The High-Fee Trap

Charging more does not guarantee a more positive cash flow

In our culture, we value our health and are willing to pay more in return for a recognized set of benefits that improves our lives. In medicine and dentistry, there is a guideline fee range for most procedures. Fees are determined by insurance companies and/or Medicare, not just providers.

Orthodontists determine their own fees based on supply and demand as well as their expertise, costs, desired profit margin—and, sometimes, their egos. There is no business structure to follow to justify the fees charged.

Our fees have reached a very high limit. Charging so much can be perceived as greed, and charging high fees does not usually lead to an increase in the practice’s cash flow. High fees usually reflect high costs of service and can be a symptom of negative cash flow where there is no cost and time control. Currently, two basic forms of fees are charged:

1) Market-driven fees. These meet or exceed what other orthodontists charge, regardless of case difficulty, treatment time, or variability. As the cost of providing service increases, the fees escalate.

2) Constrained fees that are predetermined by insurance. Most orthodontists feel that this is fee control, an insult to our professional integrity. Most perceive constrained fees as  lower-quality fees.

Both limit access to service, induce stress in the practice, and invite new entry by either less-qualified practitioners or those who offer virtual service.

High fees do not necessarily translate into high-quality treatment outcomes. Any orthodontic treatment that does not meet the professional standard and the patient’s expectations is a waste, and it will be recognized as such.

On the other hand, a price war is not an accepted practice in the health service profession. Lower fees may attract a few patients, but if they leave sad feedback, the increase in production will not last. Providing quality, convenient, comfortable, and on-time treatment is the most profitable strategy.

While profit margin is a function of fees charged (total cost times quantity in any given time), there is no long-term correlation between the fees charged and the number of cases started. What creates high positive cash flow is increasing the number of cases finished on time.

Differentiating your service to justify variable fees is a solid concept, provided that the treatment outcome benefits the patient enough to justify the fees charged. In our current market, if the service does not meet the requirements, it is perceived as a waste. In such a market, the profitable strategy is to reduce your costs, not to escalate your fees.

The high cost of providing orthodontics, both direct and indirect, is the driving force in escalating our fees. Most orthodontists fail to recognize or manage their escalating total costs so that they can maximize the return on their constrained assets. They have no interest or expertise, so they would rather outsource this type of management to those who have no clue about our treatment process. No one can manage the costs of service better than the providers can.

Orthodontists have to learn how to monitor their total costs and recognize their break-even point and profit margin in a timely and continuous process. No one will do your homework better than you. We need courses in cost and time management rather than those that teach how to be the emperor CEO in our practices.

For example, most orthodontists practice from more than one facility. If you have three offices, you are paying 100% indirect costs for 30% utilization. This easily adds 15%–25% to your total cost. Integrating the concept of alliance and horizontal or vertical integration to maximize the return of underused fixed assets is a valid concept recognized by the medical profession as a cost-reduction strategy.

Your internal labor forces are another underused, high-cost entity. A smaller, cross-trained labor force—even with high compensation—is more efficient than a traditional one, where each job is customized to fit each person.

Another cost is high patient inventory, which can be created by time therapy. Patient inventory consists of those patients who are still in their active treatment beyond the estimated treatment time, and after their active fees have been capitalized.

Time therapy is what you are practicing when you continue to treat regardless of the estimated time: from 24 to 40 months and beyond. On-time treatment contributes to high profit margins, while time therapy is a cost and creates negative cash flow.

As an example, say that a practice starts 150 new cases per year, and finishes only 50 cases. This practice has 100 cases in the queue, paid but unfinished. In 2–3 years, this practice could have 150 patients paying for 450 in service. No higher fees will compensate for such a negative cash flow.

Time therapy is a huge waste that will continue to mushroom if it is not rectified. Analyzing the high fees some orthodontists charge, one could realize that 57% to 62% is consumed for direct and indirect costs, 12% to 15% for labor and underused costs, and another 30%­ to 42% for patient inventory. Here comes our negative cash flow.

We cannot continue to escalate our fees when doing so does not add to our cash flow and is perceived as a waste of other people’s money. We cannot survive in this trap. z

Al E. Atta, DDS, MSD, MBA, has a private practice in Deerfield, Ill. He is certified by the American Board of Orthodontics. He can be reached at [email protected].