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Evaluating a Practice Via Its Active Patient Count

 

In dental school, the number that often has the biggest impact on one’s future is the “clinical procedure unit count”.  Called by different names at different schools, the unit count is the number of clinical procedure “units” required for graduation.  While there will be several other requirements necessary for graduation, completing the required number of clinical units is the total focus for most dental students during the last two years of dental school. 

Sometimes these units are numbers of individual, different types of procedures; other times they represent periods of time that one must spend in the different disciplines of dentistry.  Until these units are accomplished, however, the new dentist cannot graduate from dental school and move on in his or her dental career.

As one enters into practice following dental school, he or she will encounter another “most important number”.  This number is the “active patient count” or “active patient base”.  What makes this number so important is that it sets the parameters for the operation of the business aspects of the clinical practice.  Knowledge of and about this number has equal importance to the dental practice owner and the new dentist who is considering an associateship opportunity.  As important as it is, it is estimated that less than five percent of all practicing general dentists actually know their current “active patient count”. 

 

Defining the Active Patient Count

Before discussing why this number is important and how it is used, it is important to explain what the term “active patient count” is and how it is defined.  The active patient count is defined as “the number of ‘different individuals seen’ in the practice during the prior ‘specified’ time period”.  Depending on the approach used by the consultant, this time period should be 12, 18, or 24 months.  Part of this variation is due to the availability of information caused by limitations of various dental software programs.  Many programs cannot scan for the number of different individuals seen during the prior 18 months but can provide either 12- or 24-month reports.

Another reason for this variation surrounds the definition of “different individuals seen” versus why they were seen and/or for what type of procedure they were seen.  Some consultants only want to use patients who either were seen as a new patient with a complete new patient examination or were seen for at least one recall exam during that period.  Others will use any patient seen, including those who have only come in on an emergency basis but have not actually returned for routine, ongoing care as of the date of the scan. 

It can also be useful, however, to define a “different individual seen” as any patient seen for any reason.  This definition can be useful because it aids one in determining, among other things, hygiene staffing needs.  While it is true that a few of these patients will only be seen on an emergency basis, their numbers will not significantly affect the overall projections.  And if the practice is well managed, most of these individuals will be converted to regular patients, subsequently enter the recall system, and become part of the active patient count.

Therefore, for the purposes of this discussion, the active patient count is the number of different individuals seen for any procedure during the prior 18 months.  The critical point here is not whether 12, 18, or 24 months are used, or whether the patients were seen for a complete examination or were only seen for an emergency.  The critical point is that the active patient count is calculated and the information gained is actually used. 

 

Role in a Practice Purchase

The primary purpose of purchasing an existing practice is to acquire the active patient base.  It is the most important asset purchased, and it is the asset that has the most value--whether this is a total purchase or the acquisition of a partnership interest.

The value is not dependent on how the original owner acquired this patient base.  What gives this patient base value is the time it has taken to develop the patient base and what this patient base does.  The current patient base in any dental office has taken 7 to 15 years to build.  Even if the current patient base was originally purchased by the current owner, the time factor was invested by the prior, original developer of the practice. 

Once built, the active patient base represents instant and ongoing cash flow to the dental practice.  Conversely, the asset with the least value (typically only 10 to 20 percent of the overall practice value) is the equipment.  While expensive, dental equipment can be acquired in 60 to 90 days, whereas it can take years to build a patient base--hence the value.

The dollar value assigned to the active patients is called “goodwill”.  While there are a variety of items constituting the “goodwill” of the practice, none come close to the value and importance of the active patient base.  This goodwill represents the value of the fact that the majority of this active patient base will return year-after-year to this office to continue to receive and pay for their dental care needs regardless of whether the original owner is the practicing dentist. 

The reason this happens is fairly easy to understand.  Generally speaking, there is only one thing more frightening to a patient than having to change dentists--having to change his or her dentist and the location for their future dental care.  While the current dentist may change, at least the patient knows the staff, where the office is, where the parking is, where the elevator is, etc.

Whether it is called “goodwill”, or the value of the patient files and records, or the value of the active patient count, knowing the active patient count allows this value to be calculated.  As a whole, the value of the goodwill of the practice is generally considered to be one year’s adjusted net practice income.  Dividing the adjusted net practice income by the number of patients in the active patient count yields an individual patient value. 

There are times when only the patient files (ie, the goodwill associated with each patient record--remember that legally patients own their records and they cannot be sold) are transferred to the new owner.  In this case, a per-patient dollar amount must be calculated and the sale price for the goodwill becomes that value times the number of active patients. 

It is commonly understood that this active patient count has value because of the likelihood that the patients will continue to receive care and pay for services to the individual or entity that controls the patient’s files.  This active patient count (and the actual size or number of patients involved) represents the single most predictable ingredient and factor for the successful operation of the dental practice.  It is so important that many lenders require a calculation of this number as a condition of making the dental practice acquisition loan.  If this number is deemed to be too low by the lender, the lender will refuse to make the loan.

 

Role as a Practice Management Tool

Once the value has been determined and the active patient base is acquired, this number continues to be invaluable to the ongoing management and operation of the practice.  The first area the active patient count comes into play is in calculating and monitoring of the practice production potential.  If, for example, the average active general dental patient spent approximately $450 per year for dental services, and the active base acquired was 1,000 patients, this means the gross receipts of the average practice should be $450,000.

If the practice average patient value for the subject practice is only $300, that same practice would only be grossing $300,000.  Analyzing why the average patient value is less than the national average could provide the information necessary to raise that patient value and generate hundreds of thousands of dollars in additional revenue over the next 10 years.  Conversely, looking at what practices are doing that have an “above average” active patient value can result in ideas for even more gross and net income.

The active patient count also allows careful analysis of required staffing needs, especially from a hygiene perspective.  The average hygienist sees 10 patients per eight hour day.  This equals, in a six-month recall schedule, 250 recall patients for each weekly hygiene day. 

If a practice undergoes a normal attrition rate, the dentist will experience approximately 17% erosion of his or her active patient base each year as patients relocate, die, etc.  In a healthy, growing practice, the practice will replace these patients with 20 to 25 new patients each month.  If the starting active patient count was 1,000 (the maximum number of recall patients one hygienist can physically see), 170 patients are lost per year because of attrition while 240 to 300 new patients are added to replace them.  This is a net gain of 70 to 130 patients per year, changing the active patient count from 1,000 to 1,070 – 1,130, or approximately a net average growth of 10%.

(Continued from page 1 )

 

If the number of available hygiene days is not continuously increased, the inability of patients to be seen in hygiene will seriously limit the growth of the practice and future income of the practice.  It should be noted, the figures used above were “available hygiene appointments” only.  They did not even calculate hygiene appointments used by the new patient, or the fact that one patient requiring four quadrants of root-planing and curettage coupled with a three month re-care schedule would take up an additional eight appointments per year, i.e., displace three other two-visit-per year re-care only patients.

The active patient count also determines at what level the practice can support a full or part-time associate.  As the new dentist considers any specific associate opportunity, he or she should inquire about the active patient count.  A solo practice attempting to incorporate a full-time associate requires a minimum active patient count of at least 1,800 active patients.  If fewer than this number are available, the question must be asked relative to the original practice owner’s intent to personally cut back on the number of treatment days, or how will this practice support both clinicians.

In a well-run practice, 70 to 80 percent of new patient referrals come from the existing active patient count.  This makes the active patient count the most important marketing tool in a dental practice.  If the new dentist is relying on the practice’s existing patient base as the primary marketing tool, it is critical that this active patient count be carefully reviewed to ascertain what the current count is and whether there are sufficient active patients to provide sufficient new patients.  If there are not enough active patients, the only other potential source for new patients is an external marketing program, which must be planned, budgeted for, and executed.

Careful ongoing monitoring of the active patient count is required to track practice growth (or decline).  Once the initial active patient count is determined, adding the monthly new patient count and subtracting the patients who have moved, failed to respond to recall attempts and subsequently inactivated, or requested their records transferred to another office, requires minimal time (literally minutes to do).  But tracking this number on a monthly basis provides valuable insight into whether the practice is healthy and growing, or experiencing the alternative, ie, slow and painful regression.

 

Calculating the Active Patient Count

Given the definition the active patient count and the importance of the active patient count, the remaining question is how to determine the active patient count for a given practice.  There are five ways to determine the active patient count. First, if the practice software system can run the scan, it is very easy to determine. 

The second and equally accurate method of determining the active patient count is to conduct a chart audit and actually count every patient who has seen during the defined period.  This means each patient record must be reviewed, and each patient who has visited the practice during the past 18 months is counted.  While clearly the most accurate method, this method also poses a number of problems. 

Most clinicians are personally unwilling to invest the time to do this, meaning he or she is ultimately paying the staff for several hours to count accordingly.  If this is a practice the new dentist is interested in acquiring, because of HIPAA regulations, the new dentist cannot look at the patient charts. This again necessitates either the senior clinician doing this in the new dentist’s presence, doing it him or herself, or having a staff member do it.

Because of the time and expense involved in actually counting active patients, one or more of several alternative estimations are employed to determine this number.  The third method of determining (actually estimating) the active patient count is a partial chart audit.  A block or continuous group of 100 patient records are pulled, and each is reviewed to determine whether the patient has been in during the defined time period.  This yields a percentage based on the number of positive answers.  Next, the total charts are estimated to determine the total chart or patient count.  This number, in turn, is multiplied by the percentage to yield the approximate “active” patient count.

The fourth method of estimating the active patient count involves using the number of available hygiene appointments.  The number of hygiene days in a week are multiplied by the number of patients seen per day times 25 weeks (ie, one six-month recall cycle).  If the practice has one hygienist working four days per week and a second working two days, this is six hygiene days for the week. 

            Hygiene Days Per Week                                 6

            Times Patients Seen Per Day                     x 10

            Equals No. of Patients Per Week               = 60

            Times Twenty-five Weeks                         x 25

            Equals Active Patient Count                  =1500

 

The final method involves multiplying the number of recall exams for the prior 12-month period times 50 percent. To this figure is added the number of new patients seen during that same 12-month period.

Normally, more than one of the methods are used and the actual estimated active patient count is then stated as a range.  This in turn is used to determine the average of the different values obtained from the different calculated values. 

 

Prediction for Success

No matter how the active patient count is calculated or verified, it must be done when one is considering a practice opportunity. Whether a new dentist or an established dentist, just wanting something to happen, ie, a successful associateship or the acquisition of a dental practice with unlimited future potential, does not mean it can happen.  If the practice has an insufficient number of active patients, either situation will be a major struggle at best or an outright disaster at worst.

As a management tool, knowing the active patient count and its various uses and applications is critical to the long-term success of either opportunity.  Once the initial number is determined, it is relatively easy to monitor and track.  It will tell the new practice owner when it is time to add additional staff or a new additional hygiene treatment room. It will tell the new dentist how their efforts compare with the rest of the dental industry.

Knowing the active patient count will provide the means to monitor how successful the practice’s case presentation and acceptance rate is versus previous efforts.  This is done through the monitoring of annual individual patient values, ie, how much does each active patient spend on an annual basis. Every clinician knows his or her total prior year practice receipts.  Dividing this number by the active patient count yields the average patient annual value. 

For the newly acquired dental practice, the active patient value should normally increase 10 to 20 percent per year during the first several years of ownership.  These larger initial increases are typically due to increasing fees to proper levels coupled with the increased energy and enthusiasm the new dentist owner will bring to the practice.  After that, this number must at least be increasing by the annual dental inflation rate.  The active patient count, coupled with the annual gross receipts, is something that takes just seconds to calculate on an annual basis, but is critical to the monitoring of any dental practice.

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