CHOOSING A DENTAL PRACTICE MODEL AN IMPORTANT PART OF STRATEGIC PLANNING

By Michael Perry, DDS

In my experience as a practice management consultant and practicing dentist, most private practice dentists dont see themselves as operating within a particular practice model. Dentists often evolve into their practice model through random opportunity, market pressures, or other circumstances. Often the model a dentist works in is the only one that he/she knows and understands. Stages vs. Models Stages of practice refer to times in a dentists career. The CDA defines stages 1 through 4 describing phases from the dental student to the prospective retiree. I have often labeled stages of private practice another way: survival, growth, and fulfillment. Survival is the time when a private practice dentist is burdened with debt. Growth is the time when the practitioners priority is practice expansion. Fulfillment is when the practice becomes turnkey and is facilitating a doctors definition of success. Models of private practice are defined in this article by a dentists relationship with third party insurance. A model is determined by if and what type of contract(s) a doctor is utilizing to gain access to pools of patients. If a dentist has no direct contracts with any dental benefit company and only processes insurance via indemnity relationships, I call this a Pure Fee-for-Service model. In my experience, this model exists in approximately 10% of California practices. The remaining 90% of California practices have contracts that demand fee reductions for individual services (PPO) and/or contracts that pay a doctor a fixed periodic rate for taking care of patients dental needs (HMO). PPO plans include Delta Dental plans, Dentical, and many others. HMO plans are often referred to as capitation plans. Practices that are pure PPO or HMO are rare if they exist at all. It is likely that all private practices have at least some cash patients. A practice that obtains a portion of its patients through insurance contracts is sometimes called a hybrid practice. The level of remuneration varies significantly between insurance plans. Rules that restrict treatment options and outside charges to patients also have wide variations. These variations, in a sense, create an almost infinite number of model variations. For the purposes of this article, I will describe four common models, each with different types and levels of third party affiliations. Common Models Model 1: Hybrid - 67% Fee-for-Service, 33% PPO. This is a typical model in many areas of California. In this model, the dentist often has a single contract with Delta Premier. Years ago, it was not uncommon for a dentist utilizing this model to have one fee schedule. It was common for UCR fees to
This resource is provided by the CDA Practice Support Center. Visit the Web site at cdacompass.com or call 866.232.6362. 2009 California Dental Association

be the same as those demanded by the contract with Delta. Today it is more common for dentists to have multiple fee schedules: one for each PPO and one for their non-contracted patients. Model 2: Hybrid - 33% Fee-for-Service, 67% PPO. One ADA survey showed that, nationally, 40% of private practice dentists have three or more PPO contracts. Model 3: Hybrid - 25% Fee-for Service, 50% PPO, 25% HMO. This model is more common in urban areas with greater population densities. Model 4: Pure Fee-for-Service. Practices utilizing this model have one fee schedule. Most still process insurance on patients behalf and take assignment of benefits when possible. Overhead Variation Practice overhead percentages vary significantly between these common models. These variations occur, in large measure, in the area of variable costs as opposed to fixed costs. The brunt of variable overhead in most practices is in staff costs and supplies. In general, the greater percentage of PPO-HMO (managed care) activity, the greater the variable costs per dollar produced. Managed care patients are usually treated for lower fees than indemnity or cash patients. For a practice that treats managed care patients to match a level of net profitability achieved by a pure fee for service practice, more patients have to be treated per unit of time, more staff will be needed, and more supplies will be used. Variations in Staff Configurations Staff configuration is the grouping of individuals with the appropriate skill sets to work synergistically toward care for patients and success of the business. Plan rules and levels of remuneration vary widely among managed care plans. Having stated that, there are general rules that exist to help practice owners configure their staffs in an optimum way. Common sense dictates that the prudent business owner wants to achieve the best possible balance between staff costs and staff performance. The balance point for each of these common models differs. In my experience, if one assumes that a private dental practice in California has a solo dentist/owner and a patient flow requiring the services of one full time hygienist, the appropriate staff configuration for each of these common models is: Model 1: (67% Fee-for-Service, 33% PPO) 1 highly trained business office employee 1 moderately trained rover 1 moderately trained registered dental assistant (RDA) 1 moderately trained registered dental hygienist (RDH) Staff Cost = 27% to 31% of collections Model 2: (33% Fee-for-Service, 67% PPO) 1 highly trained business office employee 1 moderately trained business office employee 1 highly trained RDA 1 moderately trained dental assistant (DA) 1 moderately trained RDH Staff Cost = 30% to 35% of collections Model 3: (25% Fee-for Service, 50% PPO, 25% HMO)

This resource is provided by the CDA Practice Support Center. Visit the Web site at cdacompass.com or call 866.232.6362. 2009 California Dental Association

1 highly trained business office employee 1 moderately trained business office employee 1 moderately trained rover 1 highly trained RDA 1 moderately trained RDA 1 moderately trained RDH Staff Cost = 33% to 40% of collections Model 4: (Pure Fee-for-Service) 1 highly trained business office employee 1 part time bookkeeper (8 hours/month) 1 moderately trained DA 1 part time sterilization technician (20 hours/week) 1 moderately trained RDH Staff Costs = 22% to 25% of collections Variables to Profitability Between Models If a doctor/owner sets a goal of $200,000 annual net profit before retirement plan contributions and principal debt reduction, variations would exist between models to achieve that level of profitability. Some of the most significant variables would be:

Supply costs increase proportionally with production. (Managed care patients are treated at lower fees, necessitating higher production to achieve the same profit level.) Profitability is proportional to the quality of the PPO & HMO contracts in a practice. (Different contracts have different fee schedules and capitation rates.) The ratio of fees to overhead varies among geographic areas in California. Leadership abilities between dentists vary significantly. Clinical abilities between dentists vary significantly. The model of practice in place has a significant effect upon staff costs.

Production required for an annual net profit of $200K Taking into consideration the above variables, the approximate production required to achieve an annual net profit of $200,000 would be: Model 1, hybrid (67% Fee-for-Service, 33% PPO) Required annual production = $800,000 Model 2, hybrid (33% Fee-for-Service, 67% PPO) Required annual production = $1,000,000 Model 3, hybrid (25% Fee-for Service, 50% PPO, 25% HMO) Required annual production = $1,333,000 Model 4, (Pure Fee-for-Service) Required annual production = $572,000

This resource is provided by the CDA Practice Support Center. Visit the Web site at cdacompass.com or call 866.232.6362. 2009 California Dental Association

Choose Carefully! In general, the greater the proportion of PPO-HMO dentistry in a practice, the more production is necessary to achieve a given level of profit, and the less time is available for patient examinations, treatment planning, and case presentations. Each private practice model has its commensurate strengths and weaknesses. Once a model is in place, however, there is usually significant risk and strategic planning involved in switching to a different model. In my experience, most dentists let a practice model choose them. It is far better for a dentist/owner to strategically choose his/her model as part of the practice vision creation process. Utilizing this method, the practice model becomes one the many chosen elements on a doctors path to the fulfillment stage of private practice.

For more information on creating a vision and strategic plan, please reference: Effectively Utilizing a Vision Statement in the Dental Practice

August 2009

This resource is provided by the CDA Practice Support Center. Visit the Web site at cdacompass.com or call 866.232.6362. 2009 California Dental Association