88: The Economics Between In-Network vs. FFS Fee Models

Welcome everybody to yet another episode of the Dental Boardroom podcast. It's Wes Reed, cpa, cfp, coming at you as the owner of Practice cfo, a dental CPA and financial planning firm that integrates the personal financial planning with the business financial planning and CPA services. Glad to have you join Subject of today is in network PPO and the cost of being in network versus being fee for service. Now, I know most of you listening are probably a network with one or more PPOs. I find it to be a very select crowd out there that is purely fee for service. And the point of this podcast isn't necessarily to tell you to be in network with PPOs or not. A lot of that depends on the practice you're in, the practice you bought, the location that you're in, and a lot of other factors. And practice management consultants are going to give you their recommendation on what to do and other people have their own opinions on what to do about your practice as it relates to being in network or out of network. What I want to do is just make sure that you understand the basic economics of behind or the basic economics of the differences between being in network and fee for service. And the way that I'm going to try to highlight my main points here is by running through a single scenario where in a month you do X number of crowns under a PPO model and X number of crowns under a fee for service model and show you after the revenue, after the overhead, what is left to you? Now it goes without saying that if you are fee for service versus ppo, obviously you're going to have more money in your pocket at the bottom of your P and L, you're going to have more money in your pocket if you're fee for service doing the same number of crowns as if you were ppo. That goes without saying. However, how many fewer crowns? I'm just going to say focus on crowns here. Obviously there's a lot of other treatments that relate to this, but I want to really keep it down to a concept. How many fewer crowns could you do in a month under a fee for service model to make the same net profit as a PPO model? And so let's run through this scenario and really this is the only purpose of this podcast is I want to run through this scenario so you understand how it plays out. So, so the number of crowns for a PPO model in a month, I'm going to use 30 crowns done in a month. Now that might be more or less than you actually do in your practice doesn't matter. Just follow the math here. So let's say under a PPO model you do 30 crowns a month. Under a fee for service model, let's say you moved to fee for service and the amount of crowns you are able to do now is only 20. Because obviously PPOs. The main value of a PPO is just to get bodies in the chair. It's your marketing, it's a marketing channel, and frankly, it's your most expensive marketing channel. Given that, the cost structure, and this is going to be a key theme, the cost structure to deliver those crowns ends up being pretty much the same whether or not you're in network or out of network. The main difference is simply the amount of money you land. And because most of your costs are fixed, there's a huge difference in the bottom line, net profit between these two scenarios. So let's go through this PPO crown, you're doing 30. Let's say theoretically you cut ties with the PPO and, and now you go fee for service and you just lost a third of your patients. Nope, it was, they're, they're fee sensitive. Now, a lot of how much attrition you would see is a function of how close you are with your patients, the relationship with your hygienist to the patients, just how connected you are, the level of personal goodwill that you have with these patients, your brand name, all of that affects the level of attrition. If they're simply coming to you like they're going to Walmart to come in and come out and get it done at the lowest price, you may lose more than 33%, I don't know. But that's a, an analysis you would want to think about and run. But it's a big decision to say I'm going in network with all, with all PPOs or a bunch of them, because your profit per treatment is significantly lower. Which means if you want the same, if you want a healthy profit, you gotta work your butt off. I mean, there's no other way around that. You really have to work hard in order to, let's say, take home 500,000 a year as a doctor, which I think every doctor deserves, that given how much schooling they went through, how much debt they took on, the risk they took on to buy a dental practice and employ people and take on that debt and the taxes they pay, all of that. I think doctors absolutely deserve to make great money. And it's very hard to make that much money if you're doing all the production and it's all in network and Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. 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You want to, you know, you want to take home that that amount. So now PPO may be really valuable if you're running an associate driven practice and you have a lot of associates and and the associates are paid X, but you just need people in the chair so such that the revenue that comes from those PPO patients pays for the associates and there's still ideally A net profit afterward. And that's your essentially your return on investment for having an associate driven model. But for purposes of this calculation, it's just you, you're doing 30 crowns as a PPO provider, you cut your PPO and now you're only doing fee for service, and you've just lost 33% of your patients and now, so therefore you're only doing 20 crowns and instead of 30 crowns. So now let's go through what the collections would be here. Now, this is probably out of date a little bit. I don't know exactly what it would be based on your contract, but let's say Your in network PPO crown pays you $600 per crown. Now Delta in network PPO might be $700 right now, I'm not entirely sure, but the concept here is very much spot on. $600 is what you get for doing that in network crown. If it were a fee for service crown, maybe your fee for surges, fee for service schedule, I mean rate the UCR, the usual and customary rate. Your UCR rate is $1300 per crown. I have plenty of dentists who charge 1700, 1600 per crown. And so this 1300 per crown is pretty conservative in my analysis. So if your UCR for a standard crown is higher than $1300, you'll see that the message here is actually greater and more beneficial under a fee for service model than a $1300 crown scenario, which is what I'm modeling out here. And if anybody of you are watching this on YouTube, I have a screen I'm showing with these numbers on it. Okay, so the PPO column, 30 crowns, $600 per crown. The fee for service column, 20 crowns, $1,300 per crown. Total collections for the month for the PPO crowns, that's $18,000. For the fee for service crowns, that is $26,000. So $18,000 versus $26,000 so far. Fee for service, obvious winner. Fewer work, less work, fewer crowns, higher per Crown pay $26,000 versus the network $18,000. So you got a, you got an $8,000 spread there. All right, let's now talk about the overhead. Because you're paying overhead, you're not just pocketing and netting that 18,000 PPO model and 26,000ft for service model. You got to pay your overhead related to the delivery of that treatment for that patient. So the fixed overhead is, let's say it is for that. Those total crowns, let's say it's $4,000. Of course you got some labs and supplies in there. But I would say the majority of that, honestly, it's your labor cost and your rent. It's those sort of fixed costs of just having people in the office, your team, and for having your office itself, that is the rent or your mortgage payment. And most of your costs are fixed. So you're fixed. The fixed portion related to the delivery of that service is 4,000 under both models. And why? Because it's fixed whether or not you go fee for service. Your rent is the same whether or not you go fee for service. At least in the, in the short run you're probably not terminating anybody. And so your labor costs are probably the same. And so if you were to allocate or apportion some amount of your monthly cost, total cost to those crowns, I'm going to say it's about $4,000 for those two scenarios. Now your variable costs, that's your labs and supplies, obviously you're going to pay more in variable costs under the PPO model because you did 30 crowns instead of 20 crowns. Now maybe you could say under a fee for service model, I'm going with higher end labs, I'm going with higher end supplies. So maybe, maybe my, my variable overhead is it just entirely pro rata determined by the number of crowns. Maybe under PPO model you're going maybe cheaper labs and supplies. But I'm going to say under either scenario you're using the same lab and supply provider, which I think is a reasonable assumption here. And if that's the case, in my scenario we do PPO scenario, we have 30 crowns during the month and I have the variable cost at 4,500. 500. So per Crown that is $150 under the PPO model and under the fee for Service I have $3,000 because here we only do 20 crowns instead of 30 times that same number of 150 per crown, that is $3,000. Now May, maybe your labs and supplies are higher than that, I don't know. But I'm going to use that number. And the main thing here isn't necessarily are those exactly right. It's the comparison. So if I'm using the same number for both columns, then I can have an apples to apples comparison of the economics between the PPO and the fee for service model. So our total overhead therefore for PPO crowns is 4000 fixed cost, 4500 labs and supplies. So what's the net? The NET There is 9,500 for a profit margin of 53% which is 30 crowns. $600 each. That's $18,000 revenue less. Your fixed overhead of 4,000 less to your variable overhead. Labs and supplies of 4,500 nets you 9,500. Now, from that you're still paying. There's other costs that you're having to pay for. So that doesn't mean your profit margin to your practice for the month on all treatments is 53%. This is a profit margin after those costs. Let's go on to the fee for service column again, 20 crowns. So 33% less or fewer crowns. I always remember this with English, by the way. In English, if you can count it, you say fewer. If you can't count it, you say less. Most of us get that wrong. And I was terrible in English, but I do remember that one thing. So this is 10 fewer crowns, not 10 less crowns, 10 fewer crowns. You're at 20 crowns. Collection per crown is now your UCR of 1300. So again, your collections for the month are 26,000 in that column, less. The same fixed cost. The same fixed cost, it's 4,000. Whether you're PPO or fee for service, your rent is the same. Most of your labor costs are the same. Most of your costs are the same. So 4,000. Now, your variable costs are actually less here. So not only are you getting more collections because you're charging your ucr, but your variable cost, your labs and supplies are less because you only did 20 crowns instead of 30. So instead of 4,500 for your variable overhead, it's only 3,000 for your variable overhead. So two things are happening that make fee for service so much more profitable. Number one is your collections are higher. Number two, your expenses are lower. And so 26,000 collections less the 4,000 fixed overhead, the 3,000 variable overhead equals $19,000, and that's a profit margin of 73%. So now if we compare these two columns, PPO crowns. Under the PPO model, you did 30 crowns and you net 9,500. And again, there's. There's other overhead that you're going to have to pay for. There's your debt, there's your taxes, there's all that stuff. But 9,500, that's the bottom line. Head over to the fee for service column, and your profit is 19,000. So 19,000. That is literally exactly twice as much net profit than the PPO model. So think about that. You did 10 fewer crowns and you doubled your net profit. That's powerful, in other words, because your overhead is largely the same when you're when you have to take a 50% or more tax cut by being in network and your most of your overhead is the same and would actually be could be lower under a fee for service model because you're probably going to end up doing fewer, fewer crowns, but you're getting twice as much net. It is, the economics is so compelling, it is so compelling to try to go out of network. Being in network is a stranglehold because they're not really increasing the reimbursement rates. All the while your hygienist is getting paid a bazillion dollars more than they were 10 years ago. We love you hygienists, but the truth is you've become very expensive to us dental practices. I'm not a dental practice owner, but I represent a lot of dental practice owners. So that's why it's becoming increasingly challenging. And it's also why a lot fewer dentists coming out of dental school are willing to buy a practice because the economics aren't as good. And also the banks are less willing to lend because the profit, the cash flow in these heavily in network offices is less. All the while the associate out of dental school's got 5, 600,000 in student loans. They're not eligible to get a loan to buy the practice. Which is another reason why there's such a trend toward institutional dentistry that is PPOs is because PPOs have private equity money, they have outside money. There's a lot of PE money swimming or just flowing around us in the capital markets looking for a home. And dental is still relatively profitable. The other thing is that the DSOs are very good, most of them actually. That may not even been true. The good ones, I will say the good ones do know how to manage their overhead and create efficiencies and negotiate with vendors very well and do all that stuff that bigger, the bigger institutions with really intelligent business people are able to do. And so that's another reason why there's such a movement over to the DSO space. And so to be competitive today, to be able to have a very respectable profit and net take home pay as a doctor, as a practice owner, I think requires understanding these numbers. And if you can become less reliant on the insurance companies to get bodies in your chair, then you are going to make more money and you're going to have less stress because you're not having to work so dang hard for the money you have. You may be able to go from four and a half days to two and a half days, cut down your production work by 50% but it's now all paid at your UCR rate and still take home more money. So the, the, the financial toll, the life toll, the stress toll of being in network is significantly high. Now, when I say that for you in network doctors, what's going to be a lot of you I need to emphasize I'm not entirely opposed to being in network because I realize that especially if you're newer or you're just in a certain area geographically, you almost may not have full discretion to even make this decision of going out of network and staying afloat. Because even if you're getting 50% profit of what you would get relative to a fee for service margin, that may be what you need, but to pay all your bills and to take home at least a decent respectable amount to live on. That said though, that said, a great business owner knows how to deliver a service and present that service. Not only the service itself is clinically high quality, but the messaging to your potential patients and existing patients so that they know that it is a high quality treatment relative to other treatment they may get at other places, particularly big sort of dsos. I'm not saying that they can't get good, good treatment there, but I'm saying that a private practice will typically have a more white glove type of service and that type of doctor. If you can message that extremely well to your marketplace, to your patients, to so your staff know it, it just everything exudes quality such that not only do your teeth look great, your smile looks great, it makes you happier by seeing that so, so, so, so that quality, but also the oral health as well. And I have found that really good fee for service. General dentists do a phenomenal job at presenting a brand just like big companies. Apple's got a phenomenal brand new. Certain companies have phenomenal brands and they're allowed which, which allows them to monetize their product or service at a higher rate than those companies that don't have a higher brand, even if those other companies are delivering a similar product or service. I'm not saying they are, but consumers generally don't know at least easily the difference in quality when they go and get their dental work from one person over another. Now you as a dentist, you're going to know quality when you see treatment that was done. But they don't. Which is why having a messaging, a branding, a marketing that speaks to that so that when people come in and patients come in, they're not just comparing the cost of that crown with the trip to Hawaii or their big screen tv. They're comparing that cost, the cost of that crown to, to all of the negative effects of having poor oral health or a bad smile or a smile they're not happy with, or teeth that aren't really white, or dental pain. All of that, all of that. And so messaging, branding, all that becomes extremely important as you go to fee for service. But if you can do that really well through whatever your channels are, whether that's social media marketing, local mail marketing, online video, education, whatever, however you you do that, it will pay off big time in the bottom line. All right, so takeaways from this podcast episode are Most of your costs are fixed. So when you go in network, you are dramatically lowering your net take home. Not only because you're charging less or you're getting paid less, but because your overhead costs are the same and therefore you, you have a lot less. As if you are in a fee for service model. And depending on where you are in your career, if you're young, you've just bought a practice, it's an in network practice. Or if you're starting out honestly, you just need people in the chair. So you may need to be in a bunch of networks. But as you mature and grow and brand yourself a certain way, edging out of those has a dramatic increase on your work life balance and on your income. It's dramatic. I can't say it enough. It is dramatic. Thanks for joining in. Until next time.