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Track and Monitor Your Managed Care Write-Offs to Improve Profitability

April 2012 ISSUE April 1, 2012
Practice Management Profitability
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Managed care penetration has grown rapidly in dentistry over the past four years. Yet, few practices track the statistics necessary to gauge its impact on practice profitability. Below, we discuss why doctors should charge out all procedures at full fee, track related production adjustments by managed care plan, and monitor the impact on profitability by revising their financial statements to include production and all related adjustments.

Recently, we met with a new tax and business planning client complaining of tight cash flow due to excessive overhead. Reviewing his practice profit and loss statement, we determined that every major expense category was well over the professional average, and that his profit margin was a dismal 17% of collections. The doctor was poised to lay off staff, change supply and lab vendors, renegotiate his office lease, and take other drastic measures in response.

Upon further inquiry, we determined that 60% of the practice patients came from a single managed care plan. While his collection rate looked normal, it was simply because he was charging out all managed care production at the heavily discounted PPO fee, not at full fee, as we recommended. Once we recalculated his true production at full fee, the real problem was readily apparent. His managed care allowed fee was only 40% of his normal fee, and the 60% write-off totaled more than $300,000 a year in lost profits from this single managed care plan!

Unfortunately, ignorance about the impact of managed care plans on practice profitability is rampant in dentistry. With the penetration of managed care plans growing rapidly, the problem is getting worse daily. What to do?

Charge Out Procedures at Full Fee

We recommend that doctors track total production by each managed care plan. Each procedure should be charged at full fee (not the discounted PPO fee), with a related production adjustment for the write-off amount required to get to the discounted fee allowed under the plan.

Charging out all procedures at full fee helps the doctor actually measure his true practice production for comparison with prior periods and other practices. Furthermore, this helps the doctor measure the percentage of total practice production coming from Medicaid and each managed care plan. Moreover, this increases the practice’s fee profile for future managed care plan fee adjustments.

Calculate Production Adjustments

Doctors should then calculate the write-off amounts for each managed care plan by subtracting the total collections for each plan from the total production for the same plan calculated at the full fee. This write-off amount should then be divided by the total production to arrive at the write-off percentage for each managed care plan.

Rank Managed Care Plans

Thereafter, the doctor should rank all of his managed care plans from the highest write-off percentage to the lowest, to develop a drop sequence. As a general rule, plans contributing the lowest percentage of practice production with the highest write-off percentage and greatest administrative hassles are typically dropped first, if practice volume can be replaced on a cost-effective basis through other marketing efforts.

Highlight Managed Care Write-Offs

We recommend that doctors revise their practice financial statements so that their income (profit and loss) statements begin with practice production. Managed care and other adjustments should then be subtracted off to arrive at the net practice production.

While practice tax returns will continue to be filed based on practice collections, the total practice production and related write-offs nevertheless provide the doctor with valuable practice management information. Putting the managed care write-offs “front and center” each month keeps the doctor informed about their growing impact on practice profitability. While we recommended this change almost three years ago, fewer than 5% of practices have actually made it. Now is the time to do it!

Taking Action

Doctors need to understand that managed care fee discounts are, in reality, “a marketing expense.” In essence, the doctor is saying that he cannot generate enough new patients on his own, so he is paying a managed care company a fee (equal to the managed care fee discount) in order to provide the patients to the practice. Once doctors understand the magnitude of the production adjustments, they can formulate a marketing plan to attract new patients at a much lower cost.

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