119: Dental Financial Planning: Practice Capacity and Patient Growth - Part 1

Welcome back to another episode of the Dental Boardroom podcast. My name is Drew Phillips and I'll be the host of today's episode. If you run a dental practice, your calendar is more than a schedule. It's your growth engine and your valuation story. We'll be breaking this down into two episodes. In our first episode today, we're going to look big picture and identify the key elements that go into this exercise. Why they matter, how to measure them, and ultimately how to improve them.

Understanding your practice's capacity is the first step in determining what financial outcomes can be expected both now and in the future. Your practice has a few different capacity measures, all of which are important.

The short and simple definition for capacity in a dental practice is how many patient visits can we facilitate? And if we break that down further, we have facility capacity, provider capacity, and if it pertains to you personal preference capacity.

Facility capacity in a dental practice is the maximum number of patient visits your physical space will allow for that accounts for your operatories, your equipment, your supporting infrastructure. Put simply, it's about the physical limits of your building, how many operatories you have, how many rooms you can run simultaneously, and whether you your sterilization, your waiting room and your parking lot can all support that flow. If you have 8 ops plumbed but only 3 or 4 are equipped, your functional facility capacity may be 3 or 4, but your total future facility capacity is still 8. Being able to maximize your facility capacity for many is a long journey of consistent attention but and focus to the key patient flow and retention measures that make it a possibility. And there will be a number of benefits waiting for owners who choose to make this one of their goals. Because at the other end of this exercise you can experience higher and more predictable free cash flow that will be available to reinvest back into your life today, but also your future self. The highest practice valuation from a private DSO or buyer more predictable and less destructive paths to getting out of network and going fee for service, which in turn can also further increase your cash flow and profit margins.

But before we can calculate truly what the maximum facility capacity is, we first have to understand the provider capacity. The provider capacity in a dental practice is again the maximum number of patient visits a doctor or hygienist can reasonably complete on an annual basis, which will be based on their available hours, their working days per week, their clinical speed, the types of procedures being scheduled.

All of those variables go into defining and calculating what that provider capacity is. And once we know the provider capacity limits and we apply that relationship to the number of operatories within the facility, then we can start to understand and translate that to what the maximum facility capacity will be in the event that we're able to achieve that goal.

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And I'll take a step back for a moment. Regardless of the business or the industry, there are two main variables that move revenue and drive profits and that is volume. And then is price. Today and our next episode on this Topic is all centered around the volume side of the equation. Price within dentistry is impacted by a number of ways, but also in a number of ways we're limited or an artificial or ceiling is created based on the market forces that we have to account for. We have in network contracted rates. If we're in network insurance provider, even if we're fee for service, we have competitive forces from the neighboring practices and what they're charging per procedure. And so whichever environment we're in, there are areas that.

Hurt our ability to be able to control that as more freely as some other businesses in other industries have the avail the ability to do. I mean we can't just wake up tomorrow morning and start charging $9000 for a crown instead of $1100 just because we feel like it. I mean we could try, but there would be a, probably a 0% acceptance rate on that idea. Right. So if we go back to the, to the, to that framework and we think that we know that volume and price move the, move the needle for us regardless of where we are in business or industry wise. And we know that in dentistry we sort of have this, you know, inherent ceiling that we're up against on the price side. Whatever that revenue per patient per year, AKA the price, we're going to be able to apply that to whatever volume changes that we're able to manufacture through these exercises.

And I'm going to use $1,000 per patient per year as our price side. So for every patient that we add to our system net of attrition, we're going to get an extra thousand dollars. So it's a game in this framework of stacking $1,000 patients more than we lose year over year to continue to drive that needle further.

And hopefully along the way through your continued education, your.

You know, your just all the things that you guys do to learn and grow your clinical skill sets. Hopefully along that journey of volume, we'll also be impacting the price side favorably. Right. But coming out of the gate.

Even for my seasoned owners, price again is a little challenging. So anyway, let's break down provider capacity in a little bit more detail. Some easy low hanging fruit items to kind of set the stage is we have the number of working days that we work in our offices per week on average we have the number of patient hours that are available to work on those working days. Or for a nine hour day with an hour for lunch, we have eight patient hours. If we're a eight hour day with an hour for lunch,. There's seven patient hours. And if we're a four day work week. That means there's 17 working days on average per month. And on a five day workweek, we have 21 working days per average.

And so if we didn't have any cancellations or no shows and everything was scheduled at 60 minutes, that would be our theoretical capacity limit for each provider, at least in hygiene. And so If I had eight patient hours a day times 17 working days per month, that's 136 visits that if everything worked and nobody canceled and everything was scheduled on a 60 minute basis, how many patients that we would be able to facilitate in that one month per hygienist, or the number of exams that each hygienist would be able to afford, the dentist to do treatment planning on.

And if we schedule in six month turns and we're going to see those same patients hopefully twice in a year, we could take that same 136 people on a monthly basis and multiply it by six to give us the total amount of patients that each hygienist would be able to facilitate on an annual basis. Again, assuming what we know is not going to be possible, which is no cancellations or no shows and everything scheduled on a 60 minute basis. So that's our, that's our starting place. How we work back from there to get to your own individual practices. Provider capacity limits is going to be based in large part in how we schedule certain procedures. So if we have profis and perio maintenance all at 60 minutes, okay, great. That doesn't change that paradigm at all. If we schedule SRPs at 2 hours instead of 60 minutes, great probably is needed from a clinical perspective, but it obviously does change the amount of patients that each hygienist can see. For every SRP that we have scheduled. And if 20% of our patient base is in perio, then we know that at least one visit a day on average per hygiene column is going to be a two hour block for SRPs. So we just went from a theoretical eight patients a day down to seven.

And if our average cancellation and no show rate that goes unfilled is 10%.

Then we just lost another visit per day. So now instead of 8 it was 7 because of SRPS, and instead of 7 now it's 6 because of the 10% cancellation and no show rate that goes unfilled. And then lastly, how do we schedule new patients and for how much time? If I have a new patient even for just an hour in the hygiene chair, and we only schedule new patients in the hygiene chairs, well, Even in an hour, we just went from six to five. If it's a two hour new patient experience in the hygiene chair, which many offices operate that way, well, now it's not six, it's four patients that we can see that day. One two hour new patient, one two hour SRP block and four 60 minute appointments, whether they're perio maintenance or profi.

And so now we've dropped down from 8 to 4 and anywhere in between.

And based on what your mix is and how we schedule there, that's going to tell you what that patient potential is on a daily basis per hygienist. And then we can translate that to how many hygiene columns that we have on a given day or on an average weekly basis or average monthly basis to develop and determine what the max provider capacity is today based on the providers that we have scheduled.

And if that, and if the providers that we have on schedule today.

Is less than the facility capacity that we have at large, great. That just tells us, once we layer in the facility capacity, what that maximum potential is, at least as it relates to visits or patients.

And so if we have an example of an eight chair practice, four of which would be hygiene, to create that optimal relationship between hygienists and doctors, wonderful. Now we can take that, whether it's four patients or five patients, six or seven or eight times that, four chairs or 17 working days a month on average, or a four day work week, or a 21 working day average on a five day work week to determine what the facility capacity is.

So once we know what the facility capacity, the provider capacity is based on the ways in which we schedule, that's a great place to start. The next thing that we would like to do is look at our schedule and see how many patients are actually on there today over the next six months. Because that delta, that's our utilization gap. And whenever we have a utilization gap, that means that we have providers working without revenue being generated. It is not rocket science to know that that is going to drive lower revenue and lower profits without fail. And that will reveal itself in a profit and loss statement in a few different forms. It might be in the operating income margin. It could be a really high labor percentage of revenue. Right. But under to understand why our labor margin is high relative to the benchmarks in the industry, we have to know the utilization at the provider level in order to be able to determine that. And I could tell you right now on unit economic, on a unit, unit economics basis, which is in our world, a single, a single Patient I know exactly how much supplies and labs we should have, how much rent we should have, how many, you know, fractions of an assistant or front office or a hygienist or a doctor that we need to facilitate that one patient. And when you know your unit economics and you apply it to the whether the provider or the facility capacity at large, we can determine what that max revenue potential is across the board. And once we know the delta relative to what the provider capacity or facility capacity allows for today, then we're going to know what immediate upside that we have to bring back.

To bring that utilization into a better form. And once we do that, you're going to watch your margins grow.

But taking that exercise further, not just understanding what the delta is, right, and knowing, you know, by filling that delta that we have a better revenue and profit, profit environment, yeah, that will be true. But taking it further and saying okay, is four patients a day in a hygiene column the best, best use of our schedule in our facility, maybe, Right. Some of that will probably come down to personal preference. But what about if we could have our new patients out of the hygiene chair? Just as one example, we know that from earlier that went from we took it down from six to four when we scheduled two hour blocks in hygiene for new patient experiences. Well, now that goes back up to six. But we schedule a new patient in our overflow chair for an hour with no cleaning and bring them back for a cleaning on a subsequent day. After we've given them their treatment plan, we've done their perio charting, we know what type of health that they are in, we get to interview that patient to some degree in terms of a culture fit for the office. Before we give away our precious hygiene seats.

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Just in that one idea.

We grew in the two operatory or two hygiene two hygiene columns a day scenario in a four day workweek. We grew that from 907 hygiene patients that we can see a year to 1310. That's 403 more patients than just that one idea changes. And at $1,000 of revenue per patient per year, that one idea translates to $400,000 of more revenue per year. And in this particular example, we didn't have to add more hygienists, right? So there isn't this we'd have to add more assistance. There isn't this big change in staffing costs, nor was there a change in rent or our practice debt. So actually the only expense that we have to account for in that change is supplies, labs and merchant processing fees. So about at least 80% of every one of those $400,000 is going to go straight to the cash flow line. And then if we kept those same principles in place and we scaled out the other two hygiene columns in the eight year practice, that's $800,000 of growth once we reach that end game.

Now, I won't go into any further detail around how the percentage of your perio patient base can change those numbers or if we shorten the SRP blocks or whatever. Those all do matter. Those all give visit potential back. Those all translates into more patients than we could facilitate, which then expands that revenue growth figure even further.

Nor am I going to touch on the price side like I mentioned, because what about meanwhile we're going to kois, we added a CEREC cbct, we start placing implants, all of those procedures that we start keeping in house increase that price side. And if meanwhile we're increasing the volume, when those two things meet together at least temporarily, we're going to get an exponential growth curve in the form of revenue and profit growth. Before that revenue per patient per year plateaus again. And then we're still back to the volume being the main driver.

But hopefully we're starting to get a decent understanding as to how our scheduling system translates to provider and facility capacity differences, which translates to varying degrees of patient flow growth that we can get to, better utilization that we can get to. I mean simple things about patient hours per day, I mean a seven hour workday. So hopefully you guys are starting to get a good grasp over how facility capacity and provider capacity really dictates what's possible from a revenue creation standpoint today. What opportunities that you have within your current framework without necessarily adding providers, and how you guys can potentially change or reorganize.

The ways in which you schedule certain procedures to create more capacity within the same provider framework. And hopefully you're starting to get a good grasp over what facility capacity is and you know, how that differs from the provider capacity that we have today and as we scale through those different capacity levels, how our revenue and our profits will respond accordingly.

In our next episode, we're going to go through.

All of the variables and elements that lead to patient growth, net of attrition or vice versa.

So once we know how we're growing and we can fundamentally predict that growth rate, how we can then apply that to the utilization that we're experiencing today and hopefully with that information, really live in to the full capacity of both the providers and the facility that we operate within. Thanks for your time today. Until next time, take care.