Evaluate PPOs When Building Your Practice By Purchase
Our 2014 practice economic survey published last month revealed that most practices are now operating at only 80-89% of optimal capacity, defined as being as busy as the doctor wants to be, doing the kind of dentistry the doctor wants to be doing. This means that the average doctor is losing $100,000-$200,000 in profits annually, compared to what she would be making at 100% of capacity.
Many doctors have attacked their busyness problem by increasing external marketing expenses or, even worse, signing up for or increasing managed care participation. However, we recommend a much more cost-effective strategy: purchase a nearby competitor’s practice and merge it into your practice’s existing location.
This allows doctors to build practice volume to the desired level as quickly as possible. Since fixed overhead costs such as rent, equipment, utilities, insurance, etc. have already been covered, incremental overhead (usually just supplies, lab, and additional labor) usually runs only 30-40% of the additional volume purchased. As a result, the purchasing doctor can bring 60-70% of the added volume to the bottom line as increased profit, before taking into account annual debt service costs. These annual debt service costs on practice purchases typically run no more than 10-15% of the incremental added collections, and then only for the typical 7-year buyout period. As a result, a purchasing doctor can usually generate a net profit of 45-60% on the added volume purchased, even after paying the related debt service.
While the economics make adding another practice through purchase a “slam dunk” financially, doctors must carefully analyze the impact of managed care before cutting the deal. Doctors who “leap before they look” can lose thousands of dollars to unforeseen managed care implications, says Bill Rossi, a practice management expert.* As the trend toward group practice continues, Rossi has seen an increased number of practices grow by purchasing one or more additional practices. Rossi has worked with dozens of clients through this practice purchase/merger process and describes below some important managed care issues that must be carefully considered and successfully navigated.
For example, what if you’re purchasing another practice that’s participating in a large PPO that your practice is not? Do you join that PPO for the sake of having a smoother transition?
Continuing with this example, let’s say you’re a Delta Premier provider. In many parts of the country, patients with Delta Dental insurance have the option of going to a Delta Premier provider and getting that level of benefits, or going to a Delta PPO provider where they have the incentive of reduced co-payments.
If you are a Delta Premier provider (the “regular Delta,” not with Delta PPOs) and you buy a practice that’s with Delta PPO, those patients will experience a transition as they blend into your practice. This must be handled carefully, or the patients you are assuming the care of may leave your practice.
On the other hand, if you join Delta PPO and have a significant number of Dental Premier patients, you will experience deeper discounts on the patients you already have. This can be terribly expensive, in fact even more expensive than the actual practice purchase in some cases!
It’s very important to get a specific list of all PPOs the selling doctor is participating in, along with the related fee schedules, as part of your due diligence related to the purchase. Unfortunately, many doctors purchase without knowing what PPOs the practice participates in. Sometimes, even the current owner isn’t aware of the plans for which they are a provider!
Even if the practice you’re purchasing participates with the same PPOs, be sure to compare both practices’ PPO fee schedules. Believe it or not, PPOs do pay different fees for the same procedures to different providers! The practice you are purchasing might be getting higher (or lower) reimbursements than your practice. Obviously, doctors would want to negotiate with the PPO (if you’re going to continue to participate) to ensure that you get the higher fee schedule of the two, even if you are bringing the selling doctor over to work in your practice.
If you’re purchasing a practice that has significantly more PPO participation than your practice does, make sure that you and your staff are ready to take these patients through the transition, much the same as if you were leaving a PPO. However, this situation is significantly more delicate, because you don’t have the patient loyalty working for you yet.
On the other hand, if you’re purchasing another practice to “top off” yours, it puts you in a better position to dump PPOs and take some patient loss. As you can see, successfully navigating the managed care issues in a practice transition can be quite complicated.
In conclusion, the right “PPO plays” can add thousands of dollars to your bottom line when you are buying a practice. Make sure you perform the due diligence to determine all the facts and then implement a carefully planned strategy to come out ahead.