Edward C. Challberg, CPA

Edward C. Challberg owns and manages a CPA firm in San Rafael, California that exclusively serves dentists. Ed is a member of the American Institute of Certified Public Accountants (AICPA), the California Society of CPAs, and has been an active member in the Academy of Dental CPAs (ADCPA) since 2001.

 

Strategies For the Challenges Ahead in Private Practice


The dental profession is undergoing fundamental changes. The ever increasing presence of dental-management companies, i.e. “corporate dentistry,” the decrease in the number of private practices, shrinking dental-insurance reimbursements and ever-growing debt required to get a dental degree are some of the issues facing young dentists who intend to enter private practice. So what should a young dentist do? The successful dentist in private practice of the future will likely:

  1. Be more engaged in personal financial planning
  2. Be much more savvy at marketing
  3. Develop greater business and management sophistication

Financial Planning
The American Dental Education Association (ADEA) reports that 80 percent of the Class of 2014 is in debt for their dental school education, and that debt averaged $247,227. Over 30 percent of the Class of 2014 is in debt over $300,000. If you have school debt, should you consolidate? Should you refinance to a variable loan at a lower interest rate or stay with a fixed higher rate loan? A 1-percent interest rate difference on a $300,000 6-percent loan repaid over 20 years results in a $42,000 interest cost so the stakes are high. Should you take advantage of one of the numerous federal and state debt repayment programs? Is it wiser to enter private practice or take a position in corporate dentistry to manage your school debt? Are there tax considerations? Does it make sense to prepay the loans? There are many issues to address, and this is just school debt.

The typical dentist who opts for private practice will not only be facing large school debt but will also be financing the purchase of a practice or practice interest, facing increasing competition in the marketplace, financing the purchase of a home, raising a family, saving for their children’s college education, saving and investing for retirement, and striving to maintain a comfortable lifestyle. Managing all that well and protecting it from loss requires a well-thought-out, realistic and effective game plan. Establish it early, then constantly monitor and adapt the plan to changing conditions.

A 2010 survey of 11,998 dentists by the ADA found that the average decline in retirement plan portfolio value after the 2008 economic downturn was 26 percent. As a result, dentists delayed their retirement by an average of 5.4 years. In other words, it just takes one economic event to upset your financial plans. Attaining your financial goals has little margin for error. Flexibility and the foresight to do it right the first time are paramount.

Marketing Savvy
Corporate dentistry is claiming a larger and larger share of the dental marketplace. What is corporate dentistry? Though certainly not homogenous, corporate dentistry is generally comprised of large organizations often managed by nonprofessional corporations and often funded and controlled by private equity groups. They have sophisticated business models and very large marketing budgets.

The corporate trade group Association of Dental Support Organizations claims 32 members operating in 4,000+ dental locations in 46 states with more than 8,000 affiliated/owner dentists employing 32,000+ employees. The McGill Advisory June 2014 Issue states that corporate dentistry currently has 5-7 percent of the dental market and will likely increase to 20 percent in 10 years.

In the future, private practitioners will have to employ more sophisticated marketing strategies to set themselves apart from corporate dentistry and attract patients. Scott McDonald of Scott McDonald & Associates, a dental marketing firm, states, ”Corporate dentistry has done a much better job than MOST (but not all) solo practices in the way that they market and manage their offices. I believe that there is much that solo practices can do to use their differentiation to win-out over their corporate competition. But the solution requires attention to the local market conditions along with stepping up their game of messaging, promotion and administration. There is no answer that I can give that would apply to all markets, however. What we usually do when we are looking at marketing a practice (which includes internal and external practice promotion) is to find out the demographic and psychographic profile of the patient base and go from there. The answer lies in understanding the basic needs and wants of local people.”

At DentalTown.com (April 2014), Michael Barr, DDS, who has worked both in corporate dentistry and private practice, makes the argument that dentistry is a highly personalized service requiring the nurturing of relationships. The corporate profit-driven orientation often does not support that. Therefore, as long as private practitioners focus on developing patient relationships, there will be a place in the market for them.

Business Sophistication
The number of solo private practices is declining. In 1991, Kent Nash, Ph.D., wrote in the Journal of the American Dental Association that dentists in ownership positions represented 91 percent of all practicing dentists, and solo practitioners accounted for 67 percent of all dentists. In 2012, the ADA Health Policy Institute reported that the percentage of dentists who are owners decreased to 84.8 percent and the percentage of all dentists in solo private practice declined to 57.5 percent.

Private practice is evolving into more group dental practices. Marc B. Cooper, DDS, of The Mastery Company attributes more group dental practices to six factors:

  1. Dentistry always follows medicine. Although the economic engines are somewhat different, the basic practice models are the same. With increased government oversight through regulations and mandates, with third parties squeezing harder, and with the cost of doing business going up, solo dental practice is going to have trouble managing these forces.
  2. Costs continue to go up. Equipment, staff, fixed costs, variable costs, supplies. Revenues are flat or declining. The only way to beat this is through economies of scale, which is only available in managed group practice (MSOs/DSOs).
  3. Third parties will continue to exert downward pressure. PPOs are now 80 percent of the insurance landscape. More than 50 percent of the population has dental benefits. Of these 50 percent, 70 percent to 80 percent are the ones who see a dentist.
  4. The dental industry is severely fragmented with 86 percent of the dentists (in private practice) practicing solo. Corporate dental companies see a clear financial windfall in coalescing these individuals into group expressions.
  5. Dentistry as an industry is recession-resistant, growing at an annualized rate of over 5 percent. Capital investors, entrepreneurs and professional senior executives see tremendous opportunity in managed group practice.
  6. Dental school debt can be as high as $250,000 or more. The door is closing to entering dentists, which might explain why fewer than 20 percent of graduates are seeking practice ownership. And the door is closing on exiting dentists since there are fewer buyers. Managed group practice looks like the answer.

Group practice by its very nature requires a more complex and sophisticated business model than solo practice. Managing people, setting and monitoring performance goals, strategic planning, and marketing for a group practice require greater sophistication and reliance on advice from business advisors.
To succeed in this new world of dentistry and reap the rewards that dentistry has to offer the successful young dentist will:
1) Get more engaged in personal financial planning
2) Become more marketing savvy, and
3) Develop more sophisticated business and management skills An experienced and knowledgeable CPA who understands the dental profession can help.