Are your percent Initial Payments averaging between 25% and 35%? Are your Paid-in-Full-up-front cases under control? Are your additional family member low initial payments under control? If not, maybe this management pearl can help.
Background: It is always best to be paid for your services as you provide them; therefore, you don’t owe them and they don’t owe you for past services. Being paid much more than what you provide is just as bad as being paid much less (past due, low collections). There are three phases of your services; Initial, Active Tx and Retention and each make up a certain percentage of your total fee. In the past, it was about 26% Initial (Initial services = Consults/Records/Initial-Appliances), 50% Active tooth movement, and 24% deband/retention. Today, overall chairtime has shortened for all three phases and their percentages have changed. Today there are more efficient Records and Consults visits, longer times between appointments and fewer Retention visits (now about 2-3 visits as opposed to 8 to forever visits in the past).
In the past it took about 1,150 minutes to treat a full braces case; today it takes about 750 minutes for a full braces case (aligner full cases are about 450-550 minutes). Thus in the past, it took about: Initial = 300 min, Active = 550 min and Retn = 300 min. Today we have: Initial = 200 min, Active = 400 min, and Retn = 150 min. Thus for a total Tx time of 750 min we have: Initial = 27%, Active = 53%, and Retn = 20%. Actually, percentage-wise, this is not much different from the past.
Of course, the number of minutes, and thus the percentage of total treatment time vary from practice to practice and your percentages will be higher or lower than above. Thus, an average between 25% and 35% of a full fee is still realistic.
Why does this matter? If you receive too much or too little initial payment it can affect your cash flow significantly. And any swing in cash flow affects your NET twice as much. For example, if your net is 50% and you have a 20% change in your collections, you will have a 40% change in your net. While a net increase is welcomed a net loss is not. And of course, if your net is only 35%, you will gain or lose 70% of your net for a sustained 20% change in collections—scary!
For example, for a $6,000 fee your initial payment should be about $1,500 to $2,100. A paid in full (100% initial payment) is $5,700 with the 5% courtesy. On the other hand initial payments are typically low (0% to 15%) for multiple family members in treatment simultaneously. But this is acceptable as long as they are balance out by the patients paying in full. Typically, 60% of patients pay 25% to 35% IP, about 20% PIF and about 20% pay little to nothing. These percentages will vary widely depending on your practice situation.
So, if 50% of your starts pay in full, then only 30% (not 60%) of starts will pay the usual 25% to 35% and the overall %IP will end up being 45% to 55%. Thus, you are getting paid up front for work you haven't completed yet, which eventually balances out with the lower monthly payments as treatment is completed; this isn't a problem unless the patient transfers out and you need to pay them back.
The problem with consistently collecting more than you produce is that you are mortgaging your future income and net. If you receive 20% more in collections than what you produce, you are taking 20% of next year's collections and shifting it into the current year. And if you mortgaged 20% of your collections you are mortgaging 40-45% of your NET; i.e., you will receive 40-45% less net if your practice experiences a downturn. Over-collection is not a problem as long as you produce (charges) the same or greater each successive year, but it becomes a significant problem if your practice is long in the tooth and declining.
Possible Solutions: If your PIF starts are much greater than 20% of starts and you give a 5% courtesy for PIF, then just give a 2-2.5% courtesy—by giving 5% they are getting more of a return on their braces investment then they would get in their average investment. If you lower the percentage, you will notice a drop in collections and net in that year, but will get back on course next year and will also contribute that 2-5% courtesy amount directly to your net.
If you have the opposite problem, with too many families with multiple children in treatment paying a low initial payment you might want to encourage more PIF starts by offering a 4-5% courtesy on their fee. They might be able to pay it with investment monies they are getting a low interest on.
I hope that this helps you to balance out your initial payments and have a less episodic net.
