4 Reasons Why Your Dental Practice Overhead is Out of Control
A 2014 survey of dental practice revenue and overhead appeared in the August issue of Dental Economics. The survey reported that on average dental practice overhead was almost 75% of revenue and specialty practices were only slightly less. This is shocking to me as it seemed only a few years ago overhead was 60% of revenue. While the dental practices we work with have overhead percentages well below the average reported in the survey, I felt that I would share some of the reasons why overhead can be out of control.
1. Not looking at the numbers
I find that most dentists are usually focused on some but not all of their important practice numbers. Focusing on cash in the bank, production and collections overlooks the impact of overhead on the net income to the dentist. A practice can experience consistent growth through increasing revenue but all that extra income can be absorb by an increase in overhead costs.
There are industry averages that a dentist can use to compare overhead percentages to the average practice. For example, the industry standard for the cost of dental supplies as a percentage of collections is about 5% to 7%. If a practice has a higher percentage, I recommend looking into the purchasing system in the office, inventory control and supply usage. A 1% decrease in a practice can mean thousands of dollars being part of net income.
2. Too many appointment cancellations and no shows
When a practice reserves time for a patient and the patient misses their appointment, that time is lost forever. The only way to make up for the lost time is to take away free time in the future. More importantly, income is also lost. When patients do not show up for appointments much of the overhead associated with the time is still incurred. Employee wages, rent, utilities and other fixed costs can create a higher overhead percentage when production goals fall short.
I believe that patient education is critical to minimizing missed appointments. Patients that understand the importance of treatment or follow up are more likely to show up for their appointment. Keeping a list of short notice patients who can be flexible with their appointments can also help fill in for cancelations.
3. Employee Theft
It is not surprising to me that dental industry statistics reveal that as many as 1 in 4 dental practices will experience some form of embezzlement. Many dentists do not have the training or knowledge on how to protect their assets. However, there are simple controls that can implemented in their offices to discourage or even prevent embezzlement.
The most common form of embezzlement is the theft of collections. The theft of cash and checks can be relatively easy, especially for an experienced embezzler. I do say “experienced embezzler” because most embezzlers are not prosecuted so they usually move on to their next victim.
Embezzlement of cash and checks reduces the income of the practice and increases the overhead as percentage of collections. Embezzlement through the unauthorized use of credit cards or the over reporting of hours worked can also increase overhead. At the same time that overhead increases, accounts receivable can also be increasing.
Dentists should be watching for other signs of an embezzler. The person is usually the most trusted employee. They come to work early, stay late and demand to be in control of everything even if the work environment is a mess. This person rarely takes vacation and if they do, no one is allowed to do their job while they are away. This person may also seem to be enjoying a lifestyle that appears to go beyond their means.
The implementation of controls to prevent embezzlement can raise trust issues with employees. I recommend that all employees be informed of the implementation of new controls as a way to protect them from unwarranted accusations.
4. Work more or make less
In many practices, there is an expectation by the employees that each year they will receive an automatic pay increase. If an employee receives a raise, how does the dentist pay for this? Unless there is some sort of patient fee increase, the dentist will most likely have to work more to pay for the raise or make less money. From my perspective neither is a healthy option.
Not only is employee compensation increasing overhead annually, there are other overhead expenses that increase each year as well. An increase in employee wages will increase payroll tax expenses. Utility costs increase periodically. Many office leases increase annually and the cost of living rises due to inflation.
I believe that annual fee increases are warranted to cover the rising cost of overhead. Increases do not have to be substantial. Currently, I am recommending fee increases for fee for service patients of about 2% to 3%. Even if the practice is an insurance based practice, the increase in the UCR (usual, customary and reasonable) charges will put your insurance provider on notice that fees are increasing in that area. If fee for service rates are submitted when billing the insurance company, renegotiation of reimbursement rates are made more compelling. I understand this may require more recordkeeping when adjusting for insurance reimbursement but I believe it is better than having to work more or make less.