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We are not Wal-Mart

Nov. 1, 2003
One of the biggest questions faced by the new dentist is whether to accept reduced-fee dental insurance plans.

Dr. Michael Gradeless

One of the biggest questions faced by the new dentist is whether to accept reduced-fee dental insurance plans. Most doctors see these plans as a solution to two problems that especially plague the new dentist — too much open time on the schedule, and not enough gross production. You must also examine how the proposed dental plan will affect your net income, and how it fits with your practice vision and your ethics. Most importantly, if you embark on this path, you must understand the business model that is the only road to success when offering a retail discount.

Discount retailing is one of the most difficult business models of all. K-Mart has been struggling. Montgomery Ward is toast. Have you seen a Best Buy lately? It has been closing many stores. A few months ago, short-selling Sears stock wasn't a bad play. Sears will probably do OK, but it is no longer "Where America shops." Take a look at the chart to see why discounting is such a difficult business.

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The crown is the most profitable procedure in dentistry. If your most profitable procedure earns you $33 per hour, instead of spending huge dollars on dental school, you might be better off selling shoes. How does Wal-Mart do it? Wal-Mart has three business advantages that allow it to prosper while other retailers fold. Its first competitive advantage is its volume. If Wal-Mart sells 5 million items at $20, it has an immediate 100 million dollar increase to its gross production. Its second competitive advantage is the power it has over its suppliers. Wal-Mart can and does require its suppliers to cut its wholesale prices. For some reason that I have yet to figure out, when I remind my dental lab, "This is Dr. Gradeless you're dealing with!" the lab doesn't immediately come across with a 20 percent discount. The third advantage Wal-Mart has is its huge accounting staff that spends every working moment factoring all costs and future capital needs to ensure its profitability.

In dentistry, we can work in these same three areas to improve profitability. We are limited in what we can do about the volume of business. A single-dentist practice is essentially "maxed out" at around 2,500 active patients. What you absolutely must do is improve the efficiency of your scheduling system, and you must perform quadrant dentistry. Performing multiple procedures at the same appointment is the only road to profitability on reduced fees.

The second area is controlling costs. The profitability in our reduced-fee cash-flow analysis can be significantly improved if you use a less-expensive dental lab or reduce payroll costs. This is where you must examine your own personal vision of how you want to practice. It is written in my mission statement that our staff will be comprised of the highest-quality individuals who will be highly compensated. If your vision specifies high-quality labs and a well-paid staff, your profitability will be very limited if you participate in reduced-fee dental plans.

The biggest accounting mistake many dentists make is that they fail to add an amount for cash reserves for future capital needs as an expense factor. The ADA estimates that only 4 percent have adequate funds available for retirement. Most dentists do not build cash reserves for remodeling or new equipment purchases. They usually borrow for these purposes.

Discounting is a very difficult business model. To be profitable, you must have an efficient scheduling system and perform quadrant dentistry, control your overhead, and maintain capital reserves in cash and in a fully funded retirement plan. If you manage all these areas well, you can be profitable as a reduced-fee dentist; but then, if you are good at all this, why would you reduce your fees?
*Reduced-fee cash-flow analysis by the Pride Institute.

Dr. Michael Gradeless, a 1980 graduate of Indiana University, practices preventive dentistry in Indianapolis with an emphasis on cosmetics and implants. He is an adjunct faculty member at Indiana University where he teaches the Pride Institute university curriculum of dental management. He is also the editor for the Indiana Dental Association. Contact him at (317) 841-3130 or email to [email protected].

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