I want to walk you through a concept I’ve been writing and lecturing about for a few years. It’s called “procedure cost” and it’s a way of evaluating your fees.
I wrote about how to calculate procedure cost back in 2013, but here’s a short explanation again:
Your total cost is made up of three things:
(1) materials for the procedure
(2) assistant salary for the time it takes to do the procedure
(3) lab cost (if any)
Here’s the total cost for a crown. Note that I originally included front desk salary and rent in the calculation. I think that clouds the numbers a bit too much. Sure, you’re paying those things, but theoretically you also have a hygienist producing in another room at the same time. We should keep “total cost” to just materials, assistant salary, and lab cost. Those other costs come into pay when we calculate the overall overhead for our practice, which comes from the profit and loss statement. Here we just want to calculate the overhead for an individual procedure (i.e. the procedure cost).
Okay, so now we can plug in our private fees and PPO fees to see how profitable a procedure is. Here is a table that shows my cost calculations at the top and then the procedure cost calculations at the bottom, organized by on fee schedule.
This is a large image, so click on it to see the whole thing.
We now can see some very interesting information. Let’s look at a two surface composite.
The total cost of materials is $7.80, my assistant is paid $9 for 30 minutes of her time, and there is no lab cost. Total cost is $17 using round numbers.
Using the procedure cost calculation, I’m at 7.3% for a private office fee of $230 and 30% when I accept a GHI fee of $57. What does this mean? It gives me a reference for comparing profitability for different fee schedules. If you’re contemplating participation with a PPO schedule, just looking at the listed fee won’t tell you much about whether or not you can afford to accept that reduced fee. A procedure cost calculation will reveal how profitable (or unprofitable) the procedure becomes with a certain fee.
This also allows me to compare different procedures to each other. It takes me 1.5 hours to do a crown (1 hour prep/temp/impression and 30 mins to insert). It typically takes me 1 hour to do a single-rooted endo. My fee for a crown is higher than a single-rooted endo, but the profitability is significantly lower (14% compared with 3.3%). From a profitability standpoint, I’m better off doing endo than crowns.
Here’s another interesting lesson from this calculation. Post and core materials are not cheap. You may be tempted to use cheaper materials because you’re afraid ordering the expensive stuff will increase your overhead. However, if you look at the numbers, post and cores are incredibly profitable, even at PPO reduced fee schedules. This is because they can be done in about 15 minutes, so the assistant time cost is low. So don’t skimp on the post and core materials!