Every doctor wants their practice to be financially successful, but striking a balance between providing excellent patient care and maximizing the profit of the business is not always easy to navigate. For some dentists, being the CEO doesn’t come naturally and, as a result, they tend to focus more on the delivery of patient care. Having a busy office and full chairs often becomes the yardstick for measuring a practice’s business performance and they may not routinely look at numbers behind the numbers or for opportunities to improve.
When working with practices that are seeking to improve profitability, we always start with a review of the fundamental elements of profit or “the profitability factors” shown below.
- Production Volume: It starts here - more production should result in more collections/revenue.
- Collection Efficiency: Production is a key factor, but its impact is diminished if not collected efficiently and timely. Bills are paid and profits are realized as the direct result of collections.
- Overhead Management: Expenses reduce profit, period. They are, however, necessary to maintain the resources required to effectively run a dental practice. The essence of good overhead management is to minimize excessive or unnecessary expenses while ensuring that investments in the necessary resources are not marginalized.
These factors are typically the logical starting point for any review or analysis of a practice’s financial performance with production being the first on the list. In this review, we’ll take a closer look at production and particularly the importance of understanding the difference between Gross Production (GP) and Net Production (NP).
Before we dive into GP and NP, let’s begin with quick summary of some production fundamentals.
Like any business, measuring product and service sales volume is a key performance measure and one that often gets the most attention. Dentistry is no different – total production or production “volume” is an important indicator that is usually easy to obtain and, as a result, will inevitably receive more than adequate attention.
Routinely monitoring production volume is important and recommended, but that alone may not provide the complete picture when it comes to production. Practice consultants may monitor dozens of production measures and metrics to get a full understanding of a practice’s production performance and will likely always include:
- Doctor vs. Hygiene Production Volume – is the ratio between Doctor and Hygiene production in the ideal range of 70-75% DR and 25-30% HYG?
- Doctor and Hygiene Production per hour – the per hour average provides insight into the amount of effort expended to achieve the current level of prod volume. Are the DR and HYG averages meeting/exceeding the ideal per hour average over the ideal respective ranges of $300/$100 per hour?
Another important measure and the subject of article is the concept of Gross vs. Net Production or measuring how much of the practice’s production volume is actually collectable. The following review is intended to provide insight into this often overlooked metric.
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Gross Production vs. Net Production
The relationship between Gross and Net Production is similar in nature to an employee’s paycheck - there is a noticeable difference between an employee’s earnings (gross pay) and the amount deposited into the employee’s account (net pay) after taxes and deductions. For the dental practice, Gross Production is like the employee’s earnings in that only a portion of that total will make it to the bank account. Deductions, or in the case of the dental practice, discounts and insurance write-offs reduce the “collectible” amount of the GP with the result representing the net production.
Production Volume: $10,000 GP
Discounts & Insurance W/Os: ($ 2,000)
Collectible Production: $ 8,000 NP
Why It’s Important…
Understanding and monitoring your practice’s NP is important for a variety of reasons including:
- Accounts Receivable totals are overstated when based only on GP
- Other important performance measures including Collections Efficiency and Overhead Analysis are distorted by tracking only GP.
- Analyzing the cost of insurance plan participation is not possible without fully and accurately tracking discounts and insurance W/Os
The NP Challenge…
Any practice management software can track and generate “production” reports. The challenge, however, is determining what is actually gross production and what is actually net production. Most software applications are not designed to manage both. Rather, they require the user to choose between charging the full office fee or using an “alt fee” for a given insurance carrier/plan.
Full Office Fee: Users charge full office fee for services rendered.
- Pros: Enables user to track GP and NP as posted fees require subsequent insurance write-off adjustments that can now be tracked.
- Cons: No ability to auto-estimate insurance and patient due amounts
Alt Fee Schedule Method: Users charge the insurance “allowed” fee instead of the full office fee.
- Pros: Enables user to accurately estimate insurance and patient due amounts leading to better time of service collections.
- Cons: No ability to accurately track net production as insurance write-offs are not recorded.
To further complicate the matter, most software applications allow for the simultaneous use of both office and alt fees. As a result, users have no easy way of distinguishing between full fee and alt fee production which further complicates GP and NP tracking.
Production Analysis Parting Thoughts
As evidenced above, understanding and monitoring Gross and Net Production can provide meaningful insight into a practice’s financial performance and health. However, it is important to remember that Production is only part of the equation and a logical place to start the analysis process. Statistics and metrics become more indicative as the time period reviewed is increased and when viewed in conjunction with additional performance measures.
It is important to avoid the mistake of drawing conclusions from only a few pieces of the big picture puzzle. A regular review of key measures from each of the profitability factors including but not limited to treatment acceptance, collection efficiency, and overhead ratios will keep any dental practice on the right track for optimizing profitability. Look for more details on these in upcoming posts.
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