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The 6 critical key performance indicators for dentists

Sept. 14, 2021
Dentists simply cannot afford to ignore their KPIs. There are several, but Dr. Roger Levin says these six are the most critical.

Key performance indicators (KPIs) are the statistics, numbers, and metrics that are most important to understanding the performance of a dental practice. In an age of practice management software, dashboards, and other technology, KPIs provide what dentists need to know most about their practices. Despite the advancement and availability of numerical data and information regarding practice performance, most dentists still focus on only a small number of metrics centered around production, revenue, and income.

If you ask most practice owners about very specific numbers that define and illustrate the performance of their practice at any given point in the year (not year-end), they won’t have a good handle on these numbers. As I have jokingly said, most dentists find out how they did that year when their accountant tells them on December 31. I say that with respect, because dentists are excellent at providing high-quality clinical care and making a difference in patients’ lives. We were not trained, nor did we want, to be day-to-day accountants. Therefore, understanding a small number of KPIs on a weekly, monthly, and annual basis will tell most dentists what they need to know and exactly how the practice is performing.

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Here are the most important KPIs that Levin Group recommends practices review weekly and monthly. If a KPI indicates that something is off, or the practice is not performing well in a specific area, it can be addressed by looking at additional metrics and determining why performance is below goal. However, by tracking these six KPIs regularly—just like a physician takes the vital signs and blood test of a patient for a physical—the practice can determine how well it’s performing.

Production

Production is the single most important KPI for a dental practice. Levin Group’s extensive research has found that if the practice has acceptable production or is meeting production goals, there is a very high chance that it will perform well. The only exception is if overhead is so high that even great production is not enough to generate the proper level of profit. However, this is quite rare. Practices should set a production goal every year. In our experience, almost every practice has a minimum production potential increase of 30% to 50% over a three-year period. This can be a guideline for many practices, to target 18% growth for each of the next three years.

Revenue

Revenue and production are not the same and I wish they were. If they were, it would mean that a practice was collecting 100% of everything it charged out as usual and customary fees. It’s critical for a practice to know what it is producing versus what it is collecting, because what a practice truly collects represents the revenue. Given that about nine out of 10 dental practices participate in at least one dental insurance plan, there are adjustments that must take place. Practices that have more insurance revenue will have larger adjustments. Models ranging from fee-for-service to entirely PPO can be profitable and successful, and every practice should understand its model so it can build the appropriate systems to make that model work properly and achieve the right KPIs.

Practices should have exquisitely designed collection systems because Levin Group has noted that after 60 days, the likelihood of collecting overdue accounts drops below 10%. Every year, practices of all types lose revenue to uncollectible accounts and often don’t realize it because they don’t write off those accounts for years. If you think that you have a 2% level of uncollectible accounts, it is more likely at 4% to 5%. Understanding this KPI will motivate you to improve collections. Keep in mind for every 1% increase in collections, the doctor income (not production or revenue) increases by $1,000 for every $100,000 of practice revenue.

Profit

Profit is what is left after you have paid all your bills. The problem with measuring profit per month as a KPI is that different months have different expenses. There are months when insurance premiums, taxes, or staff bonuses must be paid. All bills or months are not equal, which is why you must understand this KPI.

Profit is an essential KPI because as the saying goes, you can’t spend revenue, you can only spend profit. It’s also important because profit is a major factor in the practice value. You may not think that you care about the practice value if you’re not ready to sell your practice; however, from a business standpoint it always makes sense to know if you’re building or decreasing your practice’s value. This is how good decisions are made. Will an expensive technology purchase increase practice value or is it just a new toy? Is the new service you were thinking of spending hundreds of hours (and dollars) on learning about in CE courses worth it? Should you build that beautiful new office, or could you be far more efficient in the office you already have by using your chairs more effectively? In most cases, if you add to the practice value, you eventually add to the practice profit. Otherwise, from a financial standpoint, why are you making changes?

Profit is the bottom line of all KPIs. Most practices with high production can still increase profitability by 5% or 6% or far more if they increase practice production by 30% to 50% during the next three years.

Overhead

Every business has overhead and every business has waste. Waste comes in the form of overspending, inefficiency, or not regularly analyzing the overhead and expense structure.  Because of this, overhead is what I often refer to as the “silent killer.” To avoid getting taken down by this, every practice should have an overhead target. For example, general practices should target a total overhead of 59% or less.

Lowering overhead is just as good for your bottom line as increasing profit. For every 1% decline in overhead, the practice has a 1% increase in profitability. Production leading to profitability has a much bigger upside in most practices than lowering overhead, but both should be addressed.

So how do you lower overhead? First, you analyze it by category and compare it to national averages. For example, the staff labor expense in a general practice should be approximately 25%, although this may be rising due to the staff shortage crisis in many parts of the country. If your staff labor overhead is 31%, you’re giving up 5% in profit each year or $5,000 of bottom-line income for every $100,000 of production. In an $800,000 practice, this represents $40,000 of lost income relative to industry norms.

Understanding overhead by categories such as supplies, equipment, labor, technology, accounting, marketing, legal, and more is the only way to drill down to see where overhead is exceeding national averages. Some of my favorite recommendations for lowering overhead include bidding out your top 10 billable expenses each year, changing vendors when one offers better rates, asking your distributor sales representatives for recommendations to lower overhead by a specific percentage in each category, and not always buying the most expensive equipment if a less expensive but equally acceptable option exists.

Following an annual plan of overhead evaluation and taking steps to bring overhead into line will be a continual effort. There is always a battle between overhead and profitability, but too many dental practices simply ignore the overhead side of the equation. This has direct impact not only on practice performance, but also on practice profitability, income, and the number of years it will take the doctor to reach financial independence.

Cash

During the pandemic, especially the shutdown phase, cash became a more prominent interest for most practices. Had it not been for the PPP loans, many practices would have found it difficult to pay bills. It was even more fortunate for practices when their PPP loans were forgiven.

Given this, one of the great lessons to be learned from the pandemic is that cash truly is king. My honest concern is that as we move out of the pandemic into more normal times, practices will revert to holding very little cash in reserve. During the pandemic, more than 90% of practices had less than one month of cash on hand. Had it not been for the PPP loans, most dentists would have been forced to put their personal cash back into the practice.

Levin Group recommends that practices build a three- or four-month cash reserve. If the practice runs into a challenge and has three to four months of cash in place, things will be fine. The cash can be accumulated slowly and gradually, but it should be saved up. Keep in mind that since most practices are subchapter S corporations or limited liability companies (LLCs), taxes will have to be paid on that cash; however, if the cash is never used it can be converted into income without paying more taxes down the road.

Businesses with cash, including dental practices, have other positive options. They can purchase equipment without acquiring debt, purchase another practice, add a staff member, or invest in the practice right from the cash they have available. Many practices are not able to take advantage of opportunities simply because they don’t have cash available and end up missing a chance to grow and increase profitability.

Cash, in any business, is one of the most important metrics to be considered. Although it’s unlikely we will experience another pandemic soon, there may be other areas of uncertainty and cash will always help build a fortress around the practice.

Active patients

The number of active patients is a critical KPI. By active, I want to be very clear here—I am referring to patients with their next scheduled appointment. The prepandemic definition of active and inactive patients is no longer valid. An inactive patient used to be defined as a patient who had not been in within 18 months. After the pandemic, we found that 18 months is much too long a timeframe to work with. Our definition at Levin Group of an inactive patient is any patient without their next appointment, and an active patient is a patient with an appointment.

This KPI is so important that it should be tracked daily. How many patients have made their next appointment? How many are overdue (meaning they do not have their next appointment)? And how many were contacted today that converted to making their next appointment? Here’s the bottom line: if you have enough active patients, your practice will do well. You might not be in the top 10%, but you will also not be in the bottom 50%. Practices with enough patients, whether fee-for-service or insurance, can perform at a higher level and produce income to support the lifestyles and retirement funds of doctors. Practices without enough active patients will scramble, spend money erratically on marketing that doesn’t work, and continue to struggle unless they find a formula that allows them to build a large base of active patients.

During the pandemic it became obvious that the number one strategy to maintain practice production in 2020 and 2021 is to reactivate inactive patients. Accomplishing this involves contacting patients and using excellent scripting to get them on the schedule.  The practice team must allocate time every day to this activity. This is how critical reactivating inactive patients has become. It is important to remain focused on this even during a busy period of pent-up demand. The pent-up demand will eventually slow down, especially as people spend more money on dining, travel, entertainment, and luxuries, which diverts money from being spent in dental practices.

Every practice should know its number of inactive patients and develop a gameplan to reach those patients and get them scheduled. Remember, don’t be fooled into the lazy approach of simply texting people and hoping that’ll come back. They won’t. Texting should be part of the gameplan, but phone calls help patients gain the confidence to make appointments and continue to build relationships. Your goal is to have 95% or more of your patient base be active.

Other KPIs to think about

While the KPIs listed here will help a practice gain a far better understanding of its current status and performance, there are secondary KPIs that are also important. These include production per doctor, production per hygienist, total doctor production, total hygiene production, and no-shows (which almost inevitably lead to lost money for the practice). Over time practices should alternate these secondary KPIs onto their “KPI watchlist” to determine how different parts of the practice are performing at a more specific level. However, the main six KPIs should be tracked as consistently as possible. The reality is that practices do not have to track countless KPIs to understand performance.

Practices need to track their KPIs consistently so they can understand and know when they fall outside the normal limits. This can be done quickly using short reports from your practice management software. The front desk team or office manager should assemble the report for daily, weekly, monthly, and annual reviews. Once you review this information regularly, it will paint a picture of how your practice is performing. This will allow the practice to take advantage of strengths, weaknesses, opportunities, and threats earlier than in the past and avoid challenges and barriers. KPIs do not have to be complicated, overwhelming, or unpleasant. They must simply be tracked.

Editor's note: This article appeared in the September 2021 print edition of Dental Economics.

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