Practice Management Ignore Overhead; Just Grow Production

By Roger P. Levin, DDS

Many dentists fixate on their practice overhead. They view it almost as an enemy to their income. And, in cases where overhead is too high, it is an enemy. However, in my experience reviewing hundreds of practice financial reports, overhead is typically not the main factor why doctor income is not higher. In an era where dentists have accumulated student loan debt, incurred the cost of opening or purchasing a practice, and are working longer hours, controlling overhead will not be the driving force for generating a desirable income for a modern lifestyle and long-term savings. What will be? Let’s first start by understanding overhead. Every business has overhead, and overhead is an essential part of doing business. You can’t operate a business without expenses. Large industries have generally accepted standards regarding expense levels. Dentistry, with few national comparisons that tell us exactly what practice overhead should be, relies on anecdotal evidence from surveys, consulting firms, accountants and expense analyses by companies that perform practice valuations and other legal transactions. This provides general guidelines for dental overhead expenses, which vary by specialty. We know, for example, that staffing costs are now running at about 28% and that lab fees in a general practice should be about 7%.

Reducing overhead is generally a worthwhile effort. For example, a practice that can reduce expenses in any category by 1% will increase profit (i.e., doctor income) by $1,000 on every $100,000 of collections. So, if the practice has collections of $1 million and is able to reduce overhead by 4%, doctor income will increase by $40,000. This is significant and should not be ignored. However, there is a finite limit on expense reduction. If a practice is relatively in line with the available anecdotal overhead information, then the practice does not have an overhead problem. Perhaps a few more dollars could be squeezed out of certain expenses, but, in most cases, overhead reduction strategies yield limited results.

Increasing Production

Dentists often talk about overhead as a percentage. For example, 65% overhead for a general practice is not unusual. In this case, the practice may be able to reduce overhead by a few percentage points, but, overall, the real opportunity to change the overhead percentage is by increasing practice production. A practice that is able to increase production by $100,000 while holding down expenses will lower the overhead percentage. The opportunity to increase practice production is the best opportunity to decrease the overhead percentage.

To be clear: When production goes up, some expenses also rise. However, in my experience, the first 30% increase in production in most practices will not require new fixed expenses. That level typically does not require expenses such as hiring a new staff member, paying for more continuing education or investing in technology. Therefore, fewer expenses are needed to generate a 30% increase in production because you are only adding variable expenses like lab fees and supplies. Your core fixed expenses stay the same. Sturdy production growth allows the overhead percentage to decline even when you can’t reduce costs one penny more. This is not to say that you shouldn’t pay attention to opportunities to reduce overhead, but increasing production will have a much more dramatic effect on practice income — funding your lifestyle and long-term retirement savings — than spending time trying to find more costs to cut.

There are many ways to increase practice production, and I encourage each practice to create a list of opportunities. It could be adding a service, expanding hours, adding an associate paid on commission, increasing the internal marketing program, heightening the team’s case presentation skills or building a higher level of customer service to attract more new patients. These are just a few of the many opportunities to increase practice production that significantly outweigh the number of opportunities to reduce practice overhead.

Focus on these three things first:

1. A proven way to increase practice production fast is to attract more new patients. Rather than adding to overhead with expensive advertising, the best avenue is internal marketing. Examples of effective internal marketing strategies include:

• Offering every new patient a free exam for every member of their family as part of a new patient-family program.

• Asking patients to refer friends.

• Doctors personally calling every patient who refers a new patient to thank them.

• Developing a short monthly email newsletter that always includes gently encouraging more referrals.

A strong internal referral marketing program should include at least six to eight strategies in order to have enough momentum to bring the brand and referral marketing message to patients.

2. Schedule all active patients. In my observation, up to 50% of patients do not have their next appointment scheduled, which means the practice is losing revenue and/or possibly losing patients and families. A daily task of reaching out to patients who have not scheduled and encouraging them to make appointments is a critical part of the front desk scheduling system. The goal is to have 95% of your patients scheduled at all times. This will increase chair time, increase dental treatment and even improve referrals because patients who aren’t remembering to come in are not going to refer others.

3. Improve case presentation skills. Case presentation is a system just like any other. It should be outlined step by step and carefully scripted for every member of the team. Every presentation should conclude with “the magic question.” Every time a case is presented, look at the patient and ask, “Mrs. Jones, would you like to have this done?” That is not being pushy. You are actually helping your patients make a decision. And make sure your team is following up on all unaccepted treatment. The hygiene appointment is the perfect opportunity to remind patients of treatment they have declined in the past. Remember, if you are able to schedule 95% of your active patients at all times, then you will have more people with whom you will be able to discuss potential treatment that has not been completed.

Summary

Regardless of the title I chose for this column, I don’t think dentists should completely ignore their overhead. I’m in favor of it, but I recognize the limitations of cutting costs when it comes to improving doctor income. The real opportunity is to increase practice production. And, given that the first 30% of practice production increase does not necessitate higher fixed expenses, all doctors can quickly improve their income by putting these strategies in place.

Roger P. Levin, DDS, is the founder and CEO of Levin Group, a dental management consulting firm. To receive his Practice Production Tip of the Day, visit levingroup.com. To comment on this article, email impact@agd.org.