The Great PPO Question

By Penny Reed, CEO Practice Booster

Should you participate in a PPO network or not? While this question has been on the minds of dentists for years, the impact of Covid-19 has truly brought it to the forefront. The combination of increased stress due to infection control protocols, lack of qualified team members, and rising staff and supply costs, have dentists and office managers taking a second or third look at their numbers.

Many are asking, is PPO participation right for us? Do the costs outweigh the benefits? Let’s evaluate whether now may be the time for you to join a plan, reduce the number of PPOs you participate in, or get out altogether.

We’ll start at the beginning. I remember, nearly 30 years ago, when I began my career as a practice management coach, I was on fire to share the best systems and stats with dentists and their teams. I had a passion for sharing the best information and processes with offices and I truly believed that the reason most practices weren’t reaching their potential was that they simply didn’t possess the knowledge to do things a “better” way.

It didn’t take long before I realized that while many offices needed instruction to increase their patient flow and profitability, others had the tools but couldn’t figure out how to implement better systems or new ideas.

The same is true with PPO participation. Before we dive into the objective points on evaluating your level of involvement with PPOs, let’s look at the most complex and intangible aspect first — the culture of your team. Why begin there? Your practice culture consists of the values, beliefs, attitudes, and behaviors that you and your team consider essential. For example, if you believe that most patients will not go to a dentist who is out of network, that belief will do more to limit your success than any methodology or strategy for reducing your practice’s insurance dependency.

It would be so easy if the business owners could simply say, “We are going out of network with this plan on February first,” and the entire team would be on board with it. Every person on the team must have the same level of conviction as the doctor in order to convey to the patients the value of the care that your practice provides and congruently stand behind the way the practice manages dental benefits. It must be at the core of how the office communicates, not only in the office but also on the phone. This is truly the most challenging work and the most critical area to evaluate and overcome. Bear that in mind as you look at the following areas, which are easier to measure.

Think of PPO participation as a marketing effort, because that is essentially what it is. The provider is paying to have their name listed with the PPO in order to increase patient numbers. That said, most practices should be spending at least 2% to 5% on practice marketing. If the practice is in a competitive market or is a fee-for-service office, that can be closer to 10%. By contrast, many practices are “spending” upwards of 25% to 30% for the marketing that the PPOs generate for them in terms of their write-offs. Prepare to have a strong marketing plan and be ready to invest more than you are likely spending now on other forms of advertising if you are considering reducing or eliminating PPOs.

It is also imperative to measure open chair time. If you have very little open chair time and you schedule patients effectively, this could mean that you may be able to stay out of PPO participation entirely, or at least limit your participation. A healthy practice should have new patient openings within a week and high production openings within one to two business days.

Just as important, if not more important, than tracking your write-offs is knowing your chair hour value. You should review this statistic at least once per year. Knowing your chair hour value helps you track the profitability in your practice in order to know if you can make money on a plan.

Chair hour value is calculated by reviewing the following (figures below are referenced for the previous 12 months): § Number of hours the office is open to see patients § Number of chairs utilized in the practice for patient care (total number of chairs, for both operative and hygiene, if applicable) § Practice collections § Practice income statement (showing all expenses by category) § Monthly notes payable, which aren’t reflected on the income statement. This may include but is not limited to the practice purchase note, equipment notes, etc.

First, you will multiply the number of hours the practice is open times the number of chairs utilized for patient care. For example, in a practice open five days per week with five chairs that is closed ten business days per year, the calculation would look like this: 50 weeks of patient care per year, times 40 hours of patient care per week, times 5 chairs utilized for patient care equals 10,000 chair hours per year available for patient care and revenue generation

Next, take the last 12 months’ collections, and divide it by the number of chair hours the practice had available. In this example, we will use $1.5 million in collections. $1,500,000 collections divided by 10,000 hours = $150 per chair hour collections

In a practice with a 98% collections ratio, this is $153 per chair hour production.

So now we know what the practice generated per chair hour is, we need to see what the breakeven is per chair hour – also known as our cost per chair hour. This is done by finding the overhead dollars from the income statement (again for the last 12 months) and the annual amounts spent on practice and equipment notes, which most often aren’t reflected on the income statement.

In this example, the practice has an overhead (expenses not including doctor’s salary) of $900,000. Here is the recommended way to segment these expenses for computing chair hour costs.

For this calculation, we figure existing or base staff salaries as a fixed cost. The reason is that unless they are on commission or you send them home when the schedule is light, you are spending those dollars on staffing. A little later, we will cover how to factor in adding staff and its impact on the chair hour cost.

Fixed costs (for chair hour cost calculation) Approximately 40% Rent or Building Note Build-out and/or Renovation Note Equipment Note Staffing Cost Payroll Taxes (staff only) Other Taxes Legal and Accounting Professional Dues Consulting and CE Travel Business Insurance Postage Utilities, Internet, and Phone Repairs and Maintenance

Variable Costs – Expenses that increase directly with production – Approximately 20%

Lab

Dental Supplies

Office Supplies

Advertising Expense

Bank and Credit Card Expense

Now that you have your expenses listed and tallied, you can review your overhead per chair hour, also known as “breakeven per chair hour.”

Expenses of $900,000 for the last 12 months, divided by 10,000 chair hours equals $90 breakeven per chair hour. This means, based upon the days and hours worked and chairs utilized, each chair must generate $90 per hour simply to cover overhead.

Why is knowing the breakeven per chair hour so important? When evaluating insurance plan participation or adding and/or staffing additional chairs, it’s critical to know the overhead per chair per hour. This will tell you whether or not you will make money, and how much, for adding additional working space. It will also tell you whether you can afford to participate in certain plans based upon their reimbursement.

There are many ways that knowing your breakeven or cost per chair hour can help you to make decisions. Refer back to the practice in our example. Let’s say there is a 6th room that is equipped and ready to use but has not been staffed and you are thinking of adding additional hygiene days to the schedule. If you added three more days of hygiene per week, this would result in an additional 1,200 chair hours added per year.

Now let’s look at the cost of staffing that additional room. Say your staff cost will increase by $45,000 and your additional costs will be the supplies used to see those additional patients. If the hygiene chair produces $1,200 per day, and supplies run approximately 5%, the supplies will run approximately $60 per day. Therefore, the additional annual overhead to book hygiene in the 6th room, three days per week, will be $54,000.

Let’s see how that changes the numbers.

We’ve added 1,200 chair hours for a total of 11,200 chair hours annually. And now our overhead (if we take the last 12 month’s figures) would be $954,000. Therefore, our new breakeven per chair hour is $85.18.

Remember, knowledge is power, and the more you know about your practice statistics, the better decisions you will make. Before you make any decisions regarding PPO participation, add another team member, operatory, or an associate, be sure you know these numbers so you can project the financial impact it will have on your bottom line.

Sources:

Reed, Penny. Growing Your Dental Business: Market Yourself Effectively and Accelerate Your Results. Indie Books International, 2015.