Is Your Dental Practice Ready for a Potential Economic Downturn in 2023?
By Brian Tortolano, Partner, Managed & Consulting Services, Michael Zepf, Director, Managed & Consulting Services, & Brandon Gillett, Senior Manager, Tax & Business Services
The outlook for the dental industry in 2023 reminds us of the outlook in 2008 and 2009 amid the Great Recession. That event began when the United States housing bubble burst, and it triggered a series of economic impacts in virtually every industry. Although hopefully not to the same extent, it seems the stage is set for the country to slip into another recession over the next nine to 12 months.
There were a few economic indicators that signaled the early signs of a crisis in 2007, and it appears some of those indicators are beginning to emerge today. Most practices experienced a decline in overall revenues in 2022 compared to 2021, and additionally, labor, supplies, and ancillary service costs have all increased. The combination of the two means overall practice profitability has decreased.
During the last economic downturn, dentistry didn’t feel the true impact of the crisis until late 2008/early 2009, but you could argue that declines started as early as 2002 when dental expenditures per capita began to decrease. This is when the industry experienced a decline in overall dental care utilization. In other words, patients were not going to their dentist’s office as often as they had in the past, and consequently, dental offices saw net income drop an average of about 13%. Although hygiene production grew slightly during that time, restorative dentistry declined which decreased net revenues. Case acceptance also declined as patients’ disposable income decreased.
Whenever there is an economic crisis, we can assume it will affect consumer discretionary spending habits, and dentistry is usually a victim. Patients will look to postpone larger, non-emergent cases, but in the past they did appear to continue seeking routine dental re-care. Patients will make decisions about their dental care based on their ability and willingness to pay for services, which will shift the procedure mix in offices.
What Can You Do?
Measure! Measure! Measure! Then pull your internal and external practice advisors and leaders close. Your internal leaders are those inside your office: key associates, managers, and clinical and administrative coordinators. External advisors are your operational consultant, marketing consultant, accountant, and financial advisor. Keep a close eye on your key performance indicators (KPIs). Successful businesses, including dental practices, pivot when the data points in a specific direction. Don’t wait to measure or speak to your team. Any delay in action could cost the practice greatly and lengthen recovery. It is crucial to proactively drive your practice forward, increase operational efficiencies, and tightly manage your revenue cycle. Continually and proactively monitor the key areas of your practice and communicate with your team.
After the last major economic recession, dentistry rebounded steadily until the COVID-19 pandemic. From 2010 through 2014, average production in dentistry increased by 12% and collections by 8%. This is partially due to a rise in the number of patients with dental benefits as unemployment decreased from a high of 10% to 7.5%. There has been a shift to more preferred provider organization (PPO) offerings than fee-for-service. As a result, reimbursement rates fell while both production and collection adjustments grew, and cash-paying patients dropped from 20% to 17%. This did negatively impact future cash flows.
While we have heightened economic concerns in 2023, we learned a lot from the last economic downturn. Use this as a springboard to increase your knowledge of what is happening in your office. Study all KPIs, measure your practice performance against your expectations, meet with your advisors regularly, and discuss how to improve your practice’s performance. Plan and implement strategic changes so you can successfully navigate this potential economic downturn.