THE EDITOR'S CORNER

An orthodontist can largely overcome the eroding effect of inflation on his purchasing power by tying his fee structure to the annual inflation rate or by being paid in advance and investing the money at the going rate. He can also affect his annual increase in costs to some extent and he can attempt to avoid decreases in gross income by practice building and by raising fees. Without underestimating the importance of any of these factors or of a favorable combination of these factors, we can learn something from a study of the relative detrimental effect of cost increase, gross income decrease, and a combination of the two; and from a computation of what fee increase is necessary to restore one's "take home pay" if cost increases continue and gross income decreases continue.

A 10% decrease in gross income is 10% that you never see and it can be equal to 15% to 30% decrease in net income, depending on the circumstances. A 10% cost increase on the other hand results in just half that much decrease in net, because costs are tax deductible, generally at the 50% level.

If you were to try to make up for annual 10% cost increases by fees alone, it would require a 5-6% fee increase annually to do it. If you were to try to make up for an annual 10% gross income decrease by fee increase alone, it would require better than a 10% annual increase to do it. A combination of these two is additive and it would take a 16-17% a year fee increase to make up for a 10% cost increase and 10% gross income decline.

In actual numbers, if you have a case fee of $1500 it would only need to be raised to $1850 over a period of four years to make up for an annual 10% cost increase. However, to make up for an annual 10% gross income decrease, the $1500 fee would have to be increased to $2240 over a four-year period. To make up for both together, the $1500 fee would have to be increased to $2760 in four years.

Even at a low level of inflation, costs are going to go up and, while they can be controlled to some extent, there is an irreducible minimum for operating a practice, and cutting costs too much can be counterproductive.

the real damage is done to a practice by a decline in starts and a decline in gross income. That is harder to take care of with fee increases and may be less and less reduced by cost savings. So, the message is loud and clear. Practice build. Compete. Pay attention to the economic variables in you r practice . Set up that early warning system and have a blueprint for survival.