Controlling Overhead While Increasing Production
Strategies to grow your profits amid stagnant reimbursement rates
Richard P. Gangwisch, DDS
The time for cost containment is now. Although preferred provider organization (PPO) fees have remained stagnant, our overhead expenses are still continually rising. It is becoming more and more difficult to eke out a profit with such tiny margins. The rewards realized by reasonable overhead control will come in small increments; however, in a million-dollar practice, even a savings of 1% will reap an extra $10,000.
The best way to reduce your overhead percentage is to increase your production (and subsequently, your collections). Because there are fixed costs associated with practicing dentistry, which will stay the same no matter how many patients that you see, increasing the number of treatments that you are performing will go a long way toward growing your take-home pay. Dentists should be wary of cutting any costs that could ultimately affect their production. Sometimes you have to spend money to make money.
A generalized breakdown of overhead should be somewhat close to the following:
• Salary ratios: 20% to 24% overall
• Laboratory: 8% to 10%
• Dental supplies: 5% to 6 %
• Facility: 4% to 6% for renters; 5% to 8% for owners
• General administrative: 6% to 10%
• Marketing: 2% to 5%
• Doctor salary: 20% to 25%
• Retirement, reinvestment, and capital expenditures: 20% to 25%
A majority of these costs are fixed in nature. Fixed expenses include those related to labor, facilities, utilities, and insurance. We must provide a building for our practices (unless you are a street dentist), we have to be able to turn the lights on, and we have to have a staff available to take care of patients. These expenses will be relatively the same whether we see two patients or 100 patients in a day. Variable expenses include those charged by laboratories and for dental and office supplies. The more treatments that we perform, the more that we will have to write checks for variable expenses. However, that part is not necessarily bad because our goal is to increase production. Labor costs comprise the largest percentage of a dental office's overhead. A complete discussion of cost control for labor expenses would require an entire article devoted just to that topic.
Regarding marketing expenses, track them and cut the underperforming ones. You must ask all new patients who walk in your door how they found out about your office. If they say that they were made aware of it by an advertising campaign, you need to record that. As time goes on, you should be able to get good data out of your practice management software. You should be able to determine whether the revenue that you produced from any given marketing effort exceeded the cost of its advertising. If the return on investment isn't there, then cancel the program.
Another way to reduce costs is to renegotiate your lease. Oftentimes, landlords will consider reducing rent for a longer-term commitment. Having been a landlord for many years, if a tenant who took care of my property and consistently paid his or her rent on time came to me and asked for special concessions on the rent, I would probably be very open-minded.
Look for quality laboratories that have cheaper prices (with the emphasis on quality-you do not want to be penny-wise and pound-foolish). If you have a long-term relationship with a local laboratory, point out that you can get the same quality of work done at a cheaper price to see if they will consider matching it. Keep in mind that if the laboratory that you normally use does quality work with minimal remakes, that can be a cost savings in and of itself. Inferior work comes at the cost of additional chair time and aggravation for both you and the patient, and this can far outweigh the cost savings realized by switching to a cheaper laboratory.
Shop around for the best prices on your insurance policies. Getting a number of quotes from various insurance companies and switching can result in considerable savings. The American Dental Association and its state constituents often offer large discounts, and there is always the power of the Google search to locate potential insurers.
Assess the use of disposable items in your practice (eg, disposable bite blocks for x-ray sensors, air/water syringe tips, etc) and see if using nondisposable, autoclavable ones would be more cost-effective. Ensure that proper infection prevention protocols are in place to avoid the potential of cross contamination.
Try to purchase all of your supplies from one company. They tend to give you better discounts and service when you are a customer with a larger account. Ask your supply representative about the availability of free samples from the manufacturers. Shop online and see if your main supplier will match an online price from a competitor. If they will not, then go ahead and order online, but make sure that you are ordering from a reputable company. There are many inferior, "grey market" products floating around online. In addition, try to keep your inventory low. There is no need to keep money tied up in excess product sitting on your shelves. However, you need to balance that by ensuring that you have a sufficient amount of materials on hand to meet the needs of your patients. Imagine having a patient who has finally decided that he or she is ready for those 10 veneers, only to find out that you are out of impression material. Patients may be excited to accept treatment in the moment, but that feeling can wane if they have to be reappointed for a later date while you wait for your order to arrive. To avoid this scenario, place orders often to stay ahead and implement a good inventory control system.
Paying your bills on time is essential to controlling overhead. Finance charges can add up quickly. If cash flow is a problem, consider obtaining a line of credit from your bank. Lines of credit are easy to get and the interest involved is usually the prime rate plus a small percentage. When compared with paying penalties, this will save you money in the long run.
Remember that overhead percentage is calculated from collections, not production. You cannot write a check against the work that you perform. Only the money sitting in the bank account will suffice for that. Therefore, it is essential that a good collection policy is implemented and enforced. In a perfect scenario, everyone would come in for their treatment and write a check for the full amount on their way out. If you could pull that off in today's world, it would truly be an achievement. In reality, we have to find the means to help many of our patients afford quality dental treatment. This is where third-party financing can come into play. The decision to accept healthcare credit cards can help keep the cash flowing and keep you out of the banking business. This option does come at a price, however, with fees hovering in the 10% range.
One way to further cut costs related to collections is to offer in-house financing to those who qualify for a healthcare loan. This can save you from the financing fees. I recommend utilizing an automatic, monthly bank draft or credit card charge. This cuts down the cost of billing and provides you with more control. Generally, patients who have good credit want to maintain that status, so there is a good chance that you will ultimately get paid. If a patient does not qualify for a healthcare loan, then I do not recommend offering an in-house option.
Keeping an eye on overhead can make a significant difference in your take-home pay. Due to the extremely low reimbursement rates offered by PPO plans, this has become increasingly important and will likely remain so because many predict that the stagnation in reimbursements will continue or worsen.
About the Author
Richard P. Gangwisch, DDS, is a master of the Academy of General Dentistry, a diplomate of the American Board of General Dentistry, and a clinical assistant professor at the Dental College of Georgia at Augusta University. He maintains a private practice in Lilburn, Georgia.