Dentists: Protect Your Dental Lease from Inflation

Dentists: Protect Your Dental Lease from InflationHow an Inflation-Hedged Tenancy Agreement Can Save Your Dental Practice and Give You a Competitive Edge

Last week I started talking about what I see as the upcoming “perfect inflationary storm.”

While some indicators suggest that a slow economic recovery may be underway, there continues to be skepticism among many economists.

Some feel the current rebound is unsustainable and driven primarily by the massive – but temporary – fiscal stimulus promoted by the Federal Reserve.

In the past three years, for example, the Fed has injected more liquidity into the U.S. economy than in the previous 25 years, combined.1 Never before in human history has so much money entered the world’s economy so quickly, and certainly never before in American history have we tripled the money supply by 300% in less than 4 years.

Preparing for Inflation

This is setting up our economy for what could be an inflationary period of time longer and more extensive than ever experienced before.

Indeed, some business owners and financial analysts with whom I have consulted have commented that many policymakers are already well aware of this. However, many of them – as well as corporate executives and Wall Street bankers – often have vested interests, thereby making implementation of these policies difficult. Further, many have been trained as expert systems managers rather than generalists, and thus only see piecemeal solutions to these very complex problems and will be unable to replace a failed system with a new one.

What does all this mean for dentists? In my view, today’s dentist must both have the foresight to read the writing on the wall and create the tools necessary to effectively manage their dental practice during rising and high inflation. This may start with an annual inflation rate of 7% within the next 1 to 3 years, rising to double-digit inflation within 4 to 5 years.

Preparing to manage a dental practice through an inflationary period can be a daunting task when you stop to think about it. Imagine your costs going up significantly and not being able to pass those costs onto your dental patients at the same rate.

However, the good news – as the saying goes – is that you don’t have to outrun the tiger; you just have to outrun the person next to you.

Being One of the Survivors

Hedging your long-term business commitments today will give you the edge needed to outlast and outperform your competition. Many of today’s dentists opt to listen to the financial cheerleaders as if they’re financial planners because it “feels” good and because it “fits in” with their view of how the world works.

Instead, take this opportunity to be a reflective strategist and critical thinker about tomorrow. One of the greatest of these was Herb Kelleher, the former CEO of Southwest Airlines. He had a reputation for thinking outside the box, and his proactive risk management style – including his fuel-hedging program implemented in the 2000s, which allowed the airline to enter into aggressive fuel futures contracts – allowed them to better manage their costs.2

As the price of jet fuel rose dramatically during that period, Southwest emerged as the most profitable airline in the industry, driving out competitors and avoiding Chapter 11 bankruptcy – the fate that ultimately awaited all major U.S. air carriers. Southwest’s fuel-price inflation-hedging strategy provides a great lesson in how to compete in difficult economic times and emerge victorious.

Hedging against Inflation

America’s tenant-based businesses like dental offices should, in my opinion, act like Herb Kelleher by identifying the major expenses in today’s dollars, in order to hedge against future inflation.

As occupancy and tenancy costs remain top priorities in long-term lease contracts for dentists, these are critical costs to contain. As your tenancy leases roll over for renewal, avoid locking into existing options to extend the terms of the previous NNN Lease Agreement protecting the landlord against inflation by passing the costs on to you.

Be willing to “step out of the box” and renegotiate hard, both the base rent provisions, and triple net components of the lease, much like the hedging strategy employed by Southwest.

In particular, ask for longer-term rents with locked-in fixed rents, which do not rise based on the Consumer Price Index (CPI), but rather, have set increases and thereby cap off the percentage increases year over year. Landlords will generally object to this, but given today’s real estate environment, they will often concede, as they are unlikely to want to lose a good, paying tenant.

An excellent window of opportunity still exists to take advantage of struggling landlords by implementing such a hedging strategy. Only agree to triple net provisions with a cap on increases of no more than 6% year-over-year. You’ll want to do this while most landlords are still operating in a non- or low-inflation mindset and remain insensitive to this request as they do not yet foresee a high-inflation period ahead.

Although putting in place an inflation-hedging strategy will take time, planning and effort, the pecuniary benefits would be a significant competitive advantage similar to the one Southwest had if you feel there is a reasonable risk that our economy will enter into an inflationary period of time.

Considering Your Risks

What do you have to lose? Ask yourself where the bigger risk lies: paying marginally more in rent on the front end, or not having the ability to stop landlords from loading you up with additional expenses, so that in the end your triple net charges begin costing you more than your base rents?

If we hit a period of 12% annual inflation – which many believe to be a real possibility – it will only take about 3 years, under most lease agreements, for your triple net charges to start costing you more than base rents.

More importantly, consider how it will affect your competition’s bottom line. Should they fail to heed the inflationary warnings allowing their landlords the unrestricted ability to pass inflationary risk on to them you’ll have the same advantage Southwest had on its competitors.

Bibliography
1 St. Louis Federal Reserve
2 Cobbs, Richard & Wolf, Alex (Spring 2004) “Jet Fuel Hedging Strategies”

Private Equity Dental Management Companies Come Under Fire

Private Equity Dental Management Companies Come Under FirePrivate Equity dental management companies are at the center of a U.S. Senate inquiry, audits, investigations and civil actions in six states over allegations of unnecessary procedures, low-quality treatment and the unlicensed practice of dentistry, according to a report released by Bloomberg News.

Federal lawmakers and state regulators are trying to determine whether a popular dental practice model funded by Wall Street is having a destructive influence on dentistry in the U.S.

The private equity dental companies only account for about 12,000, or 8%, of U.S. dental practices, according to Thomas A. Climo, a Las Vegas dental consultant.

In 2010, The Wealthy Dentist reported that All Smiles Dental Center Inc., a management company owned by Chicago-based Valor Equity Partners, filed for bankruptcy protection after a Texas Medicaid action cut off reimbursement payments because of their exorbitant amounts of orthodontic care at the expense of Texas taxpayers.

All Smiles was part of a state audit that discovered 90% of the Medicaid claims for orthodontic braces weren’t medically needed.

After years of criticism that the poor were being deprived of dental care under Medicaid, class-action lawsuits and public pressure forced Medicaid to change their health care reimbursements. As reported by The Wealthy Dentist in our story, Taxpayers Footing the Bill for Braces in Texas, some Texas’ dental practices went on to bill Medicaid $184 million for Medicaid orthodontics — more than the rest of the United States combined.

M. Alec Parker, executive director of the North Carolina Dental Society told Bloomberg News that the private equity industry stepped up its investments in dental management over the last 5 years partly because health care was one of the few areas that grew through the recession.

According to the Bloomberg report, Christine Ellis, a Dallas orthodontist, who testified before Congress in April of this year reported that the “flagrancy of the fraud” she found in audits she performed for Texas Medicaid “is truly unbelievable,” with only 10% of the paid claims she reviewed actually qualifying for Medicaid coverage.

Ellis told the U.S. House Committee on Oversight and Government Reform that Texas “has gained a lot of fraudulent orthodontic providers, including many private equity owned dental clinics engaged in the illegal practice of dentistry.”

Medicaid's Dental Boom - Bloomberg News

This May North Carolina is considering legislation that would subject agreements between dentists and the companies to state approval over concerns brought about by the the practices of private equity dental practices.

The Wealthy Dentist twice reported on the North Carolina Senate Bill 655 that would require the North Carolina Board of Dental Examiners to examine all business contracts entered into by dental practices in their state.

Our first article, Dentists Beware: The Government May Want To Tell You How To Manage Your Practice detailed information concerning inclusive authority over how dentists manage their business.

The second The Wealthy Dentist article, Dental Practice Management: North Carolina Senate Bill Wants Dentists To Do It Themselves discussed dentist responses to the impact this bill could have on their dental practices.

The measure has already passed the state Senate and has moved on to the House, where leaders have appointed a special interim committee to study the bill and its potential repercussions to dentists.

Reports have surfaced that the legislative proposal likely to be heard this month. The basics of the bill is intended to restrict contracts dentists can build with dental service organizations and give the Dental Board control of how dentists in North Carolina run their practices.

The North Carolina Dental Society supports the bill, stating that dental management companies often bill dental patients for unneeded care and opponents insist that passage of the bill will only drive up dental care costs.

What are your thoughts on private equity dental management practices?

For more on this story see: Dental Abuse Seen Driven by Private Equity Investments

The Economics of Dental Hygienists

Analyzing Your Hygiene Profit Potential
Editorial by Jim Du Molin

Last week I started talking about dentists and dental hygienists, and how you, the dentist, need to think like a capitalist. The first step in this capitalistic venture is preparing the operatory space for the hygienist – as I mentioned last week, it’s both an investment and a risk, and it’s one you need to consider fully.

Next you need to actually hire a hygienist. Let us assume that the dentist is working four days per week and that 25% of his or her time is spent performing treatments that a hygienist could perform. This means that there is at least one day of potential hygiene production per week.

Let us further assume that based on the dentist’s fee schedule, a hygienist would average $700 per day in production. Collections at 96% would reduce this to $672, from which we have to deduct variable costs (disposable supplies and materials used in treatment), salary, and employer taxes. Our estimated profit before indirect overhead costs is $292 per day.

Daily Gross Profit on Hygiene Production

Production $700
Collections (96%) $672
Minus variable costs (9%) – $63
Minus salary – $288
Minus employer taxes – $29
Profit before indirect costs $292

This is the first level of profit to be realized from hiring the hygienist – direct profit on the hygienist’s production. Adding just one day of hygiene per week provides $1,168 of passive income per month and $14,000 per year.

More importantly, the dentist is now free to use his or her time more productively. Previously, 25% of the dentist’s time (two hours per day) was used to perform hygiene treatments. Let’s say that he or she could bill $88 an hour for those treatments. Now, the dentist can use these two hours to perform more complex and more costly treatments – at, say, $313 per hour. That’s an increase of $225 per hour, or $450 per day.

Assuming that collections are 96%, and variable costs including lab and supplies are 24%, the marginal net profit on the additional production is 72%. Therefore, if daily production increases by $450, the extra net profit will be $324. Remember, that’s $324 everyday. In an average 16-day month, that comes to an additional $5,184 in profit per month.

Adding the dentist’s additional production to the hygienist’s production, the total additional profit is $6,352 ($1,168 + $5,184) per month.
However, there’s more to the story: capitalists have to take risks, and smart capitalists can make lots of money… but I’ll get to that next week!

Dentists: Do You Offer Laughing Gas? (video)

laughing gas survey videoNitrous oxide sedation at the dentist office is no longer the mainstay it once was, but laughing gas is still around. The Wealthy Dentist conducted a survey asking dentists if they still offer laughing gas.

We received a variety of responses from dentists.

A Texas dentist replied, “Nitrous should be available in all offices. This is just good customer service. It is not the dentist’s decision whether or not a patient needs it. All patients should be asked if they would like it. Charge a reasonable fee and it is money in the bank!”

A Washington dentist disagreed, “I think it’s nuts to use nitrous…the dentist and staff are breathing it (which has been shown to cause miscarriages and neurological problems, along with who wants a “high” dentist), it’s takes tons of time to set up, and it’s expensive!”

We found that specialists are significantly more likely than general dentists to offer conscious sedation. Since specialists often perform more intensive procedures than general dentists, they may have need for more sedation dentistry options.

To hear more of what dentists had to say about nitrous oxide, please click play and watch the following dental survey video

Do you still offer nitrous oxide? Tell us what you think in the comments.

Would you like to take part in our dental marketing surveys? Be sure to sign up for our email newsletter in the right sidebar of this blog.

Our survey question newsletter is emailed each Friday.

Infection Control: Dentists Make Changes To Avoid Deadly Viruses (video)

infectious disease controlThis week an article by Science Daily outlined a study published in IOP Publishing’s Journal of Breath Research, where researchers invented a non-invasive breath test to measure the H1N1 strain (swine flu).

The researchers claim that over half of the people in Glasgow vaccinated during the 2009 swine flu pandemic were already infected with the flu virus, meaning they were vaccinated unnecessarily.

Scientists hope that a breath test will allow doctors to identify those who already sick, therefore allowing them to save the vaccine for people who are not yet infected.

This latest scientific invention reminded us of a Wealthy Dentist survey where we asked dentists if the threat of deadly viruses caused them to make any changes at their dental practice.

Click on Play to hear what dentists had to say about precautions against pandemics such as the Swine Flu –

The changes the some of the dentists surveyed made were –

  1. More frequent hand washing and use of a hand sanitizer.
  2. Not treating patients who feel ill.
  3. Encouraging sick employees to stay home.
  4. Use of R95 face masks.
  5. Use of eye shields.

This fall students entering 7th – 12th grade must get a whooping cough vaccine within the first month of the school year in order to stay in school.

Have you made any changes at your dental practice to avoid infectious diseases like the swine flu or whooping cough?

For more on the swine flu breath test see ‘Swine Flu’ Breath Test Could Reduce Future Vaccination Shortages, Research Suggests.

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