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How to Manage Overhead Percentages in the Practice by Charlene White

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Header: How to Manage Overhead Percentages in the Orthodontic Practice
by Charlene White
Key problem areas in overhead control
For years, many industry financial advisors said, "Raise your fees every year by 3 to 5 percent."

As costs go up, "raise your fees." Well, where does it end? Some doctors have allowed setting a goal of really low overhead stand in their way of making progress.

The American public has lost income, hours and benefits over the past several years. The average family median income is around $55,000 per year in many communities. Do the math. How much do you think the average family can set aside for orthodontic treatment? How much money are they able to pay monthly?

In my opinion, the solution is to be very efficient. Start two patients where you would have started one and increase your production per day. Each product or service has a price point. We are in the top four items parents invest in for their children: the education, the car, the wedding and orthodontics. It's a big deal to families. They are shopping more online, looking for value for the dollar spent.

Patients do judge a book by its cover. They want the new and the fresh, not the old and outdated. Sharp staff also are looking for a good wage and a better-than-average benefits plan. The doctor needs to drive a nice car and dress for success. Office décor must be attractive and current. A coffee, tea and refreshments bar is important. All equipment needs to be in excellent working order. The X-ray and sterilization area must be state of the art.

Moms make 80 percent of the decision to purchase things for the family. If she is not impressed and has other options, she will take them. Reinvesting in the practice is essential to moving it forward. Talk to your CPA about spending pre-tax dollars on your practice to maximize your tax benefits.

The total average overhead percentage is up to 60 percent for orthodontists across the country. A few years ago it was 54 percent. This increase is primarily due to the additional costs involved in incorporating the latest technology into your treatment planning. For example:

Clinical components:
  • Align fees
  • Insignia
  • Lingual systems
  • Scanners
  • 3D X-ray
Business components:
  • Computer upgrades
  • Support fees>
  • Signature pads
  • Fees for processing finances
  • Training fees
  • Transaction fees
  • Internet charges
  • Increased marketing budget
Here's a look at some factors that affect your overhead, and how to keep control.

Fig. 1

Poor collection system
If the past-due accounts are high, it lowers your profits. Past-due accounts should be only 3 to 5 percent of the total accounts receivable due to the practice. Look at insurance and patient past-due separately. For example:
  • Total patient accounts receivable due: $800,000
  • Total insurance accounts receivable due: $160,000
  • If total patient amount due over 30, 60, 90+ = $24,000 (or 3 percent of $800,000), that is excellent
  • If total insurance past due over 60, 90+ = $5,000 (or 3 percent of $160,000), that is excellent
Another option is to assess your number of accounts and how many are past due. For example:
  • 500 active accounts
  • 20 percent past due (100) = needs focus
  • 15 percent past due (75) = average
  • 10 percent past due (50) = good
  • 5 percent past due (25) = excellent
Inefficient clinical techniques
One of the things that greatly affects overhead control is the orthodontist's ability to streamline his or her clinical techniques and get an excellent result.

Frequently, I see offices that are finishing their cases in 20 or fewer visits per case, while other offices finish in 28 to 45 visits. As you can see, the office that can finish in 20 visits or less is much more productive than an office that is taking many more visits per case.

I encourage orthodontists to continue to focus on this important statistic in their practices. When you are inefficient in terms of the number of visits from start to finish, it significantly increases the number of staff needed to get the job done and increases your clinical supply cost. As we move into a time when we do not see fees increasing as they did in the past, efficiency is the key to being more profitable on a per-visit basis.

Poor clinical inventory control
Inventory control is one of the few areas of overhead that the staff can influence. Often I visit offices that are spending 12 percent of their gross collections on their clinical inventory budget.

Once these offices focus on improving this system and look at how they can control their supply costs, they are able to reduce this to 6 to 8 percent of gross collections—a significant improvement in overhead control. This is possible without switching bracket companies.

I would say that the vast number of my clients purchase quality brackets and are still able to reach goals of 6 to 8 percent of gross collections. The key is better controls in terms of shopping and comparing prices. It is important to have a staff member in charge who is cost-conscious and has an annual budget for inventory. For example, a $1.2 million practice should budget $72,000 for the year, or 6 percent.

Overbuilding in relation to production
Many times orthodontists move into or build new offices without looking at the amount of future production in relation to the rent or mortgage they will pay.

When moving to a new office and projecting growth, I recommend that no more than 10 percent of gross collections go toward the mortgage or rent. Within a few years, that percentage should be down to 6 to 7 percent. If you overbuild for the amount of production in that particular office, there is no way out of the excess overhead until the lease ends. That investment is never recouped.

High lab costs
Lab costs should run approximately 3.5 percent of gross collections for the orthodontic office. This includes the salary of the person who is doing full- or part-time lab work on the team.

For example, you may have spent 1 percent of gross collections on lab costs last year. However, if you add the salary of the person doing your lab work, that would be an additional 2 percent for a total of 3 percent.

There are many things that an orthodontist can look at in terms of reducing lab costs. I recommend keeping the lab fees for high-tech treatment separate on the P&L statement. If you offer a no-money-down option, or less than the lab fee to pay down, you will have higher case acceptance. However, the cash flow into the practice will be lower for 18 to 24 months. This occurs due to a change in the down-payment structure. You must be prepared to pay the additional lab fees up front if you are not collecting them in advance. Another option is third-party financing, in which you outsource the payment plan and pay an interest fee.

Many offices have stopped finishing models since they are frequently not presented at a formal consultation. Also, many are now scanning the patient. The amount of time and money spent finishing the models can be put to much more productive uses.

The number of appliances you use and the types of retainers will also affect your lab costs. It is important to be realistic with your budget. If the orthodontist wants to continue using the more expensive appliances, it is important that this is reflected in his or her fee so that the lab cost is still within the 3.5 percent range.

Most staff members are trained to do lab work on non-patient days, which can greatly reduce the lab costs paid to an outside lab. Lab work is becoming digital and it is not uncommon for an orthodontist to have two scanners in the practice.

Inadequate case acceptance
If your case-acceptance ratios are low, this can affect the overhead in your practice. One of the key factors we focus on in our workshop is training the coordinators in methods of implementing systems that can result in excellent case-acceptance ratios.

I have read that it costs approximately $200 to process a new patient in an orthodontic office and, typically, there is no charge for this visit. It is far more efficient to have a high case-acceptance ratio and see many more new patients per year. I highly recommend focusing on this area, which will improve your profitability when you have excellent case acceptance in proportion to the number of new patients you are seeing.

I have consulted with several offices this past year who have improved their case acceptance by 10 to 30 percent or more. An office administrator I worked with six months ago called and reported they increased case acceptance from 37 to 80 percent. In my opinion, an orthodontist can't afford to not have his or her case-acceptance rate evaluated.

Staff salaries
The largest percentage of overhead in any orthodontic practice is staff salaries. I certainly believe in paying staff well and offering them an excellent benefits package. I also believe in having efficient systems so that fewer staff are needed in order to get the job done.

Quite often when I see that staff costs are too high, there are too many people on the team. Ideally, you should have no more than one clinical assistant for every 15 patients seen per day, and no more than one administrative person for every $30,000 to $40,000 a month in collections.

In addition, if your practice produces more than $500,000 a year, you can utilize a full-time new patient coordinator. If you have a lab technician, his or her salary cost should not be included in comparing your office to the salary percentages of other offices.

Typically, I see total gross salaries run somewhere around 20 to 22 percent for the team, with an additional 2 percent of gross collections for the lab technician. If you are offering an excellent health-insurance benefits package, that typically runs another 2 percent of gross collections. Pension and profit-sharing contributions are not considered an expense, and that percentage would vary according to the plan and the individual practice. As a practice becomes far more efficient with fewer people, then you are able to better compensate individual members of the team.

It is also important not to have staff members who have too much non-patient time. For example, I often see practices that have two or three office locations where one person stays in an office and more than half of his or her time is non-patient time. Typically, I will see an imbalance in those offices, with the percentage of gross collections being spent on salaries. It is important to have approximately two to four hours of non-patient time to do behind-the-scene duties. However, when this becomes more extensive, it puts an overhead burden on the practice.

Also, if you have a team in which a large percentage of them have been with the practice for many years, it is not uncommon to see a 25 percent salary ratio. Often the doctor is quite content with this, knowing that these long-term, well-experienced staff members reduce his or her stress level. This is well worth the investment. Total salaries vary anywhere from 16 to 25 percent, depending on the individual practice. The key is to have the best, most efficient people who are well compensated, and then it is a win/win for all involved.

Insurance and supplies
Health insurance runs approximately 2 percent of gross collections, and overall practice insurance is about 1 percent of gross collections. There again, if your percentages are higher, you will want to solicit several proposals and make sure your costs are in line.

In a competitive area for hiring staff, probably the No. 1 benefit, other than vacation, is having health-insurance benefits. If the doctor is able to secure a good group price with a low deductible, this is advantageous in attracting and maintaining a staff long-term.

Business supplies are typically 1.5 percent of gross collections. The business staff should also be on a budget for supplies, which will encourage them to shop for the best prices. Going paperless reduces the cost of business supplies.

Having attractive staff outfits is definitely a marketing tool for the practice. If your patients are not complimenting the staff attire, then you need to improve your uniforms in the practice. This area typically runs anywhere from 0.3 percent to 1 percent.

Marketing budget and décor
A marketing budget ranges anywhere from 1 to 4 percent. An average budget is 1 to 2 percent, and an aggressive budget is 3 to 4 percent. This very much depends on how the doctor wants to position the practice in terms of marketing, and whether the practice needs more new patients. Each year the return on investment (ROI) should be calculated.

In addition to the marketing budget, I recommend a staff empowerment budget of 0.5 percent of gross collections. This budget is allocated for staff parties, anniversary gifts, birthday gifts and other perks for the team throughout the year. This is outside of an incentive plan.

In addition to marketing, you must think about your office décor. Image brings patients to the door and quality keeps them there. It is extremely important to reinvest in the office décor on a regular basis. The office colors need to be revamped at least every five years. Patients and parents love to see changes in the office in terms of furniture, pictures, etc. This keeps things interesting and makes them think that you are current in every possible way. This will, of course, affect your overhead, but it is worth the investment.

Continuing education
The doctor needs to decide how much to invest in continuing education. There is no doubt that highly progressive teams spend time and money each year on continuing education. This is a personal decision for the doctor.

I believe there is a huge return on investment for continuing education. We have had staff and doctors tell us that their case acceptance has improved by 10 to 30 percent after attending our new patient coordinator courses.

Fig. 2

Overall overhead analysis
On pages 52 and 54 you will find and overhead analysis report of 24 orthodontic practices from 2014. Review your profit and loss statement monthly and year-to-date with the "percentage of income" included in the report. This is easily done with QuickBooks. Also, run your P&L with the previous year's comparison.

Review this monthly with your financial coordinator or CPA. Not looking at the numbers can result in a loss of income for the orthodontist. Keep your eye on the expenses and compare them to the average norms for the specialty. By monitoring your overhead, you'll see more success in your practice.



Charlene White Charlene White graduated cum laude from Old Dominion University with a B.S. in dental hygiene. Her passion is helping her clients and team members succeed and to facilitating the creation of a "peak performance practice." White spends 40 weeks a year traveling across the country and has consulted in 48 states and five Canadian provinces. She has presented 132 practice management presentations, written 28 published professional articles and created 17 training products as a management consultant. White serves on the Smiles for a Lifetime board and lives in Virginia Beach, Virginia with her husband, Dennis.



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