M. Scott McDonald
In the due diligence portion of a practice transition, it is traditional to look at production and collection figures from the practice to help determine value. Many times, a review of the patient base does not occur because the parties involved believe that the geographic and demographic characteristics of patients do not change. While it is not possible to predict the degree to which patients will change, changes will happen. Typically, the patient base changes in three ways:
- Population size: Every cluster of residents is either growing or shrinking. Either direction of change can be quite dramatic, in some cases by as much as 5% per year in my experience.
- Demographic character: Populations (and their communities) are getting richer or poorer, older or younger. Granted, these are only two types of trends, but they can have a profound effect upon the potential of a practice based upon its location.
- Geographic distribution: This is where your patients are located in relationship to your practice, and what we are considering when we discuss historical drift below.
While population size and demographic character can easily be charted, historical drift is subtler and requires a bit more technical expertise to track. We can call it “historical drift” because it takes time to be recognized for what it is. It is not a phenomenon that is intentional at all. It occurs in the natural ebb and flow of business, but can be exacerbated by practice marketing.
The explanation is simple enough: The patient base’s distance from the practice increases the longer a practice is in operation. In other words, patients will come from farther away to visit more established, older practices. Professionals who purchase a practice ignore this factor at their peril—the same as ignoring a wave of unemployment, and increase in the cost of housing, or a drop in the birthrate.
Over the years, we have tracked the distribution of patients around an office and tracked these changes longitudinally. Some may recall the olden days when patients were represented by pushpins in a map. The idea was to offer the doctor information on where patients were found relative to the site. It told us some important things when considering the information from a static point-of-view. For example, it illustrated graphically how far away patients tended to travel to get to an office. It was from this experience we learned that most general dental practices draw about 80% of their patients from between three and five zip codes. The older a practice was, the greater the distance that patients would travel to the site. It also indicated that with more time, the number of zip codes increased incrementally.
Some may scoff at the importance of this and ask, “So what?” If your goal is to concentrate your practice promotion efforts effectively, you would want to know what the natural practice area boundaries were. If there is no statistical chance that someone would come from a relatively distant community or neighborhood, there is no reason you would want to spend money on promoting the practice there. To illustrate, in the early days of dental practice advertising, some practices would have people in Los Angeles sending mailers to people in San Diego. Obviously, those folks are not going to make that trip. But this practice served the purposes of direct mail vendors.
This was also a time in which direct mail consultants would swear that a practice must send at least 20,000 to 50,000 discount mailers out to get a reasonable return on the mailers. To get these numbers, the direct mail consultants were purchasing unfiltered lists (meaning mailing lists that did not target the recipients via demographics such as income, housing type, or age), which are also called “blanket mailing lists” because they got every household in a given area.
All of this meant that the dentists were not being careful with their money, as well as allowing a third party to push deep discounts that would eventually weaken the practice’s bottom line. By identifying a more rational boundary for the practice promotion efforts and targeting recipients, a much smaller mailing was possible and a far superior ROI was likely.
Targeting social media reach in terms of geographic area and demographic character is also important. This is another reason why the equivalent of a “heat map” or “pushpin map” can offer good information upon which the practice can make decisions. This is a static view of the practice area. A dynamic view requires a little more data on how the patient base is changing over time. This will reward the dentist with an understanding of the trends influencing the patient base. For example, do you want to know if a new corporate practice is really influencing your patient base and the value of your office? This kind of trend analysis can tell you the answer.
Historic drift analysis starts with a simple truism that most people want the practices they use to be conveniently located. Just like a barber, there may be some shops and salons that are much better than others—they get your sideburns straight, or they know how to work with your particular type of hair. The shop might not be the closest to your home, but it is within a fairly easy distance for you to travel. Imagine for a moment that you move your home just a few miles away. You likely would not go to this barber if you had never heard of it before now, but now that you have a professional relationship, the extra distance does not seem so bad. The drift may be only 2% per year, for example (but is often more). The implication is that over 10 years, more than 25% of patients have moved or changed dramatically.
Thankfully, there is research indicating how far this distance to a new dwelling might be. In other words, how big is the drift over a period of time? And, as researchers so often do, we created a statistical model that should be applied to dentistry. We borrowed a bit from realtors, who are faced with the dilemma of trying to create a rational database of homes to show clients. If you live in Boston, do you really need to know what the housing market in Boise looks like?
Matthew Ferrara, a real estate theorist and philosopher, studied numbers in the real estate transactions. He looked at the National Association of Realtors 2010 Profile of Home Buyers and Sellers,which indicated that the typical buyer of a home will move 12 miles from his or her previous home on average.1 In addition to this, he found some other interesting facts about how people move or don’t move1:
- 59% remained in the same state they were born in.
- 67.3% remained within the same county.
- 17% moved to a different county within the same state.
- 40% of intercounty moves were fewer than 50 miles apart.
- 21% of intercounty moves were 50 to 199 miles apart.
- 24% of intercounty moves were more than 500 miles.
- The total number of transfers between all states accounted for 6.8 million people.
Our research has shown that if you are in an area that is growing, a rising tide lifts all boats, even those of a corporate practice, DMO, or private practice. When the train comes in, everybody rides. And the opposite it also true in a declining population or when the economy falls apart. Growth and change have to be considered when examining the viability of a practice site.
For the young doctor, this has a more immediate impact. The “drift” occurs especially with older practices. If a practice has been around for 15 years, it may be drawing from 20 zip codes to get 80% of its patient base. But with a new buyer, those in the outlying areas will not be as loyal to the practice as those who reside or work near the patient-base core (that is, near the office). If there is a decline in the patient base after a new owner takes over, it will likely be in the outlying zip codes (or, at least, this is what our proprietary data has indicated). Therefore, it is within the buyer’s and the seller’s best interest to know the impact the historical drift has had on the practice over the last several years. Obviously, a young buyer should not be under the impression that all of the patient base will stay with the office when there has been significant drift, and the seller will want to be realistic in representing the practice to the buyer to confirm that an honest evaluation of the practice has occurred.
Reference
1. Ferrara M. White Paper: National Association of Realtors 2010 Survey Results. Realtornomics. 2011.
