Chapter 11
Fees, Fee Setting, and Financial Policy: A Practitioner’s Perspective
Introduction
Dental fees are the lifeblood of a dental practice. They are the single most important tool the dentist has to generate income and to offset the cost of doing business. The primary goals of a fee schedule are simple: generate profit and growth for the dental practice. Fees and fee increases are part of the normal process of conducting a dental practice. Fees need to be high enough to permit the business to accomplish the following objectives: (1) cover the expenses of the business, (2) permit reinvestment in the business, and (3) provide a respectable rate of compensation for the owner. On the other hand, fees need not be so high as to price oneself out of the marketplace.
Dental practices have a tremendously high overhead. Historically, overhead will range from 60 to 65% of production for a general dentist (McGill Advisory May 2007b). Lab fees, dental supplies, equipment, facility costs, staff salaries, and taxes are just a few of the items that contribute to overhead. The doctor often has to be content with the amount that is left over after all the bills are paid. The amount can vary from practice to practice. It can be as little as 9% and as much as 35% of collections. The point is, the doctor does not get anywhere near all that is collected (Glasscoe 2000).
Practices with low fee schedules and thus low profit margins are frequently subjected to complaints from staff members about low wages. This in turn can lead to a high staff turnover rate. It can also lead to an inordinate amount of stress for the doctor having to deal with an overhead that is out of control and the financial difficulties associated with failing to recognize a profit. Dental practices with healthy, well-maintained fee schedules are rarely subjected to these financial and managerial problems.
How much is a professional service worth? Ask ten different people and you are likely to get ten different answers. In dentistry, we frequently talk about professional fees being based on care, skill, judgment, overhead, and expected revenues per hour. Ideally, fees should be derived with these considerations. In reality, dental fee schedules are established in a variety of ways. Some dentists use survey data, others use tables of allowances from indemnity insurance plans, others use relative value tables, and some opt for using inherent cost of procedures in establishing fee schedules. For the most part, fees in the dental industry are determined like those in other consumer-driven entities. That is to say, prices are market-driven. The range of price has been set by the marketplace. Various fee surveys reveal the range and percentile that have been established for a service in a particular geographic area. These surveys add credibility to the fact that the majority of dental fee schedules are derived in such a manner. That being the case, it makes no financial sense to charge any less than what has been established in a given geographical marketplace. Pricing established in such a fashion is referred to as “target pricing.” Target pricing is defined as being a mechanism wherein prices are set based on market penetration or price points rather than building from standard costs (12manage, The Executive Fast Track).
The insurance industry uses this pricing model to build fee schedule profiles on its providers. It is also a means by which usual, customary, and reasonable (UCR) fee tables of allowances are determined as well as preferred provider organization (PPO) fee schedules.
Fee Schedules and Definitions
Ethically, your practice should have only one fee schedule. The fee schedule in your office represents what you would normally charge for each procedure performed in your office and is referred to as your usual fee schedule. State boards and other regulatory agencies frown on practices that have multiple fee schedules. That is to say, you cannot have one fee schedule for insured patients and another for noninsured patients. The usual fee schedule in your office represents your full fee for a given procedure and has nothing to do with the amount of money contractually reimbursed by a patient’s dental benefit plan.
Most dental practices accept dental insurance benefit plans. As a result, your practice may accept several different tables of allowances. Tables of allowances should not be confused with your usual dental fee schedule. Tables of allowances are dollar amounts representing the total contractual dollar obligation on part of the dental benefit plan. They have nothing to do with your usual fee schedule.
Some dental benefit plans reimburse for specific dental services based on a maximum allowance. Typically these plans reimburse up to 100% of a predefined dollar amount. The dollar amount of reimbursement is based upon the financial strength of the plan as defined by the contract with the purchaser, not the insurance company (Limoli 2007). Dentists who participate in such plans cannot collect their full fee from patients covered by a maximum fee schedule, as they are contractually bound.
Frequently, dentists and patients alike are confused by the difference between the terms “maximum allowance” and “maximum fee” as they relate to a practice fee schedule. Regardless of the payment schedule, your usual fee schedule is not taken into consideration. With maximum allowances, the patient is responsible to your office for any balance due on your usual fee. With maximum fee scheduled plans (i.e., PPOs), participating dentists cannot collect their usual fee should a balance exist after payment. On the other hand, should a patient with a maximum schedule have work done with a nonparticipating dentist, balance billing is permitted.
Why Do Dental Practices Need to Increase Fees?
The world would be a happy place if one never had to raise the price for a particular good or service. Unfortunately, we live in an imperfect world. We live in a world subjected to economic forces that change the outlook for everyone on a daily basis. Fees charged for dental services are subjected to the relative prices of other goods in our economy. Inflation is the primary reason you must raise fees on a periodic basis.
Inflation is defined as the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index (Wikipedia).
In the long run, inflation is generally believed to be a monetary phenomenon, while in the short and medium term, it is influenced by the relative elasticity of wages, prices, and interest rates (Federal Reserve Board 2004). It is generally agreed among economists that a small amount of inflation does carry a positive effect on our economy. There are many reasons for this justification, the principal one being that it is difficult to renegotiate prices in a downward direction. One such example would be an attempt by management to lower employee wages. Modest inflationary pressure means prices for a given good or service are likely to increase over time. This trend helps to keep the economy active, as it encourages spending, borrowing, and long-term investment. It is for this reason that dentists must keep informed about inflation and keep pace with inflation by periodically raising fees. Our economy is not stagnant, and neither should be a dental professional’s fee schedule.
Disturbing Trends
It is important to stay abreast of inflation in raising fees and also to pay attention to what is happening to your profession. As recently as 2004, some disturbing trends have started to emerge in the dental profession. Unfortunately, most dentists in this country are not operating at or near full capacity. In a survey conducted by the McGill Advisory in 2006, it was reported that 83% of dentists are not as busy as they would like to be. The reported statistic showed no improvement over a previous survey conducted in 2004. What has led to this lack of busyness is a combination of factors that merit discussion.
It was previously anticipated that by 2000 there would be an increase in the number of retiring dentists. Recent surveys conducted by various consulting groups, as well as the American Dental Association, show this is not the case. The lack of retirement by dentists has been primarily due to the lower net asset values and investment incomes of doctors. The lack of retirements has helped increase the competition within the dental industry. While this is of concern, an even bigger concern is the shrinking portion of consumers’ disposable incomes.
Fueled by rising gas and energy costs, inflation, the mortgage crisis, and higher short-term interest rates, consumers’ disposable incomes have lagged behind the rate of price increases in the general economy. With less disposable income available to consumers, dentists find themselves competing for the limited disposable dollars available to consumers. For the majority of dentists in our country, this has resulted in fewer new patients and fewer procedures being performed.
Operating costs of a dental practice have continued to mount in recent years. Dentists have traditionally relied on an increasing number of units of production to sustain net income and practice growth. Survey data have shown that dental office productivity has been increasing at a rate of approximately 1.5% per year (Beazouglu et al. 2002). With the number of units of production in decline, dentists can no longer rely on productivity alone to sustain net income and practice growth. Fee increases are inevitable, even with disturbing economic news. Unfortunately, for those dentists participating in discounted fee dental benefit programs, fee increases to offset costs have not occurred due to contractual constraints by the benefit programs. Dentists participating in these programs have seen their practice profits erode and overheads skyrocket.
The ability of dentists to increase office production in the future as a means to maintain or expand their net incomes will depend on an increasing demand for dental care by people with the resources to pay for that care. The downward pressure on the utilization of services in dental benefit programs will make growth more difficult. Once viewed as an effective stimulus for the demand for dental services, dental benefit plans may be seen by some as becoming a less effective stimulus because of the downward pressure they exert on utilization and fees. Dental benefit plans can also lead to stagnation in the maximum annual benefit level (Guay 2005).
Adding to the woes of the consumer is what has been happening in the insurance industry. There has been a marked decrease in dental caries. Public fluoridation and preventative oral health programs have done their job. That being the case, consumers have opted toward more cosmetic procedures, many of which are not covered by dental benefit plans. With decreasing levels of disposable income, even these heavily marketed cosmetic procedures have been difficult for consumers to afford.
Employers wishing to control the ever-rising cost of dental insurance premiums have switched from indemnity policies to managed-care plans. Currently, 60% of the dental benefit programs are of the discounted fee type. The result for many dentists has been to willingly or unwilling become discounted fee providers. The really bad news is that annual fee increases associated with discounted fee products only permit increases of up to 1% or less (McGill Advisory May 2007a). If inflation is occurring at the rate of 3–4% a year, it will not take long for dentists to notice a marked decrease in profit and an increase in the overhead required to run the practice. Unfortunately, many dentists, fearing a lack of busyness, willingly or unwillingly opt for becoming preferred providers. Such action only adds to the problem. Practitioners, seeing their profits shrink and overheads swell, are left with only one viable solution: Raise fees to all present and future patients not on a discounted fee program, to cover the costs of those receiving the discount. From a societal standpoint, one might ask, is this fair and ethical treatment?
Doctors who do not raise fees at least annually resign themselves to higher overhead costs and lower profits over their remaining career, since it is difficult to implement large (makeup) fee increases. Also, doctors participating in managed-care plans must submit fees annually for approval. Most of these companies do not allow doctors to “catch up” with larger fee increases in a later year, so their fees remain lower permanently (McGill Advisory 2006).
Factors that Influence Pricing
How often should I increase my fees? How much do I raise my fees? These are frequently asked questions by young dentists. It is recommended that you review your fee schedule at least once a year. Fee increases can vary from the percentage of inflation up to whatever the marketplace will tolerate. It is a good business practice to pay attention to the consumer price index, the producer price index, and the employment rate in order to assure oneself of having a profitable, balanced, and reasonable fee schedule. Additionally, it is important to stay abreast of economic developments in one’s community. While it is important to periodically increase fees, one must pick and choose the times that are most opportunistic for the success of the business. Obviously, you would want to think twice before subjecting your practice to a fee increase when local economic conditions fail to support this business decision. For the most part, fees and fee setting need to be reflective of economic conditions at the local, national, and international levels.
When to Raise Fees
Is there any particular time of the year that it is better to raise dental fees? The answer is yes and no. From a budgetary standpoint, it is generally agreed that you raise your fees effective the first month of the calendar year. By doing so, you are able to properly position your practice fees in order to ensure greater profitability in the coming year. By having a consistent time of the year for fee increases, you also can better construct practice comparisons and growth indices with previous calendar years. That having been said, should economic conditions make fee adjustments necessary, you should act immediately so as to ensure profitability of the practice. One such example would be an increase in the price of gold. Drastic price changes in an upward direction of this commodity will lead to higher dental laboratory costs for the practice and will affect profitability.
How to Raise Fees
In order to raise fees, you must first determine where your practice’s fees are positioned relative to other practices in the same geographic location. This process is easily accomplished using fee survey information. Recommended surveys include Dr. Charles Blair’s comprehensive “Peace of Mind” Revenue Enhancement Program, the UCR Dental Fee Report, and the ADA Survey on Economic Research on Dentistry. Frequently, dental practice brokers will construct fee surveys on communities in which they operate. You may want to locate practice brokers and fee survey information by utilizing the internet.
Doctors cannot properly set fees without first determining where their fees are positioned in the marketplace. Failing to do so can cost thousands of dollars in the course of a career. Insurance companies have access to data from companies such as the Health Insurance Association of America. The insurance companies use the data to establish fee reimbursement schedules. As a dentist, you need to have access to this information to help position your practice fees in the marketplace (McGill Advisory 2006).
The second step in the process is determining where in the marketplace you wish to position your practice. Positioning should take into account and be reflective of the practitioner’s expertise, time, skill, and judgment. Overhead associated with the practice is also an influencing factor. In short, prices should be reflective of the quality of care. It is interesting to note that many patients do not equate fees with the quality of care. Patients generally rely on the newness of the equipment, the perceived aesthetic appeal of the practice, customer service, and personal interaction issues in judging the quality of care (McGill Advisory 2006).
Once you have decided on which percentile is reflective of the practice, you should raise all fees up to that desired percentile. Raising some but not all fees results in an unbalanced fee schedule, sending an inconsistent message to the patients of the practice and to insurance carriers (McGill Advisory 2006). Ultimately, such action results in an unbalanced fee schedule.
The third step in the process is maintenance of the fee schedule. Paying attention to what is happening with inflation and the general economy is extremely important. Armed with this information, it is recommended that the doctor continue to raise fees across the board each year thereafter to maintain market position. According to practice management consultant Dr. Charles Blair, 89% of doctors follow this approach to maintaining their fee schedules. The other 11% elect to raise some but not all of their fees on an irregular and inconsistent basis.
In general, doctors fear negative reactions by patients when raising fees. Change can be difficult, especially for the new dentist. Having to confront conflict with patients over fees is even more trying. It has been my experience and that of many of my peers that the perception of fear is much worse than the reality.
How Much to Raise Fees
Economists estimate that on average, our economy experiences a rate of inflation ranging from 3 to 4% annually. If you are to recognize a profit at this level of inflation, you must raise your fee/>
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