Dental practice overhead: Cut costs without sacrificing quality

Overhead costs determine not only the success of your practice, but also how much money you’re able to put away for retirement. According to the 2021 Dental Buyer Advocates study, the median practice overhead in 2021 was 61.9%.¹ No matter the size of a practice or accrued average revenue, every dental owner has the goal to reduce overhead and increase profit and savings.

While many expenses cannot be eliminated entirely, there are strategic ways to decrease overhead costs, increase profit margins, avoid fatal cash flow problems, and put your dental practice on track for retirement savings. Here are steps for cutting overhead to regain thousands of lost dollars, without ever sacrificing efficiency or patient experience.

Identify pain points and develop a plan

Establishing a baseline is critical when it comes to setting a dental practice budget. The first step is to identify pain points, and in which areas the practice can cut costs. To do so, review overhead costs on a monthly, quarterly, and annual basis to identify trends, and begin to understand where weaknesses and opportunities lie within your practice.

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The largest impacts on overhead are generally staffing and employment costs, lab fees, office rent, and dental supply costs, and these can often account for nearly two-thirds of a practice’s total overhead. Deciphering service prices, equipment prices, and overhead can be daunting; consider partnering with a financial advisor to accurately assess your practice and ways you can reduce costs and grow your retirement savings.

Once you’ve identified the pain points, develop a plan to lower one or more of your costs. Make a realistic strategy and time frame that can be implemented month to month. It can be easy to get ahead of yourself and then need to scale back once something is implemented, but making small changes and adjustments can help you stick to a savings plan for long-term success.

Evaluate staffing costs

One of the largest overhead costs for dental practices is staff. There is a massive shortage of experienced dental applicants and a plethora of open positions, making the staffing process relentless and difficult for practice owners. Many practices are outbidding each other, encouraging staff to switch practices for better benefits, or posting inflated rates online.

Since the market is very tight, many practice owners have been forced to pay higher wages to keep staff at their practice. By doing this, staffing costs can become unbalanced because revenues are not outpacing costs and most dentists cannot increase their fees fast enough to recoup these increased costs. There are many factors that go into calculating the appropriate wage for each employee, but traditionally, wages should average approximately 20% of the practice’s total revenue, not production.

It’s no secret that a happy and engaged staff is essential for practice success. With the current staffing environment, developing a strong workplace culture that includes proper training will encourage staff to stay at one practice long term and reduce the headache of restaffing. The longer you can keep staff, the better off your practice will be.

The 5K rule

The dental industry is expensive. To ensure a practice stays within budget, it’s important to make smart, money-conscious decisions on all new purchases and processes, specifically for the $5,000-plus costs. Many dentists do not consider the big picture when they make decisions. Reviewing the fixed costs associated with a practice prior to making a high-cost decision is crucial to deciding whether now is the best time to make a purchase.

The 5K rule helps dental practitioners make smart decisions when it comes to large purchases. Anytime you’re considering a purchase greater than $5,000, connect with a financial advisor to ensure you have the means to make the purchase while staying on track with your practice budget. A startling overhead percentage is a major pain point for many practice owners, but taking the time to evaluate operational strategies is the first step toward achieving success and growth for your business and your retirement funds without sacrificing efficiency or patient experience.

Whether a practice is looking to purchase a new piece of equipment or hire a new employee, it’s important to run a cost-benefit analysis for each upgrade. If too many decisions are made without addressing the monthly budget, overhead costs can spiral out of control, leaving a practice in debt that cannot be easily corrected.

Keep dental supply costs on a strict budget

The first step to reducing dental supply costs is to calculate your average supply expenditure. The only way to reduce spending is to know your baseline, which can be done by reviewing the average percentage a practice has spent on supplies during the last 12 months. For maximum savings, a practice’s supply expenditure should be under 6% of gross production. To calculate this, look at the dental supply production cost divided by gross production. It’s really that simple.

Having a goal is one thing but making improvements will involve a little math. One of the best ways to do this is to set a monthly budget and try to stay under this number. If you hit the monthly budgets, you’ll hit the annual budget. Many practices have several people placing orders, so making sure that everyone is aware of the budget and stays within the parameters is a step in the right direction.

There are many ways to purchase dental supplies, but it’s important to find a trustworthy supplier who offers fair prices. A strong working relationship with a supply rep makes it easier to find cost-saving alternatives without sacrificing quality; many reps love to help with instituting better ordering processes. On the other hand, new distributors often enter the market, so keep options open to make sure your distributor is meeting average product rates.

Consider lab costs in your dental procedure fee

Lab services are essential to provide the best possible care for patients; however, lab fees can take a big toll on overhead. A safe overhead percentage for lab expenditures is 10% or less of a practice’s actual production. If lab fees are over 10%, don’t panic, but evaluate additional lab options. In the post-COVID world, labs are some of the largest jumps in overhead impact, so checking your pre- and post-COVID levels may yield surprising results.

Many dental practices use at least two different labs and if they don’t, they should. When it comes to fee-for-service patients, many practices recoup all the dollars off the lab work of the case, so as long as a practice adheres to the 10% lab expenditure rule, it will be in a good position.

Most go wrong by using the same lab on an insurance patient. For instance, if insurance reduces a reimbursement by 30% on every procedure, a practice should choose a more affordable lab to save money. Dentists must be cognizant of protecting their bottom line without sacrificing quality of work. If lab costs get tight, the issue is not the lab’s fees; it’s due to not properly separating types of patients.

Editor's note: This article appeared in the November 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.

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