The 50% Associate Contract is more broken than ever

The latest issue of Business of Dentistry magazine contains an interesting article written by Ian Simpson, an accountant from Humphrey & Co and member of The National Association of Specialist Dental Accountants and Lawyers (NASDAL). NASDAL’s annual benchmark report (complied from over 700 NHS and private practices) reveals interesting numbers:

2009/2010 (000’s)

2010/2011 (000’s)Average fee income generated per NHS dentist

£197.4

£186.7Net profit per Principal with associates

£148.4

£129.9Net profit per NHS Principal

£147.8

£133.6Net profit per private Principal

£126.4

£117.8Average NHS Practice Turnover

£381.0

£369.0

So the income numbers are down – by an average of 9.25% in this sample, against an average reduction of 4% in sales. Simpson then goes on to point out the changes in the cost base:2008/20092010/2011Wages and direct costs as % of income38%41%Total practice expenses as % of income63%66%Materials and lab costs as % of income13%14%

Which means that direct costs have increased by 8%, total expenses by 5%, materials and lab by 7.5% over the prior measured. Here also is an important quote from the article: “The report finds that although the majority of dental associates continue to contract with practices on a 50% agreement basis, clearly this is not the case with NHS works the average UDA rate paid to practices in 2010-11 was £25.56; whilst the average gross UDA rate paid to associates was £20.82.” The effect, therefore, is that the effective average % paid to NHS associates was, in fact, 40.7%. Don’t shoot the messenger. I do feel inclined, however, to go back to basic economics and common sense here:

1. when sales go down, costs go up and prices stay the same, what will have to ‘give’ is profit

2. many of the practices I visit tell me that they haven’t put prices up for 2 or 3 years

3. equally, they are all telling me that decontamination, governance and compliance can be adding £30k to their capital costs PLUS £30k a year to their operating costs, possibly not yet showing in the years of the latest research

The NHS corporates, mini-corporates and independents have clearly reacted to this, according to the NASDAL article. My question – what are other independents, in both NHS and private dentistry, going to do? I’ve said a number of times over the years, that every dental business has four teams who can potentially respond to economic changes:

1. Team A – the owner and his/her family can reduce their income and/or borrow more money

2. Team B – the self-employed sub-contractors (or, in your language, the hygienists/therapists/career associates and peripatetic specialists) can take a lower percentage

3. Team C – the workforce can be reduced in size (redundancy) or take a pay cut

4. Team D – the patients can pay more to maintain their standards of clinical care and customer service

Before we say another thing – my default position is that Team C should NOT be included in this financial review (other than to quote from previous blogs expecting zero tolerance for those who do not adhere to the practice Culture and brand standards). So the choices are….

1. Team A

2. Team B

3. Team D

and, as in all things, a combination will usually be appropriate. I expect Team B to take a reduction in percentage as part of the overall re-adjustment of dental business finance. The 50% associate contract is an historical anomaly that can longer be supported in the 2012 market and my assessment is that associates should be paid 40% of earnings less 40% of lab. Those Principals who are not so brave must at least introduce a 45% flat rate to avoid increasing profit leakage that will have a detrimental effect on their own income and their ability to cover increasing costs. However, as an associate, I would want to be reassured that:

1. the owners are not profit-stripping the business and may well be facing a pay-cut themselves

2. the prices are going to be reviewed to ensure that the patients (Team D) are taking their fair share of the burden

3. the practice has a robust marketing plan to bring the right type of new patient through the door

4. the practice has a competitive product mix and the equipment to deliver those products

5. I am investing in my own clinical skills development, so that when dental maintenance is handed over to DCP’s (hygienists, therapists and others), there will be advanced work available for me to deliver

6. I know how much my own average daily production has to increase by – so that I can maintain the income I previously enjoyed

I have no sympathy for associates bleating about % cuts – the insistence on the protection of a 50% contract is a refusal to recognise, understand or accept the realties of recent years. To all Principals – wake up – to the need to review the numbers very carefully and take the tough decisions. To all associates – wake up to the economic reality of a changing market. To team members – wake up and understand that clinicians don’t necessarily swan around, making a fortune – times are tough and they need your support. To patients – wake up to the fact that quality comes at a price.