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The Best Way to Increase Practice Profitability
Roger P. Levin, DDS
There are essentially three ways to increase practice profitability. The first is to increase practice production without disproportionately increasing overhead. The second is to decrease overhead expenses while maintaining production at the same level. The third, which is the best-case scenario, is to increase production and decrease overhead. This article focuses on methods to target the third option.
Understanding Production
Production is the single most important metric (or statistic) in the dental practice. It reveals more about practice performance and future decision-making options than any other specific metric. However, total production is not simply a number that "stands alone." The ratio of production to other statistics is very useful for measuring the state of one's practice. Such ratios include production per hour, production per day, production per year, production per patient, production per new patient, production per provider, and so on. Understanding production is crucial to analyzing the health of a dental practice from a business standpoint.
Production is also important as it relates to profitability. If we broadly define profit as production minus overhead, one clear path to higher profit is increased production. Another way to increase profit is to decrease overhead. The author's company recommends practices strive for the following overhead targets: general practice, 59%; periodontal, 51%; oral and maxillofacial surgery, 50%; orthodontics, 40%; endodontics, 42%; pediatric dentistry, 49%; prosthodontics, 64%.
These targets are based on observation of many practices over the past 38 years. Successful practice models can be consistently built around them. However, reducing overhead expenses can increase profitability only so much.
While overhead reduction has a limited potential, production offers an unlimited opportunity to grow. The best of all worlds involves achieving both of these goals to increase practice profitability.
Increasing Practice Production
The opportunities to increase practice production are numerous, and the author's company has identified more than 200 strategies aimed at doing so. A few examples are as follows:
Reactivate any patient without a next appointment. Current patients that have appointments create production, and the more of them that are scheduled and not lost to the practice, the higher production will be. There may be a need to alter or upgrade the scheduling system and employ techniques to accommodate increased volume, but as practice production rises, practice profitability typically increases as well.
Leave time for new patients. Typically, the average production per new patient in their first 12 months is two to three times higher than the average production per current patient. Therefore, the author recommends scheduling new patients quickly (within 7 to 10 days). It is also important to establish a goal for the number of new patients to add to the practice each month and proactively take steps to achieve that goal.
Enhance case acceptance. Most practices have patients with recommended treatment who have either not accepted or completed it. Taking the time to understand human relations and sales psychology will help dentists and their team properly educate and motivate patients to have necessary and elective treatment. This can be done in a positive, amicable environment, with the patient's best interest and optimal oral health in mind.
Other options for increasing practice production may include adding new services, ensuring proper and best use of insurance codes, following up with patients who have remaining insurance benefits, and servicing emergency patients (who typically have a high case acceptance rate).
Simply put, increasing practice production is one of the best ways to increase practice profitability.
Decreasing Overhead
Managing overhead is critical for dental practices, and here is why: For every 1% that overhead is higher than it should be, the owner(s) will lose $1,000 of income on every $100,000 of production. Thus, a practice that produces $1 million a year will lose $10,000 of owner income.
Over time, the author's company has observed that most practices are able to reduce overhead by 4% to 6% by becoming more efficient and employing excellent systems. Systems help to eliminate waste in the practice, which reduces inefficiency and increases productivity. If overhead is 4% higher than recommended in a practice that produces $1 million per year, then the practice actually loses $40,000 a year. Multiply that over many years and the income loss becomes quite significant.
Overhead should be monitored on an ongoing basis in every dental practice. The following recommendations may be beneficial:
Each year, bid out the top 10 expenses that have capacity for being lowered. Practice insurance, supplies and materials, certain service contracts, etc., all fall under this category. Practice owners should search for at least three bids that will give them a sense of where the market currently stands. Costs typically go up annually, and as costs increase, someone in the practice must be paying attention and working to lower them. Bidding out the top 10 expenses gives the practice the opportunity to scope out whether other suppliers are offering lower costs; this affords the practice the option of choosing a lower-cost provider or approaching current vendors about lower prices.
Join a buying group. A plethora of buying groups have sprung up, and many of them offer the chance for practices to lower costs by possibly as much as 20% on certain items. Joining a buying group gives a dental practice what is known in the business world as "volume-based pricing." This means that prices are established not on a single practice, but for the volume of business that the company or vendor hopes to acquire from the entire buying group. A good buying group negotiates prices regularly and is able to deliver much lower pricing to dental practices.
Perform a 90-day line-item review. Every 90 days dentists should go through every line item of expense of the past 30 days. Often they may find expenses that are no longer desirable or necessary, and may even discover unused services (eg, forgotten subscriptions). This line-item review will often reveal ways to reduce overhead or at least prompt simple questions like, "Are we really using this?" which can lead to decisions about overhead reduction.
Increasing Production and Lowering Overhead
Increasing production or lowering overhead usually are beneficial on their own. However, the best of all worlds is to increase production and lower overhead simultaneously. This gives the practice the maximum uptick in profitability, and, in the end, it is practice profitability that generates the income and retirement savings for dentists as well as practice investment for the future. Using the strategies described above will allow most practices to both increase production and simultaneously lower overhead. These are just a few of many strategies to be considered that dentists should research.
Summary
The most important metric to measure is practice production, and dentists should understand how it relates to other factors in the practice. When practice production is strong and overhead is controlled, practice profitability will be solid. High production with high overhead can lead to low practice profitability. The goal is to have growing production and controlled overhead to help grow profitability each year. Practices that can achieve this through the use of proven, efficient systems will be able to sustain excellence from a business standpoint and create an outstanding career for the dentist and the team.
About the Author
Roger P. Levin, DDS
CEO and Founder, Levin Group, Inc. (levingroup.com), a practice management consulting firm that has worked with more than 30,000 dental practices
