Designing a treatment plan for sustainable practice health
During this period of forced closures due to COVID-19, many doctors find themselves wondering how long their business can sustain at this rate. When liquidity, savings and government stimulus can only take you so far, it’s only wise for owners to look for a long-term solution. Although this period of time is unprecedented, there will always be seasons of downturn and seasons of prosperity and growth.
Ensuring your practice is in good financial health is the strategy needed to ensure you are prepared to ride the waves of life, both the ones that pull you under and those that help you coast into shore.
Long before the pandemic, it’s standard for a new dental client to come in my office for their initial meeting, and the first question 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 is presented.
Keeping tabs on one’s practice monitor can sound simple, but emotions like fear and anxiety can 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 issue and correcting it, 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 an established practice, this number should be consistent and not be declining. For a growing practice, this number should be increasing steadily year over year. If the new patient numbers are not growing at the level they should be, this could indicate required treatment such as 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.
In today’s scenario, you will want to review your new patient monthly averages from last year, prior to the pandemic. When you reopen, these will not immediately jump back to normal levels, but knowing your target will allow you to be comfortable with the natural progression through the remainder of this year.
During my time in the consult room, I have realized that across all specialties and demographics, 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 do they 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’s 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 vs. 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 the practice health. Your dental CPA should be able to aid you in determining the normal range for the type of practice you operate, as it will vary based on, for example, if you are 100% insurance driven versus fee-for-service only. Now more than ever, it’s essential to be aware of where you stand and maintain your collectible production to maximize cash flow when you need it most.
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% 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.
It’s easy to overlook this in times of prosperity, but it’s periods of adversity like this where its impact is more glaring.
Net Profit Percentage
I like to describe the fourth vital sign as a practice’s “heartbeat.” The heart relies on the 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% for a general practice to 51-59% for an oral surgery practice. Refer to the CWA’s new How Does Your Practice Compare? Report for more overhead target percentages by specialty at cainwatters.com/hdypc.
Now that practices are opening back up in many states, keeping track of your expenses will be more vital than ever to ensure your net profit allows you the cash flow needed to maintain your practice and personal financial health. If you are not sure where to start, our team of advisors have created a 6-month cash flow plan to help you navigate the challenges of reopening your practice.
It’s not too late to get a second opinion on your plan. Contact a member of your team for a complimentary consultation.
Stay up to date with our latest news and strategy on our COVID-19 Resources page. If you are not a CWA client, but feel you could benefit from an experienced advisor guiding you through this process, contact a member of our team for a complimentary consultation.