raise them, often don`t get the job done right, he points out.
Psychology of raising fees
Lack of effective action on dentists` part is attributable to ignorance and fear, Dr. Blair comments. Most doctors simply don`t understand the impact that raising fees has on their profitability. While many dentists spend dozens of hours trying to reduce overhead costs by $5,000-$10,000, they pay little attention to fee-positioning, which is five to six times more important, he says.
Even without the detailed zip-code fee information that Dr. Blair provides, doctors easily can grasp the significance of raising fees. Figure 1 shows the relationship between a specified percentage fee increase and the effect that such an increase will have on practice profitability at given levels of practice-overhead percentages. For example, a 10-percent fee increase for doctors with a 65 percent overhead results in a 28.6-percent increase in practice profitability. As you can see, doctors with the highest overhead percentages receive the greatest percentage increase in profitability as a result of implementing a fee increase.
Overcoming fear
Dr. Blair observes that even when doctors are aware of the tremendous impact that raising fees can have on practice profitability, many still are reluctant to act. In order to take decisive action, doctors must overcome the fear that raising fees actually will decrease practice volume and related profitability due to resistance from insurance companies, staff, and patients alike.
Figure 2 shows the relationship between a specified percentage fee increase and the drop in patient volume, which must occur before the doctor`s profitability actually declines. For example, a dentist who implements a 10-percent fee increase - and whose practice has a 35 percent profit margin (practice overhead is 65 percent) - must suffer a 22.3-percent drop in patient volume before his practice profit actually declines. As you can see, doctors with the highest overhead percentages have the least to lose by raising fees, since a greater decline in patient volume is required to actually decrease practice profitability.
Dr. Blair has yet to see a single doctor who, after implementing a reasonable fee increase (10 percent or less), actually has had a decline in practice profitability as a result. The doctor`s perception and fears in this area are way overblown, he says. The reality is that probably 20-30 patients in an average-size practice will complain about the fee increase; of these, probably 10-15 may leave the practice and half of those will later return when they visit another office and find comparable fees. While the doctor`s worst-case revenue loss may be $2,000-$3,000 for the five to 10 patients who actually leave the practice, the average revenue gain usually is 25 times that amount.
Impact of reducing fees
Dr. Blair says that he continually is amazed at the number of doctors who have "bought into the managed-care "promise" that by cutting fees (or accepting lower managed-care fees), they actually can increase practice profitability through higher volume.
Figure 3 shows the percentage volume increase required to make up for a specified percentage, across-the-board fee cut at given levels of profit margin. Again, doctors with the highest overhead percentages require the biggest increase in sales to maintain practice profitability for a given fee cut. For example, a doctor with a 40-percent profit margin institutes a 10-percent, practice-wide fee cut. That doctor must increase his sales 33 percent to maintain current levels of profitability. However, another doctor operating on only a 30-percent profit margin must increase sales by 50 percent to maintain the same practice profitability following a 10- percent, across-the-board fee cut.
Few, if any, doctors actually can make up the additional volume required to maintain practice profitability following a fee cut, says Dr. Blair. As a result, he has encouraged numerous doctors to phase out their participation in managed-care operations. Through raising fees, increasing marketing efforts, and expanding services, doctors can increase practice profitability dramatically, while eliminating the headaches associated with lower-quality, managed-care participation.
For doctors who already have raised their fees to the desired percentile, Dr. Blair recommends a 6- percent, across-the-board fee increase for 1999. Continued inflation ? as well as the cost of integrating new technology into the dental office to maintain a high quality of care ? requires this level of fee increase, he says. He recommends that the fee increase be agreed upon by the doctor and the staff, and implemented as early in the year as possible.
Having the knowledge to properly deal with your fees is the first step in making an effective practice-fee decision, he emphasizes. Once doctors are fully informed, they can overcome the fear that paralyzes most of their colleagues and take decisive action for 1999.
Editor?s Note: This article was reprinted from the December 1998 issue of The Blair/Mc-Gill Advisory.
