Evolving Business

Keeping Up With the Profession Is the Challenge

Think of a dental practice as an iceberg. Above the waterline is the practice of dentistry, where dentists, young and older, employ their clinical training and experience to provide quality oral care to patients. Below the waterline lurks the other side of dentistry, the business side. There, the bulk of the iceberg lies in practice management issues such as accounting, salaries, insurance, managed care, new equipment and supplies, computerization, and other overhead costs and issues, all leading to the bottom line.

Consider a practitioner, imbued with a high degree of clinical dental education and with some level of experience, but with very little formal training in practice management. The practice can be akin to the Titanic on her maiden voyage. It was the part of the iceberg below the surface that did the Titanic in.

A thorough knowledge of practice management is the key to operating a successful dental practice. But how does a dentist get there? And what are dentists experiencing as they manage their practices on a day-to-day basis? The first obstacle to successful practice management rears its head when students enter dental school.

"I defy you to find any students entering dental schools with any prior business knowledge," said Robert S. Gartrell, DDS, chairman of CDA's Council on Dental Care and a part-time practice management professor at the University of the Pacific School of Dentistry. He said that dental schools, while they have done a much better job with practice management education than in the past, must emphasize it more in the dental curriculum to bring students more knowledge of the business aspect of dentistry.

Gartrell, emphasizing the importance of business education, said of current practice complexity, "It's not getting any easier. I think the schools seriously should consider the business of dentistry as important, then they should set curricula accordingly, because dental practice management is getting more and more difficult."

Gartrell admitted that dental school curricula are already crowded, so putting more business courses in will be difficult. It's the crowded clinical curriculum that makes it difficult for students to concentrate on practice management.

"In our senior year at USC, fighting all the requirements to get through clinic, the last thing on our minds was the business aspect of dentistry," said Cyrus Tahmasebi, DDS, a general practitioner in the La Jolla area who graduated from the University of Southern California in 1991. "At that moment, it had very little impact on us."

"It's a fact that the emphasis (in school) is on clinical skills and how to get through the requirements for certification," said Arthur S. Wiederman, a CPA who also lectures on practice management to dental students at USC and Loma Linda University.

A recent graduate of UOP, Laura Van Roy, DDS, agreed that business education in dental school is minimal. She said she received about 20 hours of business education, "mostly in the areas of insurance, capitation plans, and starting up a practice," before graduating in 1995.

Gartrell, who graduated from dental school in 1974, emphasized that dentists then didn't need a lot of business training to become successful.

"It didn't take a lot of business acumen, and banks were ready to help finance new practices," he said. But today, the marketplace is much more complex.

"When I graduated, there was only one insurance product available, traditional indemnity insurance," he said. "Now, so many plans and products are on the marketplace, a dentist must be capable of making sophisticated business decisions."

While graduating dental students today accumulate little business education, they gather a mountain of debt that experts say averages from $100,000 to $150,000 -- and more for those who attend private schools. That is a factor that causes some graduates to choose working for someone else to ensure a steady income to pay down the school debt. Others ignore it and press on into practice ownership.

Tahmasebi took the latter route.

"After graduation, I had about $80,000 in student loan debt, lower than average, but still significant," he said. He was working in the practice he purchased nine months after graduation, and, "whatever I made went to paying off loans or attorneys and accountants involved in buying the practice. The first year was very difficult," Tahmasebi said.

Even with school debt and the added burden of the practice purchase loan, Tahmasebi stayed upbeat.

"My advice to young dentists is that focusing on the debt load is a negative way to look at things," he said. "If you can get into a practice that pays well, don't be concerned with the liability."

He tempered that statement with the admonishment "to use an accountant to weigh the possibilities carefully."

But Wiederman put his accountant's hat on to take issue with Tahmasebi's advice.

"There are finance companies out there that will finance a student and fund their practice, but new dentists instead should hope to find a private practice dentist to mentor under to learn how to deal with patients, vendors, staff and all the other practice management issues," he said. "To buy a practice, while a young dentist is just getting started and a significant amount of earnings are going to debt service, doesn't leave you much to live on."

Even so, like many graduating seniors, Tahmasebi wanted to start his own practice.

"Working for someone else would have been an easier decision because it would have provided a safety net to pay off debt," he said.

Van Roy took the other path and works as an employee in a group practice owned by a dental corporation.

"I would like to have gone into a partnership in private practice, but the cost of starting my own practice was a perceived obstacle," she said.

She wanted to stay in her geographical area of choice, and "this job was available and the only position I could find in the area."

"It's not a situation I want to be in permanently. When I leave, I'll be in less debt but still starting from scratch later with no established patient base and no additional practice management experience."

While Van Roy is satisfied for now with her situation, seeking an immediate income stream to pay down debt carries with it its own set of problems, according to past CDA President Richard Lewis, DDS.

"I know that their (new dentists') indebtedness forces many of them into accepting salaried positions with dental practices they would otherwise avoid, practices that demand 'production' above all else and where the quality standards learned in school are unknown," Lewis said.

Operating a successful dental business, once business knowledge is gained through years of practice, involves myriad details. Many more-experienced dentists run the business side of their practice using computers and sometimes CPAs to help balance the books. Some don't.

"Unfortunately, some dentists manage their practices by seeing how much they have in their checkbooks and hope they can make their payroll," Wiederman said. He used his experience providing accounting services for more than 100 dental practices in California to provide an overview of operating expenses and overhead ranges dentists should fall within to be successful (see accompanying chart for breakdown).

"Salaries should run 18 to 20 percent of total office production, not including associates, hygienists, fringe benefits or payroll taxes," Wiederman said. "If it's less than that, it means you have an efficient staff or are underproducing for your level of staff. If the number is too high, it means you are overstaffed and are paying too much."

Gartrell explained the issue of staff salaries further.

"Probably the single largest cost in any practice is labor, which has risen as a matter of time and cost of living," he said. "The good news is a dentist then keeps staff members over the long term, but the bad news is that pay must be raised over time, so salary costs rise as a percentage of gross revenue."

Wiederman warned dentists not to be afraid to hire new staff when indicated.

"We find many dentists who are reluctant to hire a new staff person due to cost," he said. "But if the office is understaffed, the collection percentage is lower because you don't have time to make financial arrangements or follow up on claims or insurance."

An integral part of any dental office is the hygiene staff. Wiederman said to figure out hygienist salaries, look at this cost as a percentage of hygiene production.

"In a perfect world, about 42 percent of the gross hygiene income should be paid to the hygienist(s), and the other 58 percent used to cover other office expenses," he said. "Also, look at the percentage of hygiene as a percentage of total production. In a practice doing $50,000 a month gross, usually 20 to 25 percent is hygiene and 75 to 80 percent is dentistry."

Another personnel expense, payroll taxes, should run 2 percent to 3 percent of total production, Wiederman said.

And "never get behind on taxes," he said, emphasizing that he knows of some dentists who have lost their houses because of tax problems. Other personnel-related expenses include benefits, such as medical insurance, uniforms and education. "This should run at 1 to 2 percent of production, higher if a pension plan is included," he said.

Wiederman said a typical office used to use 10 percent to 12 percent of production for lab costs, but now it's about 8 percent to 10 percent.

"This is due to fierce competition with labs, so many times dentists can ask for fees to be cut."

Gartrell provided another perspective.

"If you look at a practice primarily treating managed care patients, lab costs are at or below 10 percent due to cost containment being a major pressure," he said. "Dentists who do more ideal forms of dentistry can go to 15 to 16 percent."

Another overhead item is supplies, at about 5 percent to 6.5 percent of total office production. Wiederman and others indicated that supply costs are now a little higher because of OSHA requirements. In fact, he said that, "the average dental office pays an extra $1,000 to $2,000 per month due to OSHA and HIV. In addition, the average practice pays from 1 percent to 5 percent of the gross for practice development, including printed brochures, advertising, marketing, referral services, newsletters and coupons."

Another big-ticket item, rent, averages about 5 percent a month. Wiederman says he has found some dentists who have overbuilt and offered advice especially useful for new dentists.

"If you're just starting out, don't spend $200,000 to build an office," Wiederman said. "Rent at first until you have an income stream to pay for it."

All that constitutes major operating expenses that make up 50 percent to 55 percent of the gross. Minor expenses include bank charges, accountants, attorneys, pension administration, office supplies, telephone, utilities, maintenance, insurance and taxes, totaling about 8 percent to 10 percent. A big computer system or use of a management consultant will boost that figure.

The bottom line? Operating overhead total should be at 60 percent to 65 percent, Wiederman said. The rest pays debt service and the dentist's salary.

Ideally, every dental practice should fall within those parameters, experts say, but dental practices aren't all alike. A look at some actual practices provides a more realistic appraisal of what it takes to operate a dental office.

Norman R. Ball, DDS, is a general dentist who has practiced in Eureka for 31 years. He says wages and supplies have always been the big-cost items associated with running his practice, and supply costs are rising dramatically.

"In the last 10 years, supplies, as a percentage of gross receipts, have risen from 5.6 to 9.5 percent of my gross production -- that's nearly a 70 percent increase," he said.

Agreeing with Wiederman, he said, "This is due in part, I believe, to the advent of HIV and infection control costs and OSHA compliance."

Ball's total overhead expense in 10 years has increased from 59 percent to 66 percent of gross receipts, so while his total production has increased yearly, his profit is getting smaller.

The former CDA president, Lewis, also has seen overhead rise significantly over the years.

"I've been in general practice for 38 years. When I started, overhead costs were in the 50 percent range, and they're now around 75 percent," said Lewis, a 1959 graduate of USC.

Lewis says the largest increase has been in salaries, and rent is another factor that outpaces the Consumer Price Index. Other costs, he says, aren't out of line with the CPI, including lab costs and costs for services and supplies. Finally, a periodontist, Steve Schonfeld, DDS, says expenses are squeezing his profit.

"Expenses are increasing faster than income -- income is thus going down," he said. "This is, in large part, due to insurance companies applying pressure to keep costs down, but the overhead is unquestionably increasing faster than my gross."

Schonfeld, as a specialist, has a lower overhead than a typical general dentist. His overhead is about 54 percent, as opposed to a general dentist's average of 65 percent. This is typical because lower overall lab costs for most specialists using diagnostic labs reduces overhead below the level for general practitioners who use prosthetic labs.

Insurance companies continue to affect the ability of dentists to charge for services, while holding down both costs and profits. Tahmasebi uses this fact to find creative ways to keep overhead costs down and profits up.

"Given the pressures that are put on us by the insurance companies to lower our fees, I feel that it is necessary for us to ask our dental labs and suppliers to share in our efforts to cut costs," he said. "I have signed a contract with our dental supplier to keep our supply bills bellow 5 percent of our production, and my dental lab has agreed to keep my lab cost at 9 percent."

Lewis explained the effect of insurance programs in another way.

"Insurance companies are holding down fees," he said. "When one of the biggest went from the 90th percentile to the 80th for filing of new fees, it effectively forced me to reduce some fees at the same time my costs were increasing. The only reason I continue as a provider with this company is that patients of 'non-par' providers pay a significantly higher co-payment, and I am not comfortable adding to my patients' out-of-pocket costs."

Managed care, especially in California, has lowered profits for many dentists. It has, as one veteran provider said, caused trouble especially for new dentists.

"The managed care situation has been a paradigm shift that has caused untold hardships on California dentists, especially the newly licensed dentist," said Eugene R. Casagrande, DDS, a Los Angeles-based practitioner.

Gartrell helped to flesh out Casagrande's paradigm.

"Managed care exerts pressure on dentists to contain costs, but many dentists may not be astute enough business managers to do that," he said. "As a result, cost containment hasn't occurred in many dental offices, and net income drops. To increase net income, dentists must become better managers of dollars. Those very successful in managed care have learned those skills and can contain costs without affecting greatly their net income."

Richard A. Simms, DDS, a longtime consultant to CDA's Council on Legislation, put it another way.

"HMO/DMO and insurance programs are not holding down your costs, but they're holding down your profit," he said. "They hold down their cost by telling you how much they will pay you."

Managed care can also exert pressure on dentists to treat patients differently than they might in fee-for-service offices.

"If you're cost containing due to managed care, you may not recommend a procedure you would otherwise ask for under an ideal treatment program," Gartrell said. "Let's say a three-surface amalgam may suffice where the ideal may be a three-surface inlay, but the cost is significantly higher. In cost containment, and looking at what is appropriate for the patient, both are appropriate, but the inlay may be the longer-lasting restoration and thereby more ideal."

While managed care may not work for some, others have had success with it. Scott Jacks, DDS, is one example.

"I've participated in managed care for more than 10 years," said the member of CDA's Council on Dental Care. "It has, however, been a mixed experience."

He said he left some plans he initially worked with because of low reimbursement levels and poor working relationships. Ultimately, he says, that's the best way to analyze a plan.

"If you're contemplating joining a panel, sign on to a plan and see how it goes. Watch the numbers to see if it's working to improve overall profitability of the practice. If it's not working, get out."

Jacks emphasized that the decision about joining a managed care plan depends on the needs of the community. His practice in a suburb of Los Angeles is in a heavily blue-collar area where the majority of patients have switched to some form of managed care (PPO/HMO). He had to accept managed care or lose patients from the community.

"If you have excess capacity and empty chairs, it makes sense to fill them with managed care patients," Jacks said. "If you have a full practice, why replace the fee-for-practice patients with lower-rate ones?"

He says that in a small town, with a low supply of dentists, many practitioners have little excess chair capacity, so they don't have the need to sign up. In areas with many dentists, the reverse is true, and managed care helps those dentists fill their chairs with patients.

From a purely business standpoint, Jacks says a majority of those plans are underfunded so, "I don't know if you can operate a dental practice on 100 percent of these patients. But to supplement a practice with these managed care patients can help. It's a business decision and should be made from a pragmatic context."

He also said that managed care is hard work.

"Each plan has different exclusions, limitations and fee schedules. It's more work for less money," Jacks said. "But you have to deal with the economic realities of your community. It's very easy for someone in a community or area where they're doing great without managed care to say 'don't do it.' It works for some but not others."

Schonfeld, in the small Northern California town of Eureka, is one of the others.

"I live and work in a rural community, and the impact of closed panels (managed care) is still minimal," he said. "Most of the dentists here have established practices, and they all got passing grades in arithmetic. They see the poorly funded plans for what they are and eschew participation."

Another area of practice management lies in the very value of a dental practice, which experts say is also on the decline. Gartrell, who has been doing practice management and sales for more than 20 years, explains.

"In the late '70s, if you sold a practice, you could get 60 to 65 percent of gross revenues, plus accounts receivable," he said. "Now, it's 50 to 55 percent plus receivables. So there is a decline, but the forces that play on practices are complicated."

One reason he offered is that the number of dentists practicing is beginning to fall, so the theoretical value of a practice should steady out. In urban areas, where many dentists practice, the value may go up. Another reason practice values are changing relates to managed care.

"In the Los Angeles basin, practices that don't have managed care contracts may be valued less than one that does," Gartrell said. As an example, he points to Lockheed.

"When they went to managed care, dentists that didn't have contracts with those providers lost out."

Lewis offered a different perspective on practice value.

"Practice owners, except possibly owners of large clinics or groups, are not realizing a return on their investment equivalent to what could be realized 20 or 30 years ago," he said. "If all costs are factored in (education, purchasing a practice, and other capital costs), I would not recommend dentistry as a profession to someone seeking maximum appreciation on capital investment."

There are, however, entities that are buying up dental practices for that very reason -- capital appreciation.

"I am disturbed by the trend toward corporate ownership of dental practices," Lewis said. "The venture capitalists who put these groups together value only the return on their investment. They will state that they must offer value in order to stay in business. Unfortunately, most of the public is not sophisticated enough to recognize the difference between 'good enough' and better or high quality. The entrepreneurs take advantage of the public's lack of knowledge."

While the number of those corporations represents a small percentage of dentistry, the impact is growing nationally.

"I know a young man who is a venture capitalist back in Georgia who is making a lot of money putting together these large group dental practices," Lewis said. "They buy practices, then hire the dentist back as a manager on salary. The dentist gets that guarantee, but it is less, and it puts him under pressure to hire other dentists to work for him at greatly reduced salaries."

This trend is just starting to affect California, according to Jacks, who says that some dentists will do well with it, while others won't.

"It's a little like saying you think you will do well in the stock market," Jacks said. "If a dentist is considering selling a practice to these companies or working with them, investigate thoroughly first."

Another trend having more and more of an impact on dentistry in California and the rest of the country is the use of computers in practice management.

"Four years ago, we computerized our office," Ball said. "At the time, we were all computer illiterates, and the learning period was difficult and frustrating at times. Now things run rather smoothly, and we wonder how we got along without it."

One area in the use of computers in dental practices that is gaining acceptance is electronic claims submissions to insurance companies.

"Once we got past some software problems, this has been one of the real bright spots in modern office management," Ball said. "Turnaround times have improved dramatically. Where through the mail it could take a month or more to get paid, we are now getting paid in half the time. Our record turnaround time is now four days. I would encourage any dentist with a computer to get going with electronic claims submission."

Not all dentists have been as successful using computers as Ball and his staff.

"As far as paperless (electronic) claims, we're not there yet," Simms said. "But we do have a computer. It makes some things in the office easier, like keeping records and appointments and doing mailings and accounting, but not necessarily cheaper."

Schonfeld doesn't use electronic claims, "as a lot of our treatment (such as radiographs and periodontal charting) requires additional documentation. Since these have to be submitted via 'snail-mail' after the electronic claim is filed and the insurance company requests it, we still see no advantage to e-claims for our practice."

Overall, though, many practices have at least attempted to file claims electronically, although not always successfully.

"A lot of people try to do electronic insurance billing, and there have been glitches on both ends," Gartrell said.

He added that, "Certainly those using it find that it works well -- when it works. Benefits include reduced labor and mailing costs and faster turnaround when it works right."

Gartrell also said that the process of filing e-claims is improving.

As many dentists wrestle with the increasing use of technology in practice management, perhaps the new generation of dentists leaving school in the past few years with more computer literacy will find it easier going.

"Years ago, I would ask dental students how many were familiar with computers, and a few would put up their hands," Gartrell said. "Now almost everyone raises their hands."

Over time, dentists, like most other types of business people, will become more computer literate and dependent, perhaps one day leading to the paperless office.

"For now, though," Gartrell said, "dental practices are using computers, but mostly as an accounting tool. More computer literate people are using them as a marketing tool, but computers are still way underutilized."

Some dentists, particularly specialists, are using computers as clinical tools, using programs that allow input of procedures and treatment plans.

"Of all the specialties, orthodontists are as a group using more of the clinical programs and some periodontists, too," Gartrell said. "From 50 to 65 percent of orthodontists are now using computerized charting and treatment programs."

Another tool some dentists are using to help manage their practices is outside experts, or "outsourcing," to handle some business functions. One such dentist is Tahmasebi.

"We have hired a public relations firm to market our practice, and they have been instrumental in introducing to the public all of the advances made in our practice," he said.

"I also have a law firm representing me in my dealings with insurance companies and an accounting firm handling every financial aspect of my practice. Although all of this sounds costly, and it is, their vision and advice have at times been invaluable."

Not many dentists rely on outsourcing most of their business functions. Those who do utilize it in the form of external marketing, Gartrell said. Another factor working against outsourcing for many dentists is the loss of control they would experience.

"A high degree of control, especially in the accounting area, is an important issue for dentists. So outsourcing may not be a good idea for many of them," Gartrell advised.

With so many options and so many demands to meet, developing an understanding of and appreciation for what is necessary to effectively and successfully work in the modern world of small business is yet another challenge in an already challenging profession.