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Accepting PPO Plans

While consulting in dental practices for over 20 years, I have observed that many dentists have an unwarranted fear of accepting PPO (Managed Care) plans.  The biggest single “fear factor” seems to be the overwhelming focus the dentist places on the reduced fees received from these plans: the dreaded “write-offs”.  They will look at a production report generated from their practice software, noting that they produced $100,000 during the month but wrote-off $25,000 due to these Managed Care plans.  Then they agonize over this “lost” $25,000.  Rather than focus on the write-offs, I will attempt to get the dentist to shift his or her focus to the PROFIT number.  Isn’t the profit number the only number that really matters?  I sure think so.

Let me walk you through an example and see if I can persuade you to begin to pay more attention to the profit number and less attention to the writeSoff number, and perhaps convince you that accepting some PPO plans might actually help you make MORE money.

(The bottom of this article contains all of the figures that I’ll be referring to.  It might help you to print that page so you can see the numbers as I’m describing them.)

On the left side are the Production, Collection, and Overhead numbers for our hypothetical “SAMPLE PRACTICE”.  From the numbers, this looks like a pretty good practice, but the doctor complains of spending too much time standing around and wishes to be busier.  The office Production is $76,500 per month, with Collections of $75,000 (98%).  (NOTE: If you missed the article in last month’s newsletter about this 2% of uncollected money, you should probably go back and read it.)  While all of the Overhead numbers are slightly higher than we at Summit would like to see, they do realistically represent what we often do see when taking our first look at a practice.  In fact, many times the numbers are a lot worse than these.  So, here is a practice that has a 65% Overhead and a 35% Profit margin.  On an annualized basis, the doctor is taking home $315,000 per year.  Not all that bad.  But it could be better.

What would happen if this doctor decided to add two PPO plans to the practice?  Take a look at the numbers in the center of the page.  For our hypothetical example, let’s add DELTA and assume an extra $5,000 per month in Production from Delta patients, and also BCBS, assuming the same $5,000 in added production from these patients.  So we’ve added two PPO plans and are producing an extra $10,000 per month.  But as I’ve indicated, the Delta plan will reimburse at 20% less than your regular fees and the BCBS plan will reimburse at 30% less than your regular fees SSS the dreaded “write-offs” totaling $2,500.  So the practice has increased Production by $10,000 but will only be able to Collect $7,500.

Now let’s look at the impact on Overhead that adding these two PPO plans should have.  There really should be no need to increase Staff (employees or hours) to add $10,000 per month in Production.  That’s only about $625 per day in a 16-day month.  The Facility expenses (rent, utilities, repairs, etc.) should not go up.  There will be additional Lab expenses.  Remember, expense percentages are calculated based on collected dollars.  So to produce the extra $10,000 you had to spend $1,000 but it turns out to be 13.3% rather than 10%.  Hope everyone follows that.  There will certainly be no increase for Marketing.  It will cost some extra for both Office Supplies and Dental Supplies.  So the total is $2,000 in extra expenses to produce the extra $10,000.  Since you will receive a combined $7,500 from the two insurers, this results in $5,500 ADDITIONAL PROFIT.  Over a 12Smonth period this will be $66,000 additional income for the doctor.

Now let’s look at the numbers on the right in green, representing the new total Overhead resulting from collecting the extra $7,500 per month ($90,000 per year).  You may be surprised to see that the total Overhead percentage actually goes down from 65% before adding the 2 PPO’s to 61.5% after adding the 2 PPO’s.  And don’t forget to notice that the doctor is now taking home $381,000 rather than $315,000. My point, again, is to encourage you to focus on the Profit and not on the writeSoffs.  The key is to know the expenses and keep them tightly under control.

I hope I haven’t confused anyone with my examples.  And I’m not necessarily recommending you rush out and add a bunch of PPO’s to the practice.  But if you’ve seen your practice slow down over the last couple of years and your income has suffered as a result, this could be a strategy worth exploring.  These plans are not going away.  If anything, I believe you will see more and more employers abandoning “old style” indemnity insurance and going with plans that are less expensive for them SSS that will save them money.  Do your homework.  Find out what the major employers in your area are doing.  Research the details of the plans.  Most importantly, consider the impact on your bottom line.

As always, if you’d like additional information on this or any other practice management topic, just email or call.

Max Gotcher
[email protected]

Sample Practice Adding 2 PPO’s New Overhead
Production 76500 5000 Delta @ 20% write-off
5000 BCBS @ 30% write-off
Collection 75000 98% 7500 75% 82500 Collection
Annualized 900000 990,000 Annualized
Overhead Add’l OH Overhead
Staff 21750 29% 0 0% 21750 26.4% Staff
Facility 9750 13% 0 0% 9750 11.8% Facility
Lab 7500 10% 1000 13.3% 8500 10.3% Lab
Mktg 2250 3% 0 0% 2250 2.7% Mktg
Ofc Supply 2250 3% 300 4% 2550 3.0% Ofc Supply
Dent Supply 5250 7% 700 9.3% 5950 7.2% Dent Supply
Total 48750 65% 2000 26.6% 50750 61.5% Total
Profit 26250 35% 5500 73.3% 31750 38.5% Profit
Annualized 315,000 66,000 381,000 Annualized