Inflation is currently the highest it has been in more than 30 years. For some younger dentists, it’s higher than it’s ever been in their lifetime. High inflation presents a challenge to one of the prevalent business models for dental practices.
If your practice relies on insurance for most of its revenue, you may be in a tight spot soon. Your vendors have either already raised prices or will soon. Your employees may ask for raises soon or will once their budgets become stretched thin. Worse, they may jump ship for someone who is paying more. Your landlord is probably planning a big rent hike when your lease is up.
Despite all these pressures, it’s unlikely that dental insurance reimbursements will increase to keep track with inflation. In fact, if you’re like many dentists I’ve spoken with recently, insurers are cutting reimbursements in the face of rising costs.
This is not an enviable situation for a dental practice. Fortunately, there is a better financial model for dental care that thousands of dentists are now using in their practices. A dental membership program allows dentists to meet inflation head on.
First, let’s be clear about what a dental membership program is not. It’s not a discount plan. Offering a membership plan to your patients does not mean you need to offer steep discounts. Simple math shows that steep discounts are not the best idea in the face of rising costs.
A dental membership program is a way for you to have much more control over how much you’re paid for care. A membership program puts the financial relationship back where it should be—between the dentist and patient. Then there is no insurance getting in the way and taking a huge cut of your patients’ dental dollars.
If inflation means you need to raise your fees, you can. There’s no one telling you that you’ll only be reimbursed 50% of your fees, and there’s no one telling you that you need to recontract to even discuss a change in reimbursements. With a membership program, when it comes time to raise your fees to keep up with rising costs, you simply raise your fees.
How inflation affects your practice
Let’s talk a little bit about how inflation can affect your practice if you’re constrained by the reimbursements insurers are paying you. For this example, we’ll assume the reimbursements are staying flat rather than declining.
Let’s say your annual revenue is $300,000. This is probably a bit below your actual revenue, but it makes for round numbers in our discussion. If your practice is typical, about one-third of the revenue covers rent, supplies, etc., one-third covers staff salaries, and the remaining third goes to the dentist-owner’s salary and profit. So, in this simple example, you take in $300,000 and you, the dentist-owner, takes home about $100,000.
Then inflation hits. We’ll use an inflation rate of 6.2%, which is the annualized rate consumer prices increased in October 2021. When prices go up, vendors charge more, and the $100,000 increases to $106,200. Your staff members will also want more, and in a tight labor market they may make a good case for raises that match the increased cost of living. So, that $100,000 also jumps to $106,200. Remember, the insurer you rely on for revenue has no plans to increase their reimbursements. You still have $300,000 in revenue to work with.
Once you pay for the increased vendor and staff costs, the $100,000 you thought you’d earn this year is down to $87,600. That’s a pretty steep cut. On top of that, your cost of living has also gone up 6.2%. If you hope to maintain your same standard of living, you need to make $106,200 this year, which makes you short $18,600.
With your reduced annual salary, you’ll run out of money in mid-October. This is not a good position to be in. Let’s return to the option of a membership program to figure out how to get out of this pickle.
To restate one of the key benefits of a membership program: the financial relationship is between you and your patient directly. You get to set the fees. You control the reimbursements. If your costs go up 6.2%, you can increase your rates by 6.2%. With a membership program, you have the flexibility to increase your revenue with inflation. So, instead of your annual salary carrying only to October 15, you’ll be able to make it to the end of the year.
Now your patients need to agree to the increased rates. In my experience, as long as rate increases are reasonable and in line with general cost of living increases, patients understand that your costs are going up and you need to pass those costs on to them if you’re going to maintain the same quality of care.
Editor's note: This article appeared in the March 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.