Applying Baldwin University

business W. Marchack, of Southern

principles

to a prosthodontic

practice

DDS, MBAa

California,

School of Dentistry,

Los Angeles, Calif.

Determining the optimum fee for prosthodontic services is difficult. Most methods of determining fees are based on comparisons with other practitioners or with established fee schedules. However, comparisons alone are inadequate because they ignore the practitioner’s underlying costs. Since it costs each individual practitioner different amounts to produce dentistry, dental fees should be highly individualized. This article presents a model for evaluating fees for prosthodontic services based on both underlying costs and intangible variables such as the dentist’s skill, experience, and quality of care. (J PROSTHET DENT 1992;6’7:550-5.)

H.istorically,

many efforts have been made to establish guidelines for setting fees for dental services.1-4 Surveys conducted annually have allowed dentists to determine how their fees compare with those of other practitioners in the country. 5,6 However, little guidance is available specifically to enable dentists to set appropriate fees for prosthodontic services. One study uses a recently developed computer program to establish estimates based on statistical probabilities of treatment results.7 Many dentists are influenced by the insurance industry’s “usual and customary” fee,s a fee level determined by the administrator of a dental benefit plan to establish a maximum payable under a given plan for a specific procedure.g Still others have adopted Pankey’s philosophy in which fees are based on fairness.lO His definition of a fair fee is “. . . any fee for which the dentist will render care and which the patient is willing to pay, with gratitude.” Dental fees are highly individualized. Yet methods of determining fees, like those mentioned, do not necessarily reflect the actual cost of providing a service, nor do they address the dentist’s skill, experience and quality of care. These considerations should be part of an appropriate baPresented at the Academy of Denture Prosthetics annual meeting, Wintergreen, Va. aAssociate Clinical Professor in Advanced Prosthodontics.

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sis for establishing optimum fees for prosthodontic services. The purpose of this article is to introduce a model for evaluating fees for prosthodontic services based on these criteria. Sound business principles that can be used to achieve proper financial management of a prosthodontic practice are described. The concept of overhead per hour, how it is derived from business principles, and its application in dentistry are also presented.

METHOD Business

parallels

All businesses are faced with the problem of setting a value for products or services. Among the strategies for pricing,” the one most common is some form of the costplus pricing strategy. In this method, a cost base is computed and a predetermined markup is added to arrive at the final price. To determine appropriate fees for prosthodontic services, parallels and similarities between dentistry and other businesses are examined, and business techniques from these parallels are adopted to arrive at a cost base. Once a cost base is determined, more meaningful fee judgements can be made. Overhead

per hour

Derivation. Overhead per hour is a key business concept that can be applied to dentistry. It is derived from the

FACTORY OVERHEAD PER UNIT Total factory overhead for year.... Total units produced for year ....... Factory overhead per unit ($200,000 / 1000) = Fig.

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$200,000. 1000 $

200.

1. Typical calculation of overhead per unit.

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MANUFACTURING COST PER UNIT

Direct cost of materials ............... Direct cost of labor used.............. Factory overhead per unit.. ........ Total cost

$

I 100. 150. 2OQ,

=$450.

I

I Fig.

2. Typical

manufacturing

cost analysis.

EXPENSES Rent Utilities Telephone Insurance Drugs and Dental Supplies Payroll (non-owner) Payroll Taxes Employee Benefits Interest Depreciation Legal and Accounting Continuing Education Auto Expense Dues and subscription Repairs and Maintenance Office Supplies and Postage Laundry Miscellaneous Laboratory Fees Dentist’s Salary Fig.

3. Typical

list of expenses of a dental practice.

business principle of fully allocating expenses to determine unit cost, a the unit cost of a product. l2 In determining typical manufacturing company allocates three types of expenses to the total cost of a product: (1) direct cost of materials, (2) direct cost of labor, and (3) factory overhead. The direct cost of materials is the cost of those materials that enter directly into the finished product. The direct cost of labor is the wages of the workers who change the materials into the finished product. Factory overhead includes all of the remaining costs of operating the factory, such as rent, utilities, insurance, administrative salaries, and other general expenses. l3 Dividing the total factory overhead for a given period, such as a month, quarter or year, by the total number of units manufactured during

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that period, gives the factory overhead per unit. This amount represents the portion of the factory overhead allocated to the cost of each unit (Fig. 1). Using $200 as an example of factory overhead per unit, and assuming that the direct cost of materials and the direct cost of labor are $100 and $150 respectively, the manufacturing cost for this hypothetical unit would total $450 (Fig. 2). Although dentists provide services rather than manufacture goods, these principles apply equally well in dentistry and manufacturing. The major difference between the provision of dental services and the manufacture of goods is that in dentistry, the unit of production is time instead of a manufactured product. Thus, by substituting overhead per hour for factory overhead per unit, avalue can

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EXPENSES OF A PRIVATE PRACTICE = = = = =

Total annual expenses Dentist’s salary Administrator’s salary Clinician’s salary Laboratory expense

Fig. 4. Annual expenses of independent

I

I

dentists. ADA 1988 Survey of Dental Practice.

I

OVERHEAD PER HOUR Total annual office overhead = Overhead per week ($215,707 /47.8 weeks) = Overhead per hour ($4,512 /33 hours) = Fig. 5. Typical

calculation

be determined for the cost of a unit of chair time, in much the same manner as factory overhead per unit of product is determined in manufacturing. Computation. Dental practice expenses encompass many items, that can easily be used to compute overhead per hour (Fig. 3). One item, the dentist’s salary, requires further interpretation. In 1990, Reed14 proposed that the dentist’s salary should be a combination of two salaries, the dentist-administrator’s (owner-operator’s) salary and the dentist-clinician’s (service provider’s) salary. He suggested that the owner-operator’s salary should be between 10% and 15% of the gross revenue and that the dental provider’s salary should be between 15 % and 30 % of the gross revenue. For example, for a practice with an annual gross revenue of $500,000, the owner-operator’s salary should be approximately $50,000 and the dentist-provider’s salary $100,000. To calculate overhead per hour, all annual expenses, including the dentist-administrator’s salary but excluding the dentist-clinician’s salary and the laboratory costs, are added together. The resulting sum is the total office overhead not including the two exclusions. The overhead per hour can then be derived by dividing this total by the number of weeks worked per year, and further dividing by the number of hours of patient treatment time per week.

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$317,210. 95,163. 31,408. 63,755. 37,748.

I $215,707. 4,512. $

137 --

of overhead per hour.

According to one American Dental Association (ADA) survey15 in 1989, independent dentists reported that the average number of weeks worked per year was 47.8, and the average number of hours per week spent treating patients was 33. In another ADA survey,16 one group of independent dentists reported, as an average, total expenses of $317,210 and laboratory expenses of $37,748 (Fig. 4). This group reported an average salary of $95,163, which according to Reed14 would represent a dentist-administrator’s salary of $31,408 and a dentist-clinician’s salary of $63,755. Adjusting these values to include the administrator’s salary, but to exclude the clinician’s salary and laboratory costs, results in an average office overhead of $215,707. Thus the overhead per hour for this group can be determined as $137 (Fig. 5). With data from other surveys published in 1990,17, ls overhead rates in the range of $65 to $200 per hour can be estimated.

Cost analysis Once the overhead per hour of a practice is known, the cost of providing a prosthodontic service can be calculated in much the same way manufacturing costs were calculated. Factory overhead, direct cost of materials, and direct cost of labor in manufacturing in business (Fig. 2) become office overhead, laboratory costs, and the dentist’s salary in

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I Manufacturing

I

j,:l Fig.

I

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I Prosthodontic I

service

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]I 6. Cost analysis parallels between manufacturing and dentistry.

COST OF PRODUCI’ION of a single gold crown Laboratory cost . ... .... .... ... .... ... .... .. Dentist’s salary{2 x $64) ............. Overhead (2 x $137) .. ................... Total cost............................... Fig.

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125. 128. 274. 527.

7. Sample cost analysis of a single gold crown.

dentistry. The parallels between the cost analysis of a manufactured product and of a prosthodontic service (Fig. 6) are apparent. For a prosthodontic service, the second component in the above analysis is laboratory costs. This is equivalent to the direct cost of materials in the manufacturing analogy. If a contract laboratory is used, the actual laboratory fee will apply. If an in-house laboratory is used, then a separate accounting of that department will have to be done to determine an average laboratory cost. The third component in this analysis is the dentist-clinician’s salary, which is equivalent to the direct cost of labor. To ensure that all units are uniform, this salary must be stated as an hourly rate. To calculate the dentist’s hourly rate, the desired annual salary is first divided by the number of weeks worked per year and then by the number of hours per week spent treating patients. In 1990, Stade and Dickey’s stated that the most frequently reported net incomes of prosthodontists ranged from $101,000to $150,000. Separating these incomes into administrator’s and clinicians’ salaries results in a range of $67,333 to $100,000 for clinician’s salaries. Dividing these by the ADA averages for time spent working will result in a range of $43 to $64 per hour. With this information, the cost of a service such as a single gold crown can be evaluated. For this example, the following assumptions are made: (1) two hours of chairtime are used to prepare the tooth, take impressions, fabricate a provisional restoration, and cement the crown, (2) the

THE

$

laboratory cost is $125, (3) the dentist desires to earn an annual clinician’s salary of $100,000, and (4) the overhead rate is $137 per hour. The cost of producing this gold crown will be $527 (Fig. 7). While figures for each dentist will vary from the above, this method does offer a realistic appraisal. The same analysis can be prepared for all other prosthodontic services.

Hidden

costs

The cost of production of a prosthodontic service is a valuable tool in determining the appropriate fee structure. However, the actual cost of providing a service also includes hidden costs. Hidden costs are not readily apparent, but they significantly increase overhead and dilute profits. Many businesses are faced with situations that result in hidden costs. Retailers, for example, have inventory shrinkage due to breakage and theft, returned merchandise that may not be resalable, and goods that are no longer current and must be marked down, often at a loss. Economically adverse situations that result in hidden costs also occur in a prosthodontic practice (Fig. 8). These costs are incurred from situations such as nonproductive time, remakes, fee reductions, and uncollectable fees. Nonproductive time is time spent on nonincome generating services such as diagnosis and treatment planning. It also includes time lost because of last-minute cancellations and patients’ failure to keep appointments. Remaking crowns, fixed partial dentures, and other prostheses is very costly. In microeconomics, the term op-

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Retailing:

Fig.

I

service

1

I

I

Prosthodontic

service

9. Pricing parallels between manufacturing and dentistry.

portunity costlg is defined as “the disadvantage associated with an act of choice” or “an opportunity lost.” Opportunity cost is the forgone income from some activity that might have been possible with resources that were actually used to perform another activity. Thus the cost of remaking a prosthesis is really the cost of providing that service increased by the opportunity cost of the profit forgone by missing the opportunity of doing another service. Uncollectable fees, courtesy discounts, and other fee reductions are also sources of hidden costs. Even the most carefully managed practice will occasionally suffer losses due to uncollectable fees, which again add to overhead and must be absorbed by the income generated by more productive procedures. These situations, and all others that contribute to hidden costs must be identified and controlled or minimized, or they may prove to be disastrous to the income of a practice.

Fee Calculation Pricing strategies from other businesses can provide useful models for dentistry. l1 Manufacturers and retailers, for example, will often use a mark up of 100% or more above their cost. This is to account for the cost of production or cost of goods, hidden costs, and brand name recognition or reputation. To reflect similar factors, a dentist’s fee for a service must

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1 Prosthodontic

8. Hidden cost parallels between retailing and dentistry.

Manufacturing

Fig.

1

likewise be some multiple of the actual cost of production of that service (Fig. 9). The final fee consists of first, the cost of providing the service, second, the hidden costs, and third, all of the intangible factors such as reputation, advanced education, experience, unique ability and skills garnered from years of teaching or research, and quality of care.

DISCUSSION On one point the parallels between dentistry and the business world are not appropriate. Whereas in business, profit maximization is a main objective, dentists must be conscious of the distinction between profit and greed. Preston20has proposed that dentistry, as a profession, has the right to govern itself, and along with that right comes the obligation to police itself and ensure protection of the people seeking its services. While on the one hand superior knowledge, superior skills, and the provision of superior quality of care deserve a fair return, arbitrarily inflated profits not commensurate with the quality of service being provided are unethical.

CONCLUSION It is important for dentists providing prosthodontic services to have a better insight into the business aspects of their dental practices. By applying relevant business prin-

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ciples in financial management, practitioners can analyze their net income more effectively. Unfortunately, because of the busy nature of the profession, this has traditionally been a much neglected area. The concept of overhead per hour has been introduced as a financial tool to simplify the process. By using this simple business tool, dentists can easily analyze their costs. Appropriate fee judgements can be made on the basis of the actual cost of service, hidden costs, reputation, and goodwill. REFERENCES 1. Caplan CM. Charting your fees. Dent Econ 1987;6:39. 2. Caplan CM. Setting fees: how to stay in the ballpark. Dent Mgt 1990;10:24-29. 3. McKenzie S. Establishing a fee schedule. Dent Mgt 1989;12:32. 4. Williams JN, Willis DO. Professional dental fees: objectives, strategies and implications for today’s dental environment. J Dent Prac Adm 1988;2:72-78. 5. Wilson B. Dental fees: national and regional survey. Dent Mgt 1989;2:22. 6. Schroder E. Dental fees: national and regional survey. Dent Mgt 1990;2:24. 7. Maryniuk GA. Estimating prosthodontic treatment costs: a probability approach. Int J Prosthodont 1988;1:281-85. 8. Webb UK. Viewpoint: What is UCR? Dent Econ 1990;6:21. 9. Van Blarcom C. Review of the literature: National Symposium on Prosthodontics, Clinical Practice, Third Party Relations. J PROSTHET DENT 1990;64:292-310.

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10. Mallin RJ. Establishing a fair fee. J NJ Dent Assoc 1987;1:6. 11. Garrison RH. Pricing of products and services. Managerial accounting. 3rd ed. Piano, Texas: Business Publications Inc, 1982;481-522. 12. Davidson S, Stickney C, Weil R. Accounting: the language of business. 7th ed. Sun Lakes, Ariz: Thomas Horton and Co, 1987. 13. Warren CS, Fess PE. Managerial accounting and job order cost systems. Principles of financial and managerial accounting. Cincinnati: SouthWestern Pub Co, 1986;511-12. 14. Reed OK. Checking the vital signs of your practice. Dent Econ 1990; 655-57. 15. ADA Bureau of Economic and Behavioral Research. Dentists in nonsolo and solo practice. The 1989 Survey of Dental Practice. Chicago: Am Dent Assoc 1989;25. 16. ADA Bureau of Economic and Behavioral Research. Annual expenses of operating a dental practice. The 1988 Survey of Dental Practice. Chicago: Am Dent Assoc 1988;19. 17. Anderson PE. Good news! Net incomes rise despite escalating costs. Dent Econ 1990;10:33-47. 18. Stade EH, Dickey KW. Private prosthodontic practice: A status report. J PROSTHET DENT 1990;64:716-22. 19. Kohler H. Choice brings benefit and cost. Intermediate microeconomits, theory and applications. 2nd ed. Glenview, Ill: Scott, Foresman & Co, 1986;6-7. 20. Preston JD. Editorial: Rights and obligations. Int J Prosthodont 1990; 3:509. Reprint requests to: DR. BALDWIN W. MARCHACK SUITE 408 301 SOUTH FAIR OAKS AVE. PASADENA, CALIFORNIA 91105

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Applying business principles to a prosthodontic practice.

Determining the optimum fee for prosthodontic services is difficult. Most methods of determining fees are based on comparisons with other practitioner...
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