Dental office overhead
April 15, 2013
By Kelly Soderlund, ADA News staff
The perception that dentists take home a hefty profit is misleading but changing the way dental practice expenses are publicized may change people's minds.
Members of the ADA Council on Dental Benefit Programs noted at their November meeting that one of the ways dental office overhead has been commonly calculated is faulty. Past survey reports released by the ADA Health Policy Resources Center reported average dental practice expenses as a percentage of gross billings as 60 percent, which suggests that dental offices have a 40 percent profit margin.
But those calculations didn't take into account the owner dentists' salaries, an important piece of the overall balance sheet for any business. Since it's a figure that's often quoted in debates about target minimum provider reimbursement levels within Medicaid programs, CDBP members thought it should be reflected accurately.
“Since no other business would consider omitting compensation for their CEO or top wage earners from overhead figures, many outside the dental industry may perceive this as a 35-40 percent profit,” said Dr. David May, CDBP chair. “This may explain why legislators and foundations feel that it is not an issue if dental insurance companies cut reimbursements 10-15 percent.”
Upon a recommendation from CDBP, the HPRC agreed to stop publishing the 60 percent statistic that excludes owner dentists' salaries when calculating dental office overhead. With owner dentists' salaries included as a cost, practice expenses average around 90 percent of gross billings, dropping the profit margin down to 10 percent. HPRC has published this statistic since 2006 but including it alongside the data that excludes owner dentists' salaries has led some to be confused by its interpretation.
“The commonly reported dental practice expense percentage of 60 percent, which excludes owner dentist salaries, if taken out of context, could lead to a mistaken perception about what it costs to operate a dental practice,” HPRC staff members Bradley Munson, Adriana Menezes and Marko Vujicic, Ph.D., wrote in the research brief titled “Dental Practice Expenses Much Higher When Owner Salaries Accounted For,” which can be found at ADA.org/1442.aspx. “It does not take into account the value of the practice owner's time.”
The previous calculation method ignored the difference between gross billings and actual receipts collected, also known as the collection rate, according to HPRC. When the collection rate is taken into account under the new measure, the average expense percentage increases to around 97 percent, HPRC reported in its research brief.
“Since more than 80 percent of active private practitioner dentists in the United States are practice owners, the traditional method underestimates the true cost of operating a dental practice. As a measure of practice expenses excluding owner labor costs, of course, it remains valid,” the research brief said. “Comparing dental practice expenses (including owner salaries) to gross billings actually collected, we believe, provides the most informative measure of dental practice expenses. Accounting for collection rates is particularly important since they have been falling steadily since 2006.”
Dr. May hopes that the updated figures will resonate with insurance companies, some of which have decreased the maximum allowable fees dentists receive.
“We wanted to put an end to the misconception that dentists aren't greatly affected when insurance companies decrease reimbursement rates,” Dr. May said. “By updating the way we publicize dental office overhead, we're giving insurance companies, legislators and the public the most accurate information from which to shape their opinions.”