Overhead costs are a major source of frustration for dental practices, and many providers don’t know where to start when it comes to lowering their overhead. Working to increase profits by extending office hours or performing treatment with limited supplies leads to burnout, fast. There’s another way to lower your overhead that won’t lead to burnout. But first, you need to know where your overhead sits so you can figure out where to start.
The national median overhead for general dentists is 75%, while specialty providers hover just under that at 74.9%.1 Do you know the monthly overhead for your practice? To figure it out, take your total monthly expenses and divide that number by the total monthly practice collections. Is it around the national median, or closer to the ideal percentage listed below?
The ideal overhead goals for each specialty:
- General—59%
- Endodontic—42%
- Orthodontic—49%
- Pediatric—49%
- Prosthodontic—64%
- Oral and maxillofacial surgery—50%
- Periodontic—51%
If your practice overhead is not around the ideal percentage, you're not alone. There’s a way to increase your profitability while decreasing your overhead that does not involve cramming more patients on the schedule or working with the bare minimum of supplies or staff.
The first step is to break it all down into a practical application. Do you know how much money you spend every hour that your practice is open? Knowing this will help you develop the courage, motivation, and determination to make every dollar count. To calculate this number, take your average monthly overhead expenses and divide that number by how many hours your office is open during the month. This is called practice hourly overhead rate. Your hourly production needs to be greater than your hourly overhead rate to be profitable.
How to reduce overhead
How do you reduce your practice hourly overhead rate? Do you like to negotiate? Many people do not because they don’t know the right way, or don’t have much experience negotiating. I recommend going into negotiations using habit number five from The 7 Habits of Highly Effective People by Stephen Covey: think win-win.2 Negotiate with integrity and courage, and you can find common ground to accomplish your needs without destroying relationships or behaving unethically. After all, there’s little or no point in saving a few dollars if you end up burning a bridge that could lead to great things. You can negotiate, walk away, and still stay friends.
Here are 12 areas where you can boost practice profitability through negotiation. You will be surprised, but almost everyone is willing to give you some type of break.
Lease: The rent or mortgage for your practice should stay below 7% of your total monthly overhead. There are certain things in a lease that should be clarified and hammered out. Who owns the air conditioner or furnace? Who pays for maintenance? Other areas to negotiate are the ability to sublease, the option to purchase (rent to own), and even your monthly rent costs.
Supplies: The ideal target for your supplies should be 6% of your total overhead each month. Contact your supply vendors and negotiate the price per item, finance charges, shipping, and more. Or join a dental purchasing organization to take advantage of group discounts on supplies you use most often.
Lab fees: Lab fees should be no more than 8% of your total monthly overhead. Sound impossible? Simply asking, “Am I getting the best price?” can open the door to price negotiations for lab costs, one of the most consistent costs in a practice. You can also negotiate warranties, shipping, cosmetic upgrades, and rushing costs.
Marketing expenses: If you use direct mail to reach existing and potential patients, that is certainly a cost that can be negotiated. You may get a bigger discount when purchasing printed marketing materials in bulk. Try to keep all marketing expenses to 4% of your total overhead each month.
PPO contracts: Did you know that you should be renegotiating your PPO contracts at least every 18 months? Focus on your most frequently billed procedures—exams, cleanings, fillings, crowns, and more—and try for a 10% increase with every contract renewal. The best practice is not to sign a new contract without negotiating reimbursement fees.
Staff wages: Staff wages make up the largest chunk of practice overhead but, ideally, they should not exceed 25% of total monthly overhead. If you don’t have stewardship agreements with your staff, I highly recommend them. This holds your staff accountable and gives them clear guidelines on expectations for attitude, hours, and responsibilities. Stewardship agreements also ensure raises and bonuses are delivered upon results, and this drives the success of the practice.
Utilities: Most utility companies raise rates every year. Certain companies (e.g., TV/cable, internet, phone) will transfer you to customer care if you call to cancel and will offer a better deal to encourage you to stay. Many of these companies have specials and deals year-round, but usually the consumer must call and start the conversation.
Software vendors: If you know you will be using your practice management software for years to come, negotiate a length of contract discount. You can also negotiate multiple practice discounts, bundled services, and more.
Real estate and practice loans: Are you in an ideal location and don’t plan to move? If interest rates are low, consider refinancing your loan for a better rate or a longer length. Both of these will lower your monthly payment and increase your profitability. If you’re purchasing a new practice or location, negotiate the closing costs, appraisal fees, and monthly abatements.
Equipment: Ready to purchase or upgrade equipment? Do your research and compare product prices. When you find the equipment you want, don’t take the price at face value. Equipment costs should be no more than 3% of your total overhead. Request a lower price that you’re confident they won’t accept but allow them to respond with the lower price they will accept. The words, “Is that price the best you can do?” can be very powerful in these negotiations.
Patients: When was the last time you increased the usual, customary, and reasonable (UCR) fees in your practice? If you have patients requesting discounts, raising your fees each year makes it easier to accommodate those requests. Consider a 2%–5% fee increase each year.
Yourself, partners, and associates: It is vital for the longevity of your practice to ensure that your partnerships are a win-win for all parties involved. Be willing to sacrifice a little for long-term gain.
Lowering your monthly overhead may feel like an overwhelming task, but just look for ways to save in increments of $100. Find five of these categories where you want to save $100 each month and use the tips above to broker better prices. You’ll never get what you don’t ask for.
Editor's note: This article appeared in the August 2021 print edition of Dental Economics.
References
1. Levin R. How does your overhead compare to national averages? Dental Economics. August 26. 2015.
2. Covey S. The 7 Habits of Highly Effective People. Free Press 1989.
WARREN WILLIS, DMD, is the cofounder and COO of eAssist’s Dental Buying Power, a dental purchasing organization dedicated to providing the absolute best practice management and profitability resources in the dental industry. Dr. Willis has also started 11 successful dental practices since 2005 and specializes in practice strategies and overhead management.
