New dentists often enter the profession as employees or associates. The method to determine compensation for these positions varies from office to office. Here are a few common threads to help you think through what might be an attractive compensation agreement.
Please note: for purposes of this article, the terms associate and employee will be used interchangeably. Keep in mind that an associate can be an independent contractor, rather than an employee.
Although employees can receive a flat salary or hourly rate, it is more common for employee compensation to be based on a percentage of production and/or collections.
Let’s imagine a scenario where you perform ten prophys over the course of a week, and patients are billed $10 each.
- Production is the gross revenue associated with the quantity of work that a dentist does. For those ten prophys, your production is $100 for the week.
- Compensation Rate is the percentage that you earn. For instance, a practice might pay a compensation rate of 30%. In the ten-prophy example above, a dentist earning 30% would earn $30. The remaining $70 would go towards practice overhead and profits. However. . .
- Important: The compensation rate is almost never based on raw production numbers!
- Collection is the amount of money that the office actually receives. For instance, a patient might not end up paying the bill, or the practice could have a contract with a third party payer that gives a discount.
Continuing with the ten-prophy example, imagine all ten of those patients have an insurance plan that pays the provider a 10% fee discount. This makes the collection $90 rather than $100.
- CP (Collection to Production) Ratio: If the fee for a prophy is $10, and the practice ultimately receives $9, the CP ratio is 90%.
- The CP ratio can vary widely, depending upon the location and type of practice. Ratios of 95% are common, but in some areas of the country much lower ratios are routine.
Putting all the Pieces Together
Here’s a simple formula to determine the level of production required for a practice that pays on collection to generate a target income. In this example, the associate wants to earn $84,000 (before taxes) for the year at a practice where the compensation rate is 33% and the CP ratio is 98%:
Production = Desired Income/(Compensation Rate x CP ratio)
Production = $84,000/(0.33 x 0.98)
Production = $259,740
In order to earn $84,000, this associate will need to produce $259,740. Obviously, any one of these variables affects the equation.
Do your homework before you join a practice and be sure to ask about patient assignment. In discussing compensation based on collections, how patients are assigned is just as important as just as important as the CP ratio for the practice. If the owner dentist treats all fee-for-service patients and you treat all the managed care patients, the owner’s CP ratio may be 98% while yours is 80%. If patients are assigned randomly, both you and the owner dentist are more likely to have the same CP ratio.