Cast emotion aside and consider managed care differently

Asking current patients to refer their friends and family to your practice remains an effective and viable marketing concept. But this simple approach just doesn`t have the impact it used to have in dentistry. The business of running a successful practice has become more sophisticated and complex.

Sep 1st, 1997

Robert Maccario, MBA

Asking current patients to refer their friends and family to your practice remains an effective and viable marketing concept. But this simple approach just doesn`t have the impact it used to have in dentistry. The business of running a successful practice has become more sophisticated and complex.

Many professionals still are asking, "Is managed care in our future?"

Most likely, yes. The truth is, managed care in your practice is not the real issue anymore. The real issue, for long-term success, is to position your practice to attract the best patients from all available referral sources, including managed care.

Managed care is not so marginal

Do not go into managed care unless you run a fine-tuned, fee-for-service practice. It is dinosaur logic to believe that only marginal practices are involved in managed care. It also is untrue that all managed-care practices produce substandard care. Many of the practices that have learned the managed-care game are producing quality care and are financially sound businesses.

Doctors should finally acknowledge that many, though not all, of the fee-for-service practices that have been dismal failures in managed care were only running marginal fee-for-service practices in the first place. In some instances, these are the most vocal practices in opposition to managed care.

So why aren`t we hearing many success stories? First, doctors who have attempted to present a business approach to managed care have been ostracized from the dental community because their colleagues are so emotional about managed care. Many of these practitioners have given up trying to be heard. Secondly, these practitioners have paid their dues to learn the new game. Why should they attract attention to their success?

You can be assured that the marketplace is not sitting still. A rapid consolidation of insurance carriers still is occurring. With consolidation, a redundancy of providers may exist within the networks.

A case, then, can be made for the next logical step in the way the insurance industry upgrades its networks. They will simply "uninvite" marginal providers to further strengthen the practices that are comfortable in the new way of doing business.

With this in mind, lets back away from the emotional issue of managed care and look at it from a business perspective, as part of a three-step business strategy. The perspective presented here is called a Dental MBA (market-based approach) strategy.

When this model is fine-tuned for providing quality care at a competitive cost, it will help you attract the best patients from all the available referral sources.

Two-fold definition of quality

The first step in this business approach begins by recognizing a two-fold definition of quality. Conformance quality is clinical excellence. In dentistry, the dentist is the expert, making sure the margin is sealed, the occlusion is correct, the partial fits, etc.

Then there is perceived quality. This relates to such things as how the telephone is answered, how long the patient is kept waiting and how the paperwork is handled. This is the patient`s perception of quality and value. Most, if not all, patients make their buying decisions based on perceived quality.

With this new way of doing business, quality improvements and cost reductions go hand-in-hand. Every other business is faced with the same issue. As the technology changes, the driving force for most other businesses is working smarter, faster, better and with a bigger smile. Dentistry is not exempt from this consumer demand.

Many high-profile speakers in dentistry are proposing that dentists raise fees to protect patients from less-than-the-best-quality dental care. Although well-intended, their approach may be creating problems for dentists who raise their fees by creating new opportunities for their competition.

The U.S. Postal Service can serve as a model to illustrate this point. The postal service has an under-used and inefficient facility, under-used staff, and, in some areas, archaic technology. (Does this sound like a solo practice you know?) The postal service also cannot make a profit, so - to protect the public from poor quality service - the only thing it can do is raise fees. Every time the U.S. Post Office raises its fees, it creates new opportunities for competition, such as Federal Express, Mail Boxes, Etc., and other new technology, such as fax machines and the Internet.

The current practice model, from which most dentists are working, is a financial model that is breaking the laws of business. A case can be made that a solo practice is not even the best model for delivering clinical excellence. This is not the most economical model for delivering quality patient care. Reformatting, using new technology and other concepts of process innovations will not save this model. They are only short-term fixes for a more structural problem.

A dental practice must adopt a strategy that encompasses clinical excellence, state-of-the-art service and cost efficiencies, if it is to remain competitive. So, as the first step, dental practices must start caring for patients as customers, the buyers of their services.

Awareness of costs

Understanding your cost of conducting business, and how that cost reflects on pricing your services, goes beyond just reviewing your profit and loss statement three to four weeks after the end of the month. Jim and Suzanne Du Molin, financial-planning experts, say, "There are more relationships that must be understood than just a profit and loss statement. In many practices, reviewing this statement is like driving a car and looking in the rear-view mirror. It will only tell you where you have been, but not what you need to know - like where you are going."

At this second stage, you need to have a firm grip on your cost of business and a solid understanding of your fixed and variable costs. A practice must also know at what point all of its fixed costs are met, as well as what incremental increase in costs will be incurred with additional production.

Of course, fixed costs stay consistent regardless of the change in production dollars. Variable costs vary with increases or decreases in production. The more dentistry you produce the more variable expenses you will incur. It is important that you understand at what level your fixed costs are met and at what level you can perform additional care with only an increase in variable costs.

Many practices have what is called excess capacity (related article above outlines strategy for determing costs in filling excess capacity). This indicates that they have room and/or time to provide more care for patients while incurring only additional variable costs.

The article above also addresses the addition of managed-care patients. It is important to understand that, just like any business model, this, too, must be managed correctly. Be careful never to displace your full-fee patients with reduced-fee referrals. This is a scheduling issue that can be managed. You must understand the difference between a covered benefit and a noncovered benefit in these programs.

Make sure that if you do participate in these programs that you select the best ones to fit your practice. There are programs out there (as even the insurance industry acknowledges) that are underfunded and, no matter how fine-tuned your practice is, you would not be compensated sufficiently to justify participation.

Also, in this model, you must realize this excess-capacity relationship does not last forever. A time may come when you have increased capacity to a point that an addition to your fixed costs, such as a new operatory, will be necessary. Then you must re-establish the formula.

Step three

Excellence and efficiency go hand in hand. We need to filter our tactics through our costs of business and then add one final piece ? our referral sources.

Any referral source has two components ? 1) patient need and 2) method of payment. It is that simple. When we distill managed care down to its basic elements, we find that it, too, is just another referral source, no different than the Yellow Pages, staff referrals and direct mail. We must evaluate all of our referral sources to determine if we can meet patient needs and if the cost of treatment fits within our practice capacity and variable-costs model.

When managed care is put in this context, it becomes a business decision and not an emotional one.

Line up referral sources and see if they can produce the desired output of quality and profit. When you analyze a referral source in this manner, your practice can determine how each one will produce in relation to costs, how each one contributes to the overall profitability of the practice and which one(s) should possibly be dropped. You may find that certain referral sources are not a good mix.

In summary, here are some of the new rules to remember when marketing your practice:

* Treat all patients with a single standard of care (conformance and perceived).

* Treat all your sources as viable referral sources and recognize that each one now has its share of good patients and not-so-good patients. With today?s market so fragmented, you must attract the best patients from the best referral sources.

* It is no longer realistic to think of managed-care patients as Othose kindsO of patients. Many well-respected companies such as Boeing, IBM and Disney are moving away from indemnity insurance plans. Their employees were yesterday?s fee-for-service patients, but they are today?s managed-care patients. They expect to receive the highest quality care and are willing to pay for it

Professional Management Sciences, Inc. is a business-management firm for dental practices, started a decade ago by Robert H. Maccario, MBA. As a 30-year veteran of the dental field, he and his associates have worked with a full spectrum of practice styles and sizes. PMSI is recognized as unique in its approach and success with dental practices in this new, competitive health-care environment. To contact PMSI, phone (800) 332-0363.

Filling the void of excess capacity

My experience is that most practices have at least 10 to 15 percent excess capacity. This is not an unusual occurrence for many practices for a number of reasons. They do not market correctly, so they are not as busy as they comfortably could be. What`s more, they are not scheduling their provider`s time productively.

An average practice, producing $35,000 per month, with an average net of 25 percent, will net $105,000 annually ($35,000 x 0.25 = $8,750 x 12 months = $105,000). Assume this practice has an average variable cost of 22 percent (0.22 cents on every dollar produced). Let`s also assume that this practice has an excess capacity of 10 percent.

Using UCR fees, that excess capacity would be equivalent to $3,500 in increased production time available per month (.10 x $35,000).

The important point to understand is, if you cover all of your fixed costs, which were covered in the $35,000 base, the only incremental increase in the cost of business are the variable costs. In this example, variable costs run only $770 ($3,500 x 0.22). Therefore, your net from the additional $3,500, when using the excess capacity model, is $2,730 per month ($3,500 - $770), or $32,760 annually. We have now taken a practice netting $105,000 per year and increased the profit by an additional $32,760, bringing it to $137,760.

Now, if you were to anticipate that you will receive 65 to 70 percent of your UCR fees by accepting a managed-care program (which is not necessarily accurate), you still will be earning a 78-percent profit on the excess capacity and a 5-percent net increase on total practice production (Original production = $420,000 with a net of $105,000, or 25%, vs. the excess capacity model of production of $462,000 with a net of $137,760, or 30%).

Counting calories to calculate what fee to charge

A second tactic in step two involves understanding how the pricing of your services may need to change. Many practices are moving away from pure fee-for-service pricing to the use of a Relative Value Unit (RVU) pricing structure.

RVUs are units of measurement that can be as simple as a unit of time or they can take into consideration not only time, but degree of difficulty. Many of the RVU schedules used by practices are set up by independent companies that have studied the times and degree of difficulty of procedures.

A simple explanation of what RVUs are is to think of them as calories. Your body, to remain healthy, needs to take in a certain number of calories per day and have the correct mix.

Your practice is the same way. It needs to take in a certain number of RVUs per day, and those RVUs must be the correct mix for your practice to remain healthy. If your practice does not take in a sufficient mix of RVU dollars, it will lose money. Many successful practices, although still operating on a fee-for-service price schedule, measure their productivity on an RVU basis to better track the cost of producing each RVU.

Richard Ryan, president of Dental Management Decisions, clarifies this concept: "Converting to an RVU-type analysis enables you to compare procedures and their dollar value (apples to apples) rather than just appointments and dollars produced (apples to oranges), be it an indemnity or a capitation plan."

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