A New Model for Setting Your Fees
How to achieve an acceptable net income

Gary Takacs

Gary’s passion is helping dentists develop profitable and enjoyable practices. His seminars, video and audio tape educational programs, and his highly acclaimed in-office consulting visits have helped thousands of dental offices master the “business of dentistry” and succeed in today’s challenging business environment. Gary has just completed a two tape video program titled, “Getting Paid: New Strategies for Changing Times.” This fast-paced, entertaining video program provides solutions to help you collect everything you produce and keep it patient-friendly in the process. The video format works great for a staff meeting and will provide each member of your team with the skills to support a first-class payment system in your office. For a limited time, readers of this article will also receive an audio tape titled, “The Four Most Common Payment Mistakes Dental Offices Make and How to Correct Them.” This audio tape is a $49 value and will be included at no charge with your video tape order. To order these valuable resources, call Gary at
602-951-1652.

The dental profession is experiencing a profitability crisis! In the not-so-distant past, most dentists had office overhead of 50% with a corresponding 50% NET income. These economic conditions remained true until the mid-1970’s. Now, fast forward to the present. Over the past 20 years, dental office profitability has eroded at the rate of about 1% per year. Recent ADA and Dental Economics studies suggest that the average dental office overhead today is 70%. Putting this information in historical perspective, while a dentist could expect a net income of 50% in 1977, today that same dentist typically will see a net income in the 30% range.

Why has the percentage of NET income dropped so precariously? One significant reason is that over the past 20 years, dental fees have not kept pace with the rising overhead costs in the dental office. In just one example of rising office overhead, consider all the things your office does today regarding infection control, to be in compliance with OSHA mandates. In 1977, OSHA was a governmental agency most dentists didn’t even know existed. They had something to do with factories or manufacturing plants, nothing to do with the practice of dentistry. Today, I venture to say, every dentist knows about OSHA and probably views this organization with about as much contempt as the IRS! While many procedures mandated by OSHA do indeed serve to allow your office to be as sterile as possible, the economic reality is these changes cost money. Dr. Gordon Christensen recently reported in his research that it costs the average dental office $15 in infection control compliance every time a patient sits in the chair! This figure does not include the costs associated with treatment. It simply covers the hard costs involved in preparing the room, then preparing the room again for the next patient.

When you compare the huge increases in overhead in the past 20 years to the relatively minor increases in fees over this time, it is easy to see who has lost—the doctor! The solution is to develop an appropriate fee schedule that will allow you to achieve an acceptable net income.

Before going any further, I want to go on record as saying I do not advocate outrageously high dental fees. However, it is my observation after visiting and consulting with hundreds of dental practices, that most dentists are not charging enough for the care they are providing. Let’s examine some practical issues of how to set your fees.

If you raise your fees, will you lose patients? And if so, what is the effect?
The single biggest reason keeping dentists from raising their fees is the fear of losing patients. This is a legitimate fear. After all, we live in a competitive society and patients are free to go somewhere else to obtain their dental care. But is the fear of losing patients founded? What would happen if you did lose some patients? To answer this question, I’d like to cite a study conducted by Eastman Kodak, the film company.

In the mid 1980’s, the executives at Eastman Kodak were concerned about increasing competition in their industry. They decided to conduct a study to determine the effects of price increases and price decreases on their profitability. The Kodak study assumed a 25% profit percentage (75% overhead) which is rather convenient for our purposes because it is fairly close to the 30% net income the ADA reports as the average dentist’s net income today. Using this 25% profit assumption, here’s what the study determined:

• A 3% price decrease requires a 13.6% increase in sales to make the same profit as before the price was lowered
• A 5% price cut requires a 25% increase in sales to achieve the same profit
• A 10% price cut requires a 67% increase in sales to achieve the same profit
• A 15% price cut requires a 150% increase in sales to achieve the same profit
• A 20% price cut requires a 400% increase in sales to achieve the same profit

Consider the above information the next time you read a managed care contract requiring you to reduce your fees 30-35%! Now, let’s reverse the process and compute how an increase in price would affect profit:

• A 3% price increase means the same profit on 90% of sales volume
• A 5% increase means the same profit on 83.5% of sales volume
• A 10% increase means the same profit on 71.5% of sales volume
• A 15% increase means the same profit on 62.5% of sales volume
• A 20% increase means the same profit on 55.5% of sales volume

To apply this study to dentistry, if a dental office had a 75% overhead and raised fees 10%, it could lose 29.5% of the patients and still have the same profit compared to before the fees were raised. The likelihood of losing that many patients is remote. If you raise your fees a modest amount, you will lose very few patients. I’ve known offices to raise fees and not lose a single patient! However, to be conservative, let’s figure on losing a few. Now, I don’t want to make light of the concept of losing patients. I know each patient is important to you and you don’t want to lose a single one. But use the Kodak study to see how you would end up, even if you did lose a few patients. It demonstrates the economic impact of raising fees.

Two common methods of determining fees
Most dentists use one of two methods to set their fees, and both are inherently flawed! Either they allow the insurance company to set their fees, or they compare their fees with those charged by other dentists. Let’s look at what’s wrong with using either of these methods.

Many dentists allow the insurance company to set their fees. Well, the insurance company doesn’t actually set their fees, but they might as well, because in effect, that’s what they are doing. Let me go on record as saying the insurance companies do not care one iota about you—their only reason for existing is to make money, and the way they make money is to NOT pay claims. Period. Oops, I forgot one part—the way they make money is to take in premiums, then not pay claims.

And if they do pay claims, the goal of the insurance company is to pay as little as possible. Hence, their internal policy regarding the adjudication of claims is to pay as little as they can possibly get away with. That explains why the UCR fee schedules the insurance companies use are always painfully out of date and rarely reflect current fees in your community. The bottom line is, do not let the insurance companies set your fees.

The second method many dentists use to determine their fees is to compare them with dentists in their area. Now on the surface, this may make sense. As I said before, we live in a competitive society and most dentists want their fees to be comparable to other dental fees in the neighborhood. But in reality, it makes no sense at all to compare your fees with other dental offices.

First of all, this notion of comparing fees would assume patients call around and shop dental fees. Contrary to what you might think, patients rarely shop dental fees. In fact, 90% of the calls you get from “patients” inquiring how much a crown costs are actually calls from the dental office down the street! Your dental neighbor has instructed his staff to call around and pretend to be a patient to find out what you charge for a crown. (Get caller I.D. if you would like to see this happening!) The reason patients don’t shop fees is that dental care is not a commodity. Dentistry is a very personal service where trust and confidence are utmost in the patient’s selection of a dental office. For most people, buying dental care is not like buying a toaster.

Another reason why comparing fees with other dentists is ludicrous is the fact that there are so many variables involved. It’s like comparing “apples and oranges.” For example, most dentists will only use the highest quality dental lab, yet I know of a dentist (who will remain nameless) who uses a lab in the Philippine Islands and actually pays more in Federal Express charges for delivery than he pays for the actual lab work! Would it be fair to compare your fees with the fees this dentist charges? I know of another dentist who was actually proud of the fact that the last continuing education course he took was 32 years ago when he was a senior in dental school! (He obviously was from a state with no CE requirements.) How’d you like to compare your fees to his?

Even two dentists similar in age, who graduated from the same dental school, may have considerable differences, such as the materials they use, the quality of team members they employ, the type of equipment they use and any number of other variables, to make comparison of fees a completely useless exercise. The concept makes sense, but in reality it’s silly to compare your fees to another dental office.

A Better Model to Determine Your Fees
I would like to suggest a much better model to use, from Boeing Aircraft, the world’s largest commercial airline manufacturer. You might be wondering how in the world a dental office could apply a concept in use at Boeing, but it actually makes a great deal of sense. Let me explain.

When Boeing prices an aircraft, it is a very complicated procedure involving many variables. They factor in the cost of raw materials, the cost of components purchased from outside suppliers, the cost of labor, the cost of administrative expenses, employee benefits, cost for legal counsel and other manufacturing expenses. After all costs are determined, Boeing adds an appropriate profit margin and establishes the final retail price. This pricing method is called Cost-Plus, meaning the cost of all components plus an appropriate profit. Boeing is not alone in using this pricing model; Cost-Plus is the method used by most successful businesses today. You, too, should be using this model to determine your fees.

In an ideal world, we would make a list of absolutely every procedure you provide in your practice. Then we would determine exactly what it costs you to provide that procedure. Just like Boeing, for each procedure we would determine facility costs, material costs, lab expenses, labor, continuing education investment and staff fringe benefits. Then add an appropriate profit margin and voila, we would come up with a specific fee. In the real world, this exercise just doesn’t work. It’s too difficult and complicated, with too many variables. Believe me, I’ve tried!

Let me suggest a shortcut. In my opinion, a successful dental practice should have the following five components:

Component #1: A Terrific Team
A successful dental office requires a team of co-professionals who are highly skilled and as committed as the dentist to delivering the best possible dental treatment in a warm and caring environment. They should be well-compensated. Dentistry is not a solitary exercise. You must have a skilled staff and you must be able to delegate as much as legally possible to your team members. The old adage “you are only as strong as your weakest link” strikes me as very appropriate here. Your patients often develop strong relationships with your team members and it is imperative that you develop a system in your practice where you attract and keep the best possible staff.

Component #2: A Modern, Up-to-Date Facility
Your facility is another important component of your success. Your office should present an image that looks current. I’m not talking about Berber carpet and silk wallpaper here; that would be a mistake in most instances. What I am talking about is an office that is well-located and tastefully decorated, with current furnishings and colors, and most importantly, an office that you can be proud of. Keep in mind that patients really cannot evaluate the quality of your dental care; they simply do not know what constitutes quality in regards to specific treatment. However, patents do make value judgments about your quality when they look at your office. If they see knee-high shag carpet and orange or avocado counter tops, think about the message that is communicated to the patient!

Component #3: State-of-the-Art Equipment
One of the wonderful aspects of dentistry today is the incredible advances in technology. In my opinion, you should have every piece of equipment that allows you to deliver the best possible care. I am a huge fan of technology such as the intra-oral camera, digital radiography, and sophisticated office computer systems. Not only does this type of equipment help you deliver the best possible care, but it also presents a powerful image to your patients—an image of being modern and state-of-the-art.

A certain amount of prudence is in order here. I don’t necessarily recommend going out and buying every new gadget that comes out. And I wouldn’t want you to be the first to buy anything. Let the technology settle a bit and let the price come down, as it inevitably will. But I am saying you should have every piece of equipment you desire and be able to budget and fund new equipment purchases. This technology will help deliver better quality care, and these new tools will also ensure dentistry remains an exciting activity for you.

Component #4: A Serious Continuing Education Plan
Gordon Christensen recently reported that clinical knowledge in dentistry is advancing at such a rapid pace that it doubles every five years! WOW! Think about the advances in materials, technology and techniques. The only way to stay current is to be a “continuing education junkie.” Fortunately, there are some fantastic lecturers and educational programs available in every part of the country today. Most speakers will be more than happy to share everything they know if you’ll make the effort to attend.

Rather than conducting your continuing education as a random process, I suggest you create a three year plan to pursue the best strategy. As part of your continuing education plan, also look at building an office library of audio and video seminars. There are some excellent programs available on tape that will provide your office with terrific resource material and stretch your continuing education budget.

Now, before I go any further, let’s revisit the Boeing model for pricing, the Cost-Plus pricing model. The above four components constitute what I consider your Cost of doing business. These four components are basically your “raw materials.” Now let’s add the Plus component of the Cost-Plus pricing model.

Component #5: Appropriate Compensation for the Doctor
Doctor, just as I said your team members should be well compensated, so should you! You deserve to have an appropriate lifestyle, to be able to educate your children properly, and take a modest amount of time off. You deserve this! Additionally, you need to be able to fund your eventual retirement. Unfortunately, funding for retirement is one area where most dentists fail miserably.

Sadly, the ADA reports only 3% of the dentists in the U.S. can retire at age 65 and not reduce their lifestyle. This is a fact! Only 3%! The other 97% either need to keep working beyond when they would prefer or reduce their lifestyle. You deserve better than this. The only way to achieve true financial independence—going to work because you want to, not because you have to—is to aggressively fund a retirement plan for yourself. I recommend saving a minimum of $30,000 per year. Let me emphasize: a minimum of $30,000 per year. Pure savings, not to be touched. If you do this faithfully and consistently each and every year, you will be able to retire without financial worry, with the dignity you deserve.

There you have it. These five components constitute a Cost-Plus fee model for dentistry. The first four components are your costs of doing business and the fifth component is the profit margin that completes the Cost-Plus model. Let me tie this back into your fee schedule. A successful practice requires these five components and, unless you are independently wealthy and dentistry is but a hobby for you, the only way you will be able to fund these five components is via an appropriate fee schedule.

Here’s what to do. Look at the list of components above and carefully analyze each one in regard to your practice. If you can honestly say that you have all five components, then your fee schedule is appropriate and right where it should be. However, if you find yourself thinking . . .
“I wish I could afford to hire another team member.”
“I’d like to remodel my office; it’s looking worn and dated.”
“That new system for radiography sure looks great,” or, “I’d like to be using one of the new microscopes for endo treatment.”
“I’ve always wanted to go to South Florida and take a Pankey Institute course,” or, “I’d like to go to Las Vegas and take a course from Dr. Bill Dickerson’s Las Vegas Institute.”
“I need to get serious about funding my children’s education,” or, “It’s about time to fund my retirement plan.”
. . . and if the reason why your wishes remain unfulfilled is that you are concerned you can’t afford it, then let me be very candid. Your fees are not high enough! You should have these five components—you deserve these five components—and the only way it’s going to happen is to have a fee schedule that allows you to have them.

How to Get Your Fees
Now, let’s look at specific things you can do in your office to support your new fee schedule. I have previously written about how to get paid, not be the bank, and do it all in such a way that your patient feels good about paying. Yes, friends, it is possible!

The single most effective thing you can do to support your fee schedule is to remove money as a barrier for your patients. Let me provide a perspective you might not have thought about before. Isn’t it true dental care today can be considered a big-ticket expense? Think about it. It really doesn’t take very much treatment for the fees to total a few thousand dollars. Take a $3,000 treatment plan, for example. It could be a simple cosmetic case, or some restorative treatment and some root canal therapy, or a bridge, or any number of other treatment options. I’m not talking about anything exotic here, just basic, high quality treatment that will help a patient enjoy optimal oral health. It could easily add up to $3,000 or much more—and it’s an investment worth every cent! But my point is, it’s a big-ticket expense in the eyes of most patients.

How are other big-ticket items like cars, houses, furniture, electronic equipment, and jewelry sold today? By making them affordable! By taking the emphasis off total price and providing an affordable monthly payment. A Honda automobile costs more than $22,000 today. That’s $22,000 for a Honda! They sell every one they make because it’s affordable; the emphasis is not on $22,000, but just $289 a month. Can this concept be applied in dentistry?

Yes, absolutely! Fortunately, the emergence of new financing tools, such as healthcare credit cards, make it possible for you to out-source financing and eliminate the risk of nonpayment. The key is to out-source financing to those that can do it best. The biggest benefit of a healthcare credit card is that you get paid up front, yet your patient is able to make affordable monthly payments. Both you and your patient win. Again, I want to be very candid here. It seems to me the dental profession has done a very poor job of understanding how consumers think. This is especially true in regard to payment issues in dentistry. Car dealers understand how consumers think. They know over 90% of all vehicle purchases are financed and that’s why they provide financing sources to their customers. I know the comparison between a dental office and a car dealer is awkward, but regarding financing, it’s valid.

In too many dental offices it’s an all or nothing proposition. “Mrs. Jones, the fee for dental treatment is $3,000 and it’s due at the time of service.” In fact, many dental offices have a sign posted in the reception room declaring payment in full is required at the time of service! (I have yet to see a sign posted on the sales floor of the car dealership requiring payment in full before you drive the car off!) Should we be surprised if patients don’t agree to pay in full up-front? I am certain the lack of financing in dental offices is one important reason why patients often ask for piece-work treatment, or ask to have their mouths just patched rather than accept optimal treatment plans.

I am not suggesting you should be loose and casual with your payment policy. Let me be clear on this point. Your policy must be to collect payment in full at the time of service. Any other payment policy is foolish. However, you must have the options available that make this a realistic proposition for your patients.

Let me tie this back into our discussion of raising your fees. My experience is patients don’t care what your fees are (within reason of course; remember my earlier comment about outrageously high fees), provided they can afford it. Often the reference point for the patient is not the total cost of the treatment, but how much per month it will cost. Imagine the benefits of having your financial coordinator say, “Mrs. Jones, if we can set up a plan that will allow you to have low monthly payments, would you like to have the best possible treatment?” By providing patients with financing they need or want, you’ll be helping them accept the best possible treatment, and you’ll have a system in place to support your new fee schedule.

Some final thoughts on developing an appropriate fee schedule
One of my passions is cabinet making and building fine furniture. Many years ago, I had a wonderful mentor who was a master cabinetmaker in the finest old-school European tradition. What this gentleman could accomplish with simple tools and some raw lumber was nothing short of brilliant. He was an immigrant from an Eastern European country and possessed skills to the highest degree.

I had been studying his work for years and finally had the opportunity to meet him in person. When I visited his shop, I was somewhat dismayed over the relative paucity of the surroundings. He had everything he needed, but indeed the shop was rather run down and not what I had expected at all, given the high regard I held for his work. He also lived a very meager subsistence, managing to eke out a living, but that was about it. In a quiet moment with his wife, I slipped and made a comment to the effect that I was surprised her husband wasn’t more successful, given the high quality of his work. Her response was enlightening. She said, “Oh, Frank may be a wonderful craftsman, but he’s not much of a businessman. You see, he doesn’t charge what he’d like to get, he charges what he would like to pay.”

Years later, I now wonder how many dentists don’t charge what they are worth, but rather, charge what they would like to pay. If this rings true for you, I’d like to give you something to think about.

Speaking for myself as a dental consumer, I want my dentist to have the best materials, the finest lab, state-of-the-art equipment and a terrific staff who are personable and genuinely cares about me. Furthermore, I want my dentist to take the best continuing education courses. I also think my dentist deserves to earn a fair compensation for taking care of me, and want my dentist to be able to retire in financial comfort. I expect nothing less, and for this, I place my trust and confidence in my dentist to provide me with the best possible dental care! It seems like a fair trade to me.