Blueprint for Economic Survival in Orthodontics

From statistics of population, the number of practitioners doing orthodontics, and the inflation rate, a picture can be drawn of the economic condition of the average orthodontic practice and what it is likely to be in the next ten years (see Orthodontic Economic Indicators, April 1976 JCO) .

That information demonstrates the potential economic problems of the specialty, but it is inadequate ammunition for the survival of the individual orthodontist. Each orthodontist must assemble his own data bank of information pertaining to his practice. Today's orthodontist needs to know a lot more information about the economics of his practice than he has been accustomed to want or to have.

Economic Practice Model

Table 1 is an economic model of a hypothetical practice. While the figures are hypothetical, the principle is applicable to all and the suggestion is that everyone construct a model of his own practice.

The interplay of the factors demonstrated in Table 1 determines the present health and future prospects of the practice. It is these factors that each orthodontist must monitor for his practice, creating flow charts and graphs of each one and continuing them for the rest of his practice life. While it is easier to begin today to keep such records, it will repay the time invested to go back into your records at least five years to create some flow and an accurate picture of the trends in your practice. Here is what you need to know about your practice: gross income, number of patients, size of fees, costs, net income, and the inflation rate.

From this information you will be able to construct an economic model of your practice, to know its trends, and to be able to make reasonable projections about its future.

Gross Income

Gross income is simple to chart from past tax records or past ledgers. It is not enough to chart a single figure for gross income. It is also necessary to construct gross income flow charts (Table 2 ), because they permit you to project what future gross income may be expected from cases already under treatment-- fees that have been contracted for but not yet earned or received. This is done by laying out future payments in the ledger when a contract is begun. This maintains projections of future income already on the books and tells you how much gross income will be required to be added to what you've already got to achieve whatever gross income you may be intending to achieve, on a monthly basis. The projections can be entered in pencil and inked over when payment is made.

Gross income declines tend to accelerate if you don't do anything about them, and they tend for a year to be masked by long term contracts which remain to be earned and paid.

Gross income is a function of the number of patients and the size of fees.

Number of Patients

The number of patient starts is one barometer of practice condition, but it is not the only one or even the best one. The flow of patients prior to start and the number of starts, plus the flow of patients in treatment and post-treatment are the EKG of orthodontic practice. A breakdown of this information into children under 18 and adults is significant to tell you how much you are depending on that declining child population.

Monthly records of referrals and source of referrals, consultations, diagnostic studies, starts and observations prior to start give you your referral rate, referral source activity, conversion to start rate, your actual starts, and your backlog of patients getting ready to start (Table 3 ).

You can see what the trends of these interrelated events have been and, as you continue to monitor them, you can perceive what is currently happening and in what direction your practice is moving. From them you can establish whether it is realistic to expect an increase in the number of patient starts next year. If all the pre-start information is in a downward trend, you would have reason to believe that the opposite may be true. If you decide that the number of patient starts will not increase or is actually declining, the alternatives are to practice build, to raise fees, to lower costs, or to accept a lower living standard.

If your conversion rate has been 100% or close to it, you might have confidence that you can raise fees, even in a level or declining pre-start experience. If you are meeting resistance in your present location to your present fee schedule, you might be less confident about increasing fees.

Size of Fees

Many orthodontists tend to think of their maximum fee or their most usual full treatment fee as their fee. Fees vary in any practice according to the service and it is important to establish what one's fees for various services are. Otherwise, when it comes time to consider fee increases, there could be a lot of guesswork involved and an uneven response to the economic needs of the practice. The size of the fee is within the orthodontist's control and, apart from a consumer resistance factor, it ought to be related to its place in the balance of all the other economic factors demonstrated in Table 1 .

In addition, it is important to keep records of fees contracted for in each month. The reason for this is that the number of starts is only an indication of patient activity and not of the income value of each start. One case may be a full treatment case, another may be a partial treatment case, and another may be a 2-phase treatment case. Dealing as we do, with relatively small numbers of patients, there can be a variation in income according to the kinds of cases that are started. So, contracts written is superior to patient starts as an economic indicator (Table 4) and you need records of both.

This flow chart is simple to maintain as follows:

If you decide that your fees can not be raised, the alternatives are to practice build, to lower costs, or to accept a lower standard of living.

Costs

Establish flow patterns for costs in 10 or 12 or 15 categories of expense-- as you have them in your ledger for tax purposes (Table 5 ). You have to know what your costs are if you are going to be able to make an adjustment in this variable in your practice model.

In addition, it is important to know percentages of increases in cost from year to year. These will be used, as will be demonstrated, when you consider how to determine what next year's gross income should be to maintain or improve your standard of living.

If you decide that your costs cannot be reduced, your alternatives are to practice build, to increase fees, or to accept a lower standard of living.

Net Income

Net income is derived by deducting costs from gross income. Most orthodontists look at their gross income as a measure of their success and financial well-being, whereas it is net income that is the important figure-- net income after taxes. It is important to know the effect of taxes, so all three should be monitored-- net income, income taxes, and net income after taxes. Tax information is simple to find in past tax returns, State and Federal, and Municipal if any. All this is included in the economic model of your practice (Table 6).

To be somewhat accurate about the loss of purchasing power and the purchasing power of net income after taxes, keep in mind that roughly half the net income must be subjected to two years of inflation and the other half to only one year.

Taxes

Income tax figures used in this article and the previous one are rule of thumb estimates of Federal income taxes. The figures do not include State income taxes or Municipal income taxes where they apply. These vary considerably around the country and your actual tax figures for all three levels of income tax must be used for your income tax figure in your model of your practice. Income taxes are an additional squeeze on the orthodontist because, as he has to make more income to keep up with increased costs and inflation, he must pay higher taxes on the higher income and, therefore must earn even more.

Inflation

The real value of your after-tax net income is its purchasing power. This is determined, with reference to the past year or any previous year, by subtracting the cost of living increase from the net income after taxes.

Figures for cost of living are available from your local office of the U.S. Bureau of Labor Statistics on a monthly basis in the form of the consumer price index. To determine the percent of change in any period of time subtract the two figures from one another and divide the difference by the earlier figure.

Some orthodontists believe that they have overcome inflation by raising their fees the amount of last year's inflation. To demonstrate the error of accommodating only to last year's inflation, let me cite a hypothetical example.

The inflation rate from December 1970 to December 1975 was 39.6%. Let us assume that the income tax rates were unchanged. Orthodontist A, noting that his gross income in 1971 was $100,000 and in 1975 was $140,000, figures that his income has gone up 40% while inflation has gone up slightly less than 40% and that he has more than compensated for inflation. Let us see if he has. In Table 7, the assumption is made that his net income/cost ratio in 1971 was 60/40 and that his costs increased at only 5% a year or 25% in the five-year period. These are undoubtedly low figures. His $100,000 gross income in 1971 at a net income/cost ratio of 60/40 resulted in a net income after taxes of $38,000. His $140,000 gross income in 1975 at a net income/cost ratio of 50/50 (due to increases in cost at 5% a year) resulted in a net income after taxes of $42,280. Now subtract the factor of 39.6% inflation in the five-year period and in comparison to the $38,000 in 1971, the purchasing power of his 1975 take-home income is $25,547.

To restore the net purchasing power to the 1971 level, he would have to have earned a gross income of $210,000 in 1975. A method of determining this is to calculate a factor for $1000 and divide that factor into the $38,000. Thus:

$1000 Gross Income
- 500 Expenses (50%)
-- -- -- --
500 Net Income Before Taxes
- 200 Income Tax
-- -- -- --
  300 Net Income After Taxes
- 119 Inflation (39.6% of $300)
-- -- --
 $181 Purchasing Power of Each $1000 of Gross Income

$38,000/181 = $209,944

Following this formula, you can figure the income necessary to recover the purchasing power to any previous time.

In the example shown, if the fee were the only adjustment that the orthodontist could make, it should have increased from $1000 in 1971 to $2100 in 1975 just to maintain his purchasing power. In that example, we started with a net income/cost ratio of 60/40. That is a low estimate for costs, and it was followed by only a 5% annual increase in costs. If anything, the 1975 figures would actually not be as favorable as shown on the chart.

It is extremely important for you to make this chart for yourself using actual figures from your own practice as follows (We will assume that you are comparing the last two years, but you can compare any two years. Just be sure that the inflation rate is calculated for the time period chosen):

This chart permits you to calculate what the 1975 gross income should have been to restore the 1974 purchasing power. To figure what the gross income should be in 1976, you have to add a contingency.

The Contingency

If you use the restored purchasing power figure for 1975 in 1976, you are not taking into account what your increased costs and erosion of inflation will be in 1976. The contingency is a combination of two estimates-- what the government estimates next year's inflation rate will be plus what your average annual increase in costs has been. When the contingency is added to the 1975 restored purchasing power gross income, your 1976 gross income requirement is projected. Each year a new model is constructed based on figures from your practice for the previous year and a new contingency is added to arrive at a new projection.

To guard against some large miscalculation in expected inflation, the cost of living figures can be monitored monthly. If inflation starts to rise sharply, you become aware of it early and have the opportunity to adjust for it, if necessary, before the end of the year.

Theory Versus Reality

The purpose in keeping all these records and in making these calculations from them is to give you an accurate picture of past trends, present condition and future possibilities in your practice. It would be a misuse of this material if one were to concentrate on any one aspect of it and, for example, conclude that a large fee increase was required or all was lost. We are operating in a real world with factors of consumer resistance and increasing competition to contend with. The beauty of monitoring practice information is that it permits you to make prudent adjustments in your practice variables.

For most orthodontists to maintain or increase their standard of living it will be necessary to find a balance among three variables of increasing fees, controlling costs and adding new patients. A combination of these are the only adjustments he has, over which he has some control, in his effort to maintain or improve his standard of living. Simultaneously, this effort is being affected by three variables over which the orthodontist has no control -- the changes in the birth rate, the number of orthodontists and others doing orthodontics, and the inflation rate. Let us examine these two groups and evaluate what the possibilities of each factor are.

EVALUATING THE CONTROLLABLE VARIABLES

Increasing Fees

We have seen that orthodontists did not increase fees in a systematic way in the past and preferred to increase their standard of living-- in an orthodontic economy of more children, fewer orthodontists and a low inflation rate-- by increasing their case load. They preferred to work harder, to employ more people, to be more efficient, and treat more patients while keeping their fee level down. This was commendable in an open-ended patient market. It isn't going to work for everybody if the orthodontic market continues a closing trend.

However, there are problems about increasing fees. We have neglected the fee area for so long in terms of the function of the fee in producing the purchasing power required to support a needed or desired standard of living, that many of us have a large gap to fill and it is questionable that it can be done all at once. On top of that, we have felt so defensive about our fees at the level that they have been at, that we feel even now that we are pricing ourselves out of the market. And indeed we might price ourselves out of the market if we were to try to add a contingency of 18% a year, which increased costs and inflation may require.

As orthodontic fees rise, they come under a certain amount of pressure just because of their size, without reference to the value of the service. This is mitigated somewhat by open-ended fees quoted as an initial fee and so-much a month to completion. In the previous article, we have seen the devastating effect on the purchasing power of the orthodontist's net income after taxes of extending contracts over periods of time longer than one year, due to increased costs and inflation. If open-ended fees are used, the orthodontist must control his costs and tie his fee installments to the cost of living on an annual or possibly a monthly basis.

For many orthodontists, fixed fees have seemed easier to present, easier for the patient to accept, and easier to administer. The only way that fixed fees will work in the present economic climate is to limit the fixed commitment on the orthodontist's part. Here are a few suggested ways:

These are not perfect solutions to the problem, but they are reasonable possibilities of overcoming most or all of the eroding effect of inflation. They do not compensate for increases in costs.

Controlling Costs

Reducing costs may be one of the most significant factors in the orthodontist's economy because fee increases may not be able to keep up with cost increases such as we have been experiencing in the last several years. Charting costs permits you to evaluate each cost and to see which, if any, can be reduced.

The most likely area for reducing costs is in salaries, which are the largest single cost in most practices. Using the practice model, it is possible to calculate what adjustment in the balance of the orthodontist's economy can be contributed by a given change in the salary area.

One of the important aspects of monitoring patient flow in treatment and minimizing delinquency of cooperation and staying on schedule is that it may pay to compress office time down so that it can be handled by part-time employees who work less than 20 hours a week, are on an hourly wage, earn less and do not qualify for fringe benefits.

Adding New Patients

Practice building must receive major attention in every practice. Your flow charts will tell you about the trends in your practice. Are the pre-start and start figures holding up? Or are they level? Or declining? Are your active patients level, your post-treatment patients rising, and your referrals declining? Are you doing everything you can to maximize dental referrals? Patient referrals? Other professional sources, such as pediatricians? Are you preparing yourself for adult orthodontics and educating your referral sources about adult orthodontics?

Adult orthodontics presently comprises 10% of the average orthodontic practice. There are at present 39 million people between the ages of 7 and 17 and 125 million between 18 and 64. In the next ten years, while the 18-64 group will increase by almost 20%, the 7-17 group will decline 10% and the 7-17 population per orthodontist will decline approximately 50%. If you figure that as many people have been exiting from the 7-17 group with orthodontic treatment needs equal to those who received treatment, there is a large unmet need in the adult population and a potential for a substantial increase in the number of adult patients in orthodontic practices. Stimulating interest among adults will be a major mission for orthodontists as individuals and as a group. An important step in this direction could be the encouragement of third party coverage for adult orthodontic treatment.

Third party activity in dentistry, and orthodontics, is increasing. There are now 25 million people covered for dental benefits and it is estimated that that figure will reach 60 million by 1980. However, it would be a mistake to assume that third party insurance for orthodontic treatment for children and possibly for adults will be a panacea. We must recognize that while third party coverage has been burgeoning to 25 million people covered for dental benefits, the average orthodontic practice is declining and, at last report, we still have only 20% of those who cannot afford dental care who visit the dentist regularly and 50% of those who can afford it. The government is rethinking a universal national health plan and it is unclear at this time when such a plan may be enacted and what form it might take.

It is questionable whether third party programs can generate new patients as rapidly as the child population per orthodontist is declining; whether possible increased utilization by children and adults can equalize the dropoff in child patients in the next ten years. Even if it were equalized, we would still have increased costs and inflation to contend with.

Public relations programs to encourage increased utilization of orthodontic care by all segments of the population would be in the public interest. However, there is no organized public relations program for this purpose on any significant scale. Indeed, the ADA would likely oppose a program for orthodontics by orthodontists; and for orthodontists to pay for an adequate program on behalf of others would be counterproductive. It would not seem as if we could expect a great deal from this approach in the near future.

Competition with others who do orthodontics is one area in which the orthodontist could increase the number of his patients. The practice of orthodontics should be limited to those with full graduate university training. It is not reasonable to assume that this will happen soon, but it will happen sooner if orthodontists support that position. We must stop conceding orthodontic treatment to those with inadequate training in orthodontics. We must also be sure that we educate ourselves further and we stop conceding adult orthodontics to periodontists, occlusion to prosthodontists, and TMJ to oral surgeons and prosthodontists. These are all patients whom we have been content to see treated elsewhere and whom we must now retrieve. Early treatment could also be a significant factor.

Efficiency has always been useful in orthodontics in order to compress one's time either to be able to treat more patients or to make time available for other things. For some it has meant reaching one's potential case load in one location and opening one or more satellite offices to extend one's services to an additional population group, to increase one's total case load and gross income. Efficiency is still a valid concept, but the idea that working efficiently, working harder, using more auxiliary personnel, opening one or more satellite offices will always result in more patients and increased gross income has to be reexamined in light of the economic circumstances we have been discussing.

We are probably going to see many more satellite offices and in some unlikely places such as very small communities to which an orthodontist may travel less than one day a week. In a sense, bringing orthodontic treatment to localities that have not previously had it will be an improvement. However, too fractionated a service has its detriments and it can be expensive to establish a fully equipped satellite office. In addition, the child population per orthodontist is declining and one orthodontist only counts for one, even if he is in two or three places. Actually, opening satellite offices will be an effort to get an average share if one is not doing so in his present location, or to get more than one share.

Under the economic circumstances we face, there are arrangements other than setting up your own office that are worth considering. In opening a satellite office, especially in a smaller community, it might be wise to consider subletting from a busy GP. This might not only save you money, but could give you a faster start in the community and also increase the percentage of adult patients because of the built-in referral system. Subletting from a GP has its detriments and they include the fact that one is not likely to get referrals from other GPs in the area. Also, a disagreement with your landlord could create a difficult situation. You are too dependent on one relationship

An alternative which has some of the same characteristics is to join a mixed dental group on a part-time or full-time basis. This might be a percent better because it would be on a more formal basis. However, there are not very many mixed dental groups and forming one is not a simple or inexpensive matter.

Additional Steps to Increase Income

What else can an orthodontist do to increase his income? Stop giving away what you are trying to sell.

It is more important than ever for orthodontists to control delinquencies in the accomplishment of both treatment and payment. Records must be kept to maximize knowledge of delinquency, accompanied by procedures to minimize their occurrence and to manage them if they do occur.

If delinquency in payment does occur, there must be a service charge to make up for the loss in purchasing power. If delinquency in treatment extends the treatment time, there must be a pre-arrangement to continue a monthly maintenance fee.

Free treatment should be eliminated except to dentists who refer cases to you or whom you expect to refer cases to you. No more free treatment to other dentists, physicians, relatives, clergymen, politicians, teachers, pharmacists, accountants. And, no more trading of services. The orthodontist will almost always be at a disadvantage in trading services. At least keep track of what you are giving away, including supposed referring dentists, and evaluate it periodically.

Free consultations, diagnoses, x-rays, appliances and retainers must all be eliminated.

We must stop assuming more responsibility for the orthodontic treatment of children of divorce than their parents are willing to assume.

We must stop making lenient transfer arrangements on the supposition that we have an obligation to other orthodontists or to the image of orthodontics or to the public. Orthodontists cannot afford to make free diagnostic examinations and supply free appliances, to say nothing of extended periods of free or low-fee treatment for transfer cases. Every patient must carry his weight. I believe that better management will not only minimize delinquencies of fee payment, but also expose delinquencies of treatment accomplishment and cooperation before transfer does. When all patients are on their proper flow schedule, the seeming inequities of transfer will disappear.

The practice of open-ended retention arrangements made at the start of treatment should be discontinued. Regardless of whether one considers that open-ended retention is appropriate, it is economically unsound to include retention in a fixed fee or to make a fee arrangement for retention prior to treatment and 2-5 years in advance of some of these retention visits. It should be established at the time of contract that there will be a visit fee for retention visits.

EVALUATING THE UNCONTROLLABLE VARIABLES

The Birth Rate

The birth rate may reverse its present trend and increase again. This may be influenced by the scare over the possible carcinogenic effect of "the pill" and by the fact that the number of women of child-bearing age has been swelled by the World War II baby crop. However, even if the trend should exactly reverse itself, in 1986 the number of 7-17 year-olds would average only 3,238,000 per year and the number of 7-14 year-olds would average 3,165,000 per year. So, it would require a birth rate beyond expectation to make a significant difference to us.

The Number of Orthodontists and Others Doing Orthodontics

There may be a reduction in the number of orthodontic graduates. This is a real possibility, especially if information is made available to dental students regarding the economics or orthodontic practice. However, if the number of orthodontic graduates were only half the present rate, by 1986 there would still be 8400 orthodontists.

In terms of the number of children available per orthodontist, possible, but optimistic, increase in births and a decrease in orthodontists would result in 380 children per orthodontist in 1986, without the dilution of orthodontic treatment by pedodontists and GPs. If there will be 1500 pedodontists in 1986 and they average 50% orthodontics, they would dilute the children available per orthodontist to 349. If GPs averaged 5 orthodontic cases a year, it would further dilute this figure to 299. This is on the basis of trends that are optimistic.

If practices were to remain 90% devoted to children, in order to start 100 cases a year, an orthodontist on the average would have to start 30% of those available to him. Evidence seems to indicate that we have not been starting children at that rate.

If full university graduate training were required to practice orthodontics, this would eliminate the pedodontist and GP dilutions in large measure, and to achieve 100 starts a year the orthodontist would have to start on the average about 24% of the children available to him. We are probably not achieving that rate in too many locations at the present time.

The Inflation Rate

The inflation rate may decrease. There is evidence that the rate for 1976 will be approximately 6% compared to 7% in 1975 and 12% in 1974. However, all of these are high compared to the years prior to 1970.

Conclusions

Even a reasonably fortuitous combination of an increase in the birth rate and a decrease in the number of orthodontic graduates cannot be classified as a major factor toward the improvement of the economics of orthodontic practice. Nor would a levelling at the current rate of inflation.

If orthodontists continue competing with other orthodontists, as well as with pedodontists and GPs, in the child population for 90% of their practices, then efforts at practice building and opening satellite offices in an effort to gain more patients will be blunted because an increasing number of practitioners will be competing for a declining or level or, at best, a slightly improving number of children. The hope and expectation from practice building and opening satellite offices as far as economics is concerned is that these efforts would result in a higher utilization rate and this is a significant goal.

Adult orthodontic treatment has important potential for increasing the average orthodontic case load. However, such a small number of adults is being treated now, that it will take a major individual and group effort to increase the number in a major way in a short period of time.

Third party programs will undoubtedly expand and become a larger factor in orthodontic practice than they are now. We have seen that it is doubtful that third party programs for children and, possibly, for adults will have an effect equal to the decline in the child population in the next ten years.

All of these factors together, especially if each one moves in a favorable direction, can have an improving effect on orthodontic economics. However, the factors which would seem to have the most immediate potential are practice building; increasing fees and nullifying the effect of inflation by tying fees to the inflation rate; and reducing costs and trying to nullify the annual increase in costs.

Without neglecting any factor which has the potential to improve the economics of orthodontic practice, it would be most beneficial to concentrate on the areas which are likely to produce the most beneficial effect the soonest, and over which we have some control, because we are talking about an economic problem with a time frame urgency of two to ten years.

There are obviously variations in different parts of the country and in different communities, and some practices have a better starting net income/cost ratio than others. There may be some orthodontists who will practice through the next ten years substantially the same way as they have, but for most orthodontists in the next ten years, financial success and even survival in practice will depend on how soon one is aware of the imbalances in the variables in his practice and how well one is able to make balancing adjustments in them.

Keeping the records that have been recommended only requires systematizing information that should already exist somewhere in the practice records. But, keeping those records will permit an ongoing knowledge of the present condition and future prospects of the practice and will indicate, when fashioned into a practice model, what adjustments in the variables will satisfy the bottom line-- the achievement of the needed or desired standard of living for the orthodontist and the continued solvency of his practice.