Brittany Frazier, CPA
When a new dental client comes to my office for their initial meeting, the first thing they typically ask is if their practice is in good financial health. Much like a doctor’s responsibility to his or her patient, before I can answer this question I must review the practice’s vital signs and assess whether or not those measurements are within a healthy range. As a result of this initial assessment, a diagnosis can be reached and treatment plan presented.
Keeping tabs on your practice monitor can sound simple, but emotions like fear and anxiety often keep practice owners from getting this routine checkup.
In my experience, if practice owners can work through the emotional obstacles associated with identifying and exploring the diagnosed issues, they can be quite successful in getting to the root of the issues and correcting them, setting their business up to be a model of dental practice health.
For a dental practice, the four key vital signs are:
- Net (New) Patient Flow
- Adjustments Percentage
- Collections Rate
- Net Profit Percentage
Net Patient Flow
The first vital sign I look at is net new patients, as this is a primary driver of the gross production of a practice. The range of what is considered a healthy new patient number varies by specialty; however, some general trends apply. For a growing practice, this number should be increasing steadily year over year. For an established practice, this number should at least be consistent and not be declining. If the new patient numbers are not growing at the level they should be, this could indicate a need for increased advertising, online presence, SEO, or focus on internal or doctor referrals.
Most doctors know their average monthly new patient number off the top of their head. What is less likely to be accounted for is the impact of lost patients on this number. The topic of lost patients almost always evokes an emotional response; however, it is a symptom that should not be ignored. It may be a signal of practice-wide issues which could require an initial review of systems and staff to determine the right treatment plan.
Adjustments Percentage
Drawing from my time in the consult room, I realize the most commonly neglected area of a practice’s health is the adjustments percentage. Adjustments are defined as anything that reduces the practice’s gross production. This can include anything from insurance and/or Medicaid write-offs to courtesies, discounts or any other category that decreases the collectible production.
Clients are often aware of their insurance or Medicaid write-offs, but rarely have an accurate pulse on how many discretionary courtesies or discounts are being given. Feel like you are working for free? Review your adjustments in detail to see if you actually are! Although true that courtesies and discounts are a way to grow business for certain specialties, it is essential to quantify these write-offs as part of your business strategy. Also leverage this indicator to evaluate the decision to stay in-network with insurance providers or to move to a more private-pay philosophy.
While a healthy adjustments percentage varies dramatically by a practice’s insurance versus fee-for-service mix, knowing the normal range for an adjustments percentage is essential. If this vital is out of range, it could indicate numerous underlying “diseases” that can adversely impact practice health.
Collections Rate
The third vital sign I use to rate a dental practice’s health is its collection rate. For most specialties this should be around 98 percent of adjusted production.
When a practice’s collections rate is out of range, this could indicate a variety of issues; again some emotionally-driven. From comping too many procedures for deserving patients to simply not having correct procedures in place for collecting money—whatever the reason, all systems must be functioning correctly in the collections process to ensure good health.
Net Profit Percentage
I like to describe the fourth vital sign as a practice’s heartbeat. The heart relies on other organs to keep it pumping, but ultimately, if the heart is not in good shape, long-term health is not sustainable. In a similar way, net new patients, adjustments and collections help us assess how well a practice can drive revenue.
Once that revenue is earned, the practice’s overhead structure is ultimately what yields cash flow for the owner to direct toward his or her personal financial goals. Overhead goals are arguably the easiest vital sign to measure—they function simply as a percentage of collections, or what we will refer to here as net profit percentage.
Healthy net profit percentage ranges vary by specialty. From 40-48 percent for a general practice to 51-59 percent for an oral surgery practice. Refer to CWA’s new How Does Your Practice Compare? Report for more overhead target percentages by specialty at cainwatters.com/hdypc-ssc.
One Doctor’s Treatment Plan
My client Jane and her spouse came to me for the first time about two years ago. They sat down at my consult table feeling the most stressed they had ever been. The key symptom was cash flow. Jane felt like she was working harder than ever, yet could barely pay their bills. They’d had to stop funding their retirement, their kids’ college funds, and all non-essential expenses. This meant their dream home was even further out of reach.
Somehow, we had to figure out how to get them earning what they needed from the practice to meet their personal financial goals.
Facts
- The client and spouse were in their late 30s.
- The client had purchased the practice from her father four years prior.
- The practice was a general dentistry practice in a rural area.
- The practice collected $800,000 annually.
Key Concerns
- Cash flow was extremely tight in the practice and at home
- Inability to save toward key personal goals (retirement, college fund, larger home)
- Concern over resistance to change with long-term employees
- Feeling of burnout due to the above key concerns
Taking the Vitals
The discussion began with first taking the practice’s vitals as the starting point for determining the treatment plan.
The downward trend in production was hard to miss. Yet averaging 25 new patients a month, at the surface, patient flow didn’t appear to be the issue. With new patients up, yet production down,something clearly wasn’t adding up.
Next, we reviewed their adjustment rate, which appeared to be 20 percent. Jane was not clear what portion of this related to insurance/Medicaid write-offs versus courtesies and discounts.
Her practice’s third vital, the collections rate, was at 93 percent. Lastly, the practice’s overall net profit percentage was an obvious area for improvement at about 26 percent.
Treatment Plan
After taking a dive into the numbers and the practice software, the underlying issues provided clarity into how to treat this case.
The patients were hemorrhaging. Of the 25 new patients each month, only about two were getting reappointed in the same visit. More surprising was that the practice lost 18 active patients on average per month. Overall, the net patient flow of seven per month was a direct contributor to the rapid decline in production. With this new truth, Jane struggled to get her staff to realize change was necessary. After much resistance—holding on to the way things were always done when dad owned the practice—Jane agreed it was best to implement procedures with her hygienists and front desk to ensure patients were being retained in the practice.
When reviewing her practice’s adjustments percentage, Jane could not track exactly what adjustments were being made. A significant amount of adjustments were being made when recording gross production without notating them as a courtesy, discount or insurance write-off. This actually had the impact of understating the gross production and therefore understating the adjustments percentage.
With this issue in mind, Jane quickly got her staff trained on how to record production in the practice software and implemented procedures to ensure all discounts and courtesies required doctor sign-off. Upon implementing this process, Jane realized her adjustments percentage was actually ten percentage points higher than originally calculated—just by properly recording all fees in the software.
Next was collections. Jane’s primary front desk employee had a hard time asking for patients to pay. This employee felt very uncomfortable with this task. With the help of a few staff members, Jane cleaned up her accounts receivable, began offering multiple financing options, and implemented a strict collections policy with her office team.
Lastly, Jane’s net profit percentage was out of range and this was actually one area she felt she could really control. Jane needed to find efficiencies in her expenses and implement changes quickly, as this was the most certain way she could free-up cash flow to be used toward her family’s personal financial goals.
The Power of Vitality
Over the past two years, Jane has made concerted efforts to focus on the financial health of her practice. Before implementing a regular vitals check, she was forced to react emotionally because she did not have a solid handle on the health of the practice. Now, Jane is able to diagnose issues in her practice on a real-time basis and remediate those as they come up. Over the past two years, she and her husband have been able to maximize their contributions in the practice retirement plan, fund her kids’ 529 plans at the necessary level, purchase a new vehicle, and are well on their way to getting into their dream home.
Most importantly, there was a very different feel to their second meeting with me—they sat down at the consult table feeling like a weight had been lifted off their shoulders. They were less stressed and more hopeful on their way to personal financial freedom.
Cain Watters & Associates LLC is an investment advisor registered with the Securities & Exchange Commission. Information provided does not take into account individual financial circumstances and should not be considered investment advice to the reader. Request form ADV Part 2A for a complete description of CWA’s financial planning and investment advisory services. There is no assurance that other client actual results will be similar to information presented. Estimated future results may not be obtained due to economic, business and personal circumstances.
