Each year in January many dental practices adjust their Fee-for-Service (FFS) fee schedule to help cover rising expenses in their dental business, and to hopefully generate higher profit margins. There have been many approaches throughout the years I have seen dental practices use to determine these new fees:
- There is the “across the board” approach where practices increase fees between 3% and 7% for all services. This works great if your practice is predominantly a fee-for-service practice. But if your practice is PPO insurance driven, this approach really doesn’t work that well because it doesn’t increase revenues from work done on insured patients.
- In some practices, the dentist and office manage review the fees of the top-25 services and increase those fees based on “gut feelings” of what they believe the patient would be willing to pay. Unfortunately, those gut feelings don’t always focus in on the science of whatever the market will bear. We typically underestimate those tipping points in sales and leave money on the table, lots of money.
- Other practices secure a copy of an industry fee survey from a third-party company that has done some research on the market conditions in their specific area. Basically, the company collected and compiled survey data from other practices in the same zip code to let the dentist know what others are charging for the same services. Practices then compare their current fee schedule against the survey data, choose a percentile in which they feel comfortable competing, and start adjusting fees to fit the pattern.
These approaches have been around forever, but, how do you know that these are the right fees for your practice overhead? Are they too low or too high? Do your fees actually support your practice being profitable? And not all practices are created equal. Some practices have thought leadership that encompasses expensive technology for patient care, while others are stuck in their low budget status-quo dental delivery of services. There is no way the fees of these two practice types can be the same.
What does it cost to operate your practice?
Before making changes to any fees, you must understand the hourly Direct Operating Costs (DOC) of your practice. Direct Operating Costs include rent, payroll (include a base salary for the dentist when calculating – you shouldn’t work for free), lab and supply fees, equipment fees, insurance costs, phones, etc.; everything you spend money on each month. Print a report from your accounting software such as QuickBooks, that’s the one I personally use, and do it for a 3-month period. Divide that total by “3” to get an average monthly expense report for each month. You could add up one year of expenses and divide by 12 for an even better average monthly expense report.
Now calculate the average number of hours you work in a month. The average practice operates 4-days/week and plans to see patients 8 hours per day. Allowing for 4-weeks of vacation annually, the average practice sees patients about 144 hours per month (48 weeks/year x 4.5 days/week x 8 hours/day divided by 12 months).
Now to calculate the hourly DOC for your practice by dividing the total monthly expense/cost average by the average number of hours worked each month. For example, if your practice that has an average total monthly operating expense of $50,000 a month and your office is open 144 hours per month, divide the 144 hours per month into the $50,000 monthly average. Your Direct Operating Cost would be $347.22 per hour. That means your dental practice must produce and collect $2,778 per day just to break-even. That does not include money for corporate profits. Most dentists do not even understand the term “corporate profits”. That’s the money you need to fund your retirement, pay cash for new technology, replace worn out equipment and instruments, buy new furniture, and even paint your walls.
What Procedures Make You A Profit?
Now that you have calculated your hourly DOC, you can objectively look at your business; the typical procedures that make up your daily schedule and how much time it takes to get them done. Say you are doing three 2-surface composites in an hour-long appointment, or a crown on a PPO plan in a one-and-a-half-hour appointment, you may not be meeting your DOC requirement. Look at each procedure with a critical eye. Are there ways for you and your team to operate efficiently or schedule more effectively? A “hole” in the schedule for either the dentist or the hygienist is expensive. Also, understand that every “professional” or “promotional” discount makes a difference in your profitability. In other words, you probably should stop giving your work away, unless it’s for a good cause.
Finally, Make Sure Your Fee Reflects Your Real Value
Over the years I’ve come to learn that all of us have different expertise in the various fields of dentistry. Because of this, not every dentists value can and should be the same. For the things I’m very good at, I charge whatever the market will bear. I understand the principle of tipping points when it comes to sales. When I’m happy getting paid fairly for what I do, meaning I’m not giving away my services and actually making a profit, a corporate profit, I tend to pay more attention to details. I tend to deliver a service that is great for the patient and great for me. This is known as a “win-win” situation in any business transaction. We all need to identify what our value really is.
When it comes to dentistry, many of your patients are always going to think it’s expensive. However, we assume that because they say something about price, that price is a problem. Price is always a consideration for the consumer regardless of the product or service they are buying. But, don’t create your own “glass ceiling.” People are not always looking for the cheapest price. They are looking for the best value they can afford. If they understand the value you are providing, and they emotionally connect with their oral health care, they will find a way to pay for it. Even wealthy people don’t want to over-pay for something. They do want to understand the value of their oral health care, and why they should spend their funds with you. Also, don’t buy in to the myth that people will only accept treatment for what’s covered by their insurance. It’s our responsibility to understand the wants and needs of our patients and to demonstrate the value we provide.
I suspect that you are an excellent dentist, or work for one who provides extraordinary dentistry and care. You’re probably committed to continuing education and adding new services and procedures to your practice. I also suspect that you have a great team, modern technology and facilities, etc. You probably offer the best materials available to your patients. In all areas, you are continually investing in to your business. I believe that it’s okay to let you patients know everything you do for them. Most important, make sure your fees are “fair” to you as well. Let me say that again, make sure your fees are FAIR to you and your team as well.
Rob Thorup, DDS
My Practice My Business