How does your overhead compare to national averages?

Roger P. Levin, DDS

Introduction

We have entered a new era of dentistry in which automatic growth is no longer guaranteed and new patients are harder to attract. In fact, recent data indicates that dentist incomes have declined in real dollars during the last decade. According to the ADA, dentist incomes, when adjusted for inflation, "have decreased significantly since the peak value of $215,876, which occurred in 2005, and have actually decreased since 2009, the end of the Great Recession."¹ By managing overhead more effectively, in many cases dentists can increase their income dramatically.

Using data from the ADA and Bureau of Labor Statistics, along with proprietary sources, the Levin Group Data Center conducted an extensive analysis of overhead for general and specialty practices. The results of this analysis yielded several surprises:

1. High overhead-The median overhead for all practices is 74.62%, which is extremely high.

2. Nearly identical overhead for general and specialty practices-The median overhead for general practices and specialty practices was virtually the same at 75% and 74.9% respectively.

3. Little difference between successful and struggling practices-The overhead for high-performance and low-performance practices was very similar for GPs (76.48% vs. 78.03%) and specialists (76.47% vs. 74.32%).

Why high overhead hurts dentists

Our findings reveal that the majority of practices are operating at high overhead levels. Levin Group recommends much lower overhead targets for general and specialty practices:

General-59%

Endo-42%

Ortho-49%

Pediatric-49%

OMS-50%

Perio-51%

Prostho-64%

For dental practices, every cost not associated with dentist income is considered overhead, including employee compensation, rent or mortgage, supplies, equipment, and utilities. Our analysis revealed that general and specialty practices-no matter their level of production-were paying between 74 and 78 cents out of every dollar they made in overhead to fund their business operations. Even a small reduction in overhead can reap huge dividends.

Let's look at an example. The owner of a practice generating $1 million in production with an overhead of 75% would pay $750,000 in expenditures and earn an income of $250,000. However, if this dentist were able to reduce expenses by 5%, he or she would gain $50,000 in additional income. For every percent overhead is reduced, the dentist increases his or her salary by $10,000. For practices generating far less in revenue, the savings can still be significant. A 5% reduction in overhead for a practice producing $500,000 annually would net $25,000 in additional income.

GPs and specialists-Different but the same

In Levin Group's experience, general practices typically have higher overhead than specialty practices. The GP business model is based on providing a wide variety of low-cost dental services to a high volume of patients, necessitating greater expenditures. For the most part, the specialty practice model is built on the opposite premise-seeing fewer patients at a premium price per procedure, resulting in lower overhead. So it was somewhat shocking to learn that the median overhead for general and specialty practices was nearly the same.

At a time when dental spending by consumers is flat nationally, the financial issues faced by practices shouldn't come as a surprise. After all, most general and specialty practices have been struggling to increase production for the past six years, while the cost of doing business (rent, supplies, payroll, equipment, etc.) continues to rise. Since 2009, inflation has increased by 10.1%, while expenses for owning and operating a dental practice have risen at an even higher rate of 18.6%! Caught in a financial vise, dentists and specialists are being squeezed by two concurrent forces-lower production and higher costs. Extricating themselves from this precarious situation will require a greater degree of practice management and marketing expertise than doctors have possessed in the past.

Top and bottom not that far apart

In terms of revenue, the best- and worst-performing practices had similar overhead percentages. For general practices, the difference between high performers (76.48%) and low performers (78%) was a minuscule 1.52%. For specialty practices, the difference was slightly higher at 2.15%.

One would surmise that highly successful practices would have greater business efficiency and thereby a lower overhead percentage, but that wasn't the case. Top-producing practices could be far more profitable if their owners implemented effective management and marketing systems, which would ultimately lead to a significant decrease in overhead for their offices. Lacking the appropriate business skills, the majority of dentists, even the most successful ones, are losing tens of thousands of dollars in potential income annually. The high rate of inefficiency in most practices also correlates to the rising number of dentists (38.29%) who described their stress levels as high or extremely high.²

What can dentists do to reduce overhead?

Growing production can decrease overhead percentages for fixed expenditures such as staff and facility, even though the dollars spent stay the same. Methods for increasing revenue include:

• Improving case acceptance through scripting

• Reducing no-shows and cancellations to less than 1%

• Expanding the number of referral sources

• Adjusting fees based on comparisons to national averages

In addition, practices should be vigilant about reducing costs as a way to cut overhead percentage. Dental supplies are a variable overhead cost that will increase as production increases, but comparison shopping to find the best prices can help decrease expenses. A few other strategies for reducing expenditures include:

• Renegotiating lease terms

• Working with your insurance agent to review coverages and premiums for potential savings

• Re-examining utility costs, especially for Internet and telecom

• Implementing a staff bonus system based on increased production and collections in place of annual cost-of-living raises

Every expense category and line item should be periodically reviewed to ensure that the practice is receiving the proper value for what it spends.

Conclusion

Controlling overhead represents one of the best opportunities for dentists to generate more income from their practices. By eliminating waste and reducing costs strategically, dentists can turn their practices into more profitable business enterprises.