Evaluating PPOs By The Numbers

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The world we live and work in has changed dramatically over the past few years. The American dream of home ownership has become a nightmare for many, the economy continues to struggle, and the promise of unlimited treatment potential arising from the aging baby boomer generation has failed to materialize. Not only are baby boomers not enjoying the huge inheritances predicted by financial gurus, many are struggling to make ends meet in an economy that has seen jobs and retirement funds disappear. Hopes for a comfortable retirement have been replaced by visions of working several part-time jobs just to stay afloat. Few dental practices have remained unscathed. Most have been affected at some level, and many are struggling to remain profitable. When cash flow gets tight, one of the first options many dentists consider is joining a PPO (Preferred Provider Organization).

According to a report published by the National Association of Dental Plans, PPO plans represented 63% of the dental benefits market in 2009. Traditional fee-for-service dental plans only represented 17% of the market. Unfortunately, this domination of PPO plans has given some insurance carriers the leverage they need to reduce participating provider fee schedules. In certain areas of the country some of the nation’s largest dental carriers appear to be in a bidding war to see who can reduce fees the most without losing a significant number of participating providers.

Citing the need to remain competitive, Washington Dental Service (WDS), one of 39 Delta Dental carriers, recently notified approximately 4,000 providers in the state of Washington that their Delta Dental Premier fees were being reduced 15% effective June 15, 2011. After reducing Premier fees, WDS also intends to reduce PPO fees. WDS is lowering fees in reaction to other dental carriers who have successfully contracted with dentists at lower rates—enabling the other carriers to offer more competitive premiums to employers.

Dentists in Washington are still reeling from the unexpected news and are trying to evaluate the financial impact on their practice. The Washington State Dental Association has reminded its members that anti-trust laws prevent it from organizing any effort to block the fee reduction. Each dentist is on his/her own to assess options and make decisions accordingly.

Reducing allowable fee schedules is not unique to WDS. Several major carriers have reduced fees recently—including other Delta Dental carriers. Knowing this, it is prudent for all dentists to carefully consider the overall effect the decision to join or drop a dental network will have on their practice. To that end, let’s take a dispassionate look at some numbers.

Assume that by choosing to participate in a PPO plan you agree to accept as payment in full for your services a fee schedule that is 15% less than your usual fee schedule or, as in the recent WDS mandate, 15% less than you had previously agreed to accept. Let’s also assume in this exercise that your office overhead is 65% in spite of current plan participation, which is typical of many dental practices. Also, let’s first present the worst case scenario—the plan that is cutting your allowable fees accounts for 100% of your practice revenues.

If reimbursement is reduced 15% while the practice produces the same volume of dentistry and an office averages 65% overhead, the office either has to find a way to reduce overhead - increase production by 75% - or do a combination of both to break even. If no adjustments are made, the dentist/practice owner will take home approximately 43% less income. Once again, as shown below, at 65% overhead, a 75% increase in production may be necessary to offset a 15% fee reduction.

In this scenario, to avoid taking home less profit, you would either need to increase production by 75% to recoup the $15 profit lost from the reduced fees (i.e., 75% x $20 = $15) or reduce overhead to 59% of the reduced fee ($85), which actually involves reducing overhead to 50% of your usual fee ($100) to yield the original net profit of $35 per procedure—or do a combination of both.

At 65% overhead, a 75% increase in production may be necessary to offset a 15% fee reductions. Calculating financial impact based on market share

Calculating Financial Impact Based on Market Share

Let’s assume the same 15% reduction of allowable fees applies to a WDS plan that covers 40% of the patients (and services performed) in your practice. Below is the calculation for this scenario:

As illustrated above, when overhead is 65% of your usual fee, and a carrier reduces its allowable fee on $100 procedure by 15% - and 40% of the patients in your practice receive that procedure at the reduced fee - your total profit for that procedure is reduced 17% if no adjustments are made to overhead or production volume.

Reduced Fee Plans Require Providers to Do More With Less

In most cases, participation in reduced-fee plans requires a practice to do more with less. That is, do more dentistry in less time, which requires a more efficient, productive team. Are you able to work more efficiently, see more patients, and/or reduce overhead in order to maintain current profitability? Are you able to expand your treatment mix to include more profitable procedures such as endo, sleep apnea appliances, teeth whitening, etc? Does the decision to participate with a particular PPO plan make sense for your patients, your practice, and your economic future? If your answer is yes, begin making the adjustments necessary to accept reduced fees and remain viable.

Improving Efficiency Is Essential

The good news is that we now operate in a time where taking advantage of technology, education, and training often improves efficiency—allowing us to do more quality dentistry in less time than ever before.

Technology has progressed by leaps and bounds making many dental practices more efficient. For example, today’s technology allows a dentist to complete an exam (with digital radiographs), present a treatment plan (using real time verification of benefits via the internet), secure third-party financing (using a web-based application process), and cut the prep, mill the final restoration, and seat the crown in a couple of hours (using CAD/CAM). True, there is generally a substantial investment of time, money, and energy to fully implement new technology. However, the return on investment may be that it allows a dentist to participate in reduced-fee PPO plans to increase patient flow and maintain profitability. In today’s PPO environment many dentists find that they must “spend money to make money,” and staff must be highly trained and motivated to perform duties that can be delegated according to each state’s dental practice act. An investment in technology and training is key to increasing efficiency, practice productivity, and profitability.

Fortunately, third-party healthcare financing is readily available, which helps eliminate the most common objection—affordability. Making necessary dental work more affordable allows dental teams to be more efficient by doing quadrant dentistry. Quadrant dentistry opens the door to doing more dentistry in less overall time.

In addition, if joining a PPO results in a new stream of patients, dental teams are often able to save on marketing costs and use the unbooked operatory to move patients from the exam room to the treatment room. This reduces the financial impact of an empty operatory chair and enables same day services that consumers often want and expect.

The Bottom Line

The decision to join or withdraw from a PPO must be made by each dentist individually based on his/her goals and practice philosophy. In light of the present economic environment, it is necessary to look long and hard at the risks versus the benefits of participating in dental networks. It is important to look at individual practice numbers and demographics as well as other contractual obligations that come with participation in reduced-fee plans. Carefully read each participating provider agreement. Participating providers are often required to agree to fee capping, accepting the least expensive acceptable alternative benefit, accepting bundled payment for multiple restored surfaces, and not billing for certain procedures performed on the same day as other procedures. After close scrutiny, some practices may find that participation is a good fit with their goals and practice philosophy. However, the decision should never be made without carefully looking at the participating provider agreement and crunching the numbers for various scenarios that may occur in the practice due to future fee decreases and market saturation.

Review your practice philosophy, production and overhead numbers, “busy-ness” levels, procedure mix, staffing levels, technology, and overall efficiency to see what adjustments can be made to offset reduced fees. This will help you determine if the benefits of participating in a reduced-fee dental network outweigh the compromises that are always inherent. When deciding to join one or more reduced-fee dental networks, it is also critical to develop a contingency plan or exit strategy, which may be necessary if a reduced-fee plan fails to increase provider fees annually to keep up with inflation or reduces its provider fee schedule.

If provider participation for a dental network is relatively small in your geographic area, the carrier may be open to increasing fees. If not, and if after careful evaluation a decision is made to drop a reduced-fee plan, it is important to optimize the practice before notifiying patients of your decision to withdraw from their plan. Consider the tips in Preparing to Drop a Reduced-Fee Plan (right column). Note that it may take a year or more to adequately prepare a practice for withdrawal from a major reduced-fee plan.

Preparing to Drop a Reduced-Fee Plan

Elevate customer service and patient relationships
Analyze/rebalance the practices’ usual fee schedule
Improve chart documentation and bill for all treatment
Consider hiring a hygienist consultant to establish an in-office periodontal program
Consider hiring a practice management consultant to increase efficiency
Use patient education and patient contact software
Upgrade facility equipment
Expand your service mix (do more procedures in-house, i.e., endo, bruxguards, TMJ orthotics, sleep apnea appliances, implants, sedation, cosmetic dentistry, whitening, ortho, etc.)
Present comprehensive care/prioritized treatment plans
Offer third-party financing
Use on-hold telephone message service to promote scope of services, commitment to continuing education, and emphasize that new patients are welcome
Explore external marketing (i.e., zip code mailings within a five mile radius, ads in local community papers, physician contacts for pediatric patients and sleep apnea patients)
Consider downsizing your facility or renting space
Consider adjusting work hours to increase availability
Consider offering a flat 10% discount to patients from specific employers/groups in lieu of joining their PPA network
Notify patient at their recare appointment (six months in advance) that you intend to drop participation in their plan

Emphasize your commitment to quality care
Explain that reduced fees prevent practice viability
Emphasize how much you value your relationship with the patient and that he/she is always welcome in the practice
Give the patient a copy of his/her treatment plan and emphasize the need for continued recare visits
Continue to send practice announcements and newsletters even if a patient chooses to find an in-network dentist
Send patients a reminder that they are due for a recare visit even when they leave the practice. This assures them that their dental health is still your primary concern
Notify patients who have left the practice of their employer’s open enrollment periods as they arise