McKenzie Newsletter 414

Fraud Costing Businesses Billions - Is Your Practice a Target?
by Sally McKenzie CEO
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Every two years the Association of Certified Fraud Examiners (ACFE) releases its Report to the Nation on Occupational Fraud and Abuse. In 2006, the organization reported that US businesses were losing 5% or around $638 billion of their annual revenues to fraud. In 2008 that figure jumped to 7% or approximately $994 billion in fraud losses. With everything that has happened in our economy, from the lending crisis to the Ponzi schemes, I suspect the 2010 report, when it is released, will show a marked increase in those numbers. For some, desperate times call for desperate measures, and employees that most employers would never suspect of pilfering so much as a few paperclips are robbing businesses blind.

Small businesses, such as dental practices, are especially vulnerable to fraud because, typically, they have few controls in place to protect their profits. It’s a scary fact, particularly when you consider that one-third of all business bankruptcies are due to employee theft, according to the U.S. Chamber of Commerce. And at least 20% of all business failures are the direct result of employee theft, according to the American Management Association.

Case in point: A business manager in Florida was recently found guilty of stealing over $200,000 from a Florida dental practice. For two years this person had been creating fake bills, giving “discounts” to patients who paid cash, and stealing patient identities. Although the former employee was sentenced to 20 years in prison – a sentence that shocked everyone, including the prosecutors – the practice folded, putting six employees on the street. Such lengthy sentences are rare, as most embezzlers, if they are even prosecuted, might serve a fraction of that time. A dental employee in Michigan was found guilty of stealing nearly $100,000 and was recently sentenced to less than a year in jail.

It’s essential for you, the practice owner, to be vigilant in protecting your profits. So how do you spot a potential thief in your practice? Interestingly, ACFE reports that occupational fraudsters are generally first-time offenders. Only 7% of fraud perpetrators in their study had prior convictions and only 12% had been previously terminated by an employer for fraud-related conduct. Although background checks can be useful in some cases, they won’t necessarily protect your practice from a thief. However, there are behaviors that dentists can look for. According to ACFE, the most commonly cited behavioral red flags were perpetrators living beyond their apparent means (39% of cases) or experiencing financial difficulties at the time of the frauds (34%).

How do they do it? Checks present a veritable smorgasbord of opportunities for the small business embezzler. As one thief discovered, it was a relatively simple exercise to write company checks to herself and then destroy the cancelled checks. Countless fraudsters have discovered the ease of ordering new checks in the business’ name and making them out to themselves. They can steal insurance checks or sign checks using a signature stamp. In a multitude of other cases, the trusted employee accepts payment from the patient or customer, deletes the transaction on the computer, and keeps the payment. Many patients no longer get their cancelled checks, let alone actually look at them. And it appears there is plenty of time for an employee to engage in check tampering as it takes on average about two years for the scheme to be uncovered.

Then there are the fraudulent billing schemes. These take a bit more effort than your typical check fraud. One small employer was building a new office only to discover by accident that a trusted employee, who just happens to be in charge of paying the bills, had set up a fictitious painting business and was billing the employer for work never done.

In about two-thirds of cases, perpetrators work alone. More than half of those participating in this particular criminal activity are between the ages of 41-50. About 52% of those engaging in fraud have been with their employer for five years or more. They frequently hold the position of manager, they are trusted, and they have access to the information they need to commit fraud. Not surprisingly, it’s those with the greatest access to the businesses’ financial transactions who are most likely to commit fraud. After all, these employees are responsible for processing and recording the organization’s financial transactions and generally have the greatest access to its fiscal assets, as well as the most opportunity to conceal a fraud scheme.

Next week, protect your practice from fraud.

Interested in speaking to Sally about your practice concerns? Email her at sallymck@mckenziemgmt.com. Interested in having Sally speak to your dental society or study club? Click here.

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Nancy Caudill
Senior Consultant
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Have A Plan Before You Relocate

Dr. Stan Marks – Case Study #411

Does this sound familiar to you? “I only have to sell one more crown to pay for this widget.” Then a couple of months later, you want to purchase something else so you say to yourself, “I only have to sell one more crown to pay for this widget”. However, you forgot that this crown was already allocated to the first widget and that because your overhead is 61%, you only have 39 cents on the dollar to go towards the “new widget.”

This is the trap that Dr. Marks found himself in. He was experiencing the stress of too much month and not enough money and was expecting his practice to “pick up the slack” to cover his indebtedness when he relocated his practice. I am not an accountant and do not offer accounting advice. However, it is my job to help dentists understand what their practice expectations should be and see if I can uncover lost revenue to assist them with meeting their financial obligations. Sometimes the findings are not good.

Dr. Marks’ practice statistics:

1 doctor, 2 assistants, 2 full-time hygienists and 2 business employees
10-year old practice working 4 days a week, 8 hours a day
13 new patients a month
$76,000 a month in net collections in 2009
Collecting 98% of net production

Standards in the Industry
When Dr. Marks decided to relocate his practice to a new facility, he was very credit-worthy and easily obtained a loan from a local bank. His monthly obligations for his lease, utilities and other facility costs were $5,320. $5,320 divided by his monthly collections average of $76,000 = 7%. Standard in the industry for facility overhead is 5%. In order to realize a 5% healthy facility overhead, he needs to be collecting $106,400 a month… that’s a 40% increase!

When he relocated, he added an additional treatment room so he hired another hygienist to put in the room. By adding her gross wages to his existing employee overhead, his gross wages is now 27% of his overhead. Standard in the industry is less than 23%.

No Game Plan – Reality Hit Home Hard
In reviewing Dr. Mark’s decision to relocate his practice, he admitted that he had no game plan for covering the increased overhead. His answer to managing the additional expense was to add an additional half-day to his four-day workweek. His business team was sure that they could keep the additional hygienist busy because they had patients that were on the “on-call” list that they knew would want to come sooner.

Then reality set in to his “make-shift” business plan. When he added a Friday morning to his Monday – Thursday schedule, he discovered that instead of increasing his monthly production, all that was happening was a reduction in his daily production – his monthly production never increased! His new hygienist was doing very well for the first two months until she was “caught up” with all the patients that were waiting to be seen sooner. Now she was idle.

Solutions for Dr. Marks
There was a glimmer of hope for Dr. Marks. His overall practice overhead was 61%. A healthy general practice such as Dr. Marks’ practice should be experiencing an overhead of around 55-60%. Even though his facility overhead was high, his Miscellaneous Category was less than 10%, his Team Benefits were less than 2% and his Dental Supply Category was 3%.

Dr. Marks needed to increase the number of new patients that he was seeing in order to step-up his daily production and potentially be able to profitably work an additional half-day. Unfortunately, it was necessary to terminate his new hygienist. The formula used to determine the # of hygiene days needed revealed that, until he reactivates the past due recall patients and improves his patient retention, he will not need additional hygiene days. When he does, he will add the days as needed by the calculations.

Conclusions
With the help of McKenzie Management, Dr. Marks increased his profitability over the next 12 months, reducing his overhead percentages and allowing him the opportunity to start paying off the credit lines he had at the bank and funding his retirement.

Learn from his experience if you are considering relocation. Understand how much your monthly expenses are going to be so you will know how much you need to produce and collect to keep your overhead in line and affordable.

If you would like more information on how McKenzie's Practice Enrichment Programs can help you IMPLEMENT proven strategies, email info@mckenziemgmt.com.

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David Clow
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Practice Cultures

Perhaps not many of your patients would recognize the term, but your practice has a “culture.” Every practice does. Whether patients know the word or not, we know what it means, and while your practice culture is sometimes ambiguous and subtle, your culture might be the single most important factor in your success.

The word has several definitions, but for our purpose, let’s call culture the values, conventions, or social practices of your office; in other words, it’s your normal way of doing business. It’s what patients see when we’re in your waiting room or your operatory; it’s how we feel when we’re in your presence; it’s how you and your staff interact with us and with each other; it’s your assumptions and givens as they become manifest in your normal routine. I said culture was subtle, but it’s subtle to some dentists because they don’t see it any longer. It’s like the art on the walls or the furniture. It doesn’t change from day to day. The dentists and the staff take it for granted until it’s invisible to them. It’s just there. But patients? We notice.

Two Practice Cultures
Here are a couple of examples of dental practice culture as a patient might experience it. Practice A is a high-throughput, pretty impersonal place where I have to reintroduce myself every time I go. The staff seems to change from visit to visit, but the magazines in the waiting room are the same every time. The art on the walls is too bland to remember. The actual care, well…it’s technically adequate, but businesslike and almost indifferent. It’s not unusual for me to be left sitting alone in the operatory for ten minutes waiting for the dentist, or even during a procedure, to be left that long while the anesthetic takes hold.

Practice B tells a whole different story. The staff of five has worked as a team for at least six years. They know their patients and even their patients’ families. The waiting room is simple but cheerful and the magazines aren’t circa 1998. The décor is extraordinary. These folks don’t just work together in this place; they get training as a group and share downtime as friends, and their smiling group photos and candid snapshots are the dentist’s choice for office art - not the bland abstracts, or posters selling some new treatment. Patients don’t get left alone in this office. If a few spare minutes happen in the appointment, someone’s there with you to ask about how you feel, or maybe just to make small talk.

A patient experiencing the first practice can tell that these people care about dentistry. One who visits the second practice can tell that these folks care about people.

Culture as a Competitive Edge
Patients might not understand the word “culture,” but we know what we like and value and we offer our loyalty to dentists based largely on that. Can we differentiate between one dentist’s technical skills and another’s? Not likely. Do we care where you went to school or what continuing education you’ve had this year? Not much. Does it matter to us if we feel safe, appreciated and cared for? You bet it does. That’s your culture. Whether it’s cool and indifferent or personal and nurturing, we understand it very well. And we’ll stay with or leave a practice based on that ambiguous, subtle, but very real perception.

It’s a challenge to take a new perspective on something you’re used to taking for granted, but it’s worth any dentist’s time to think about this. What’s your practice culture? How do you communicate it to your staff and patients? Are your best goals and values apparent to people? Most important, are you losing patients to the practice down the street because their culture is a competitive asset, while yours is just there?

On behalf of McKenzie Management, David Clow consults with dental professionals on practice culture, case acceptance, and patient expectations.

David Clow is a writer/consultant for Fortune 100 companies. His book, A Few Words from the Chair, is the first book written by a patient for dental professionals and students and is available here.

Listen to David’s FREE podcast. Click Here

Correction: In my last column here, “Evolutions in Dentistry,” I wrote about the Minnesota program to certify dental technicians, and said that “Connecticut is running a pilot version [of such a program], and over ten other state dental associations are investigating dental therapist programs of their own.” This is incorrect. Richard Dvarskas, DMD, Chairman of the Connecticut State Dental Association Dental Relations Committee, notified me that “the Connecticut State Dental Association House of Delegates voted to study the concept of dental therapists only.” Thanks to Dr. Dvarskas - my mistake.

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