By Patrick Houlihan, DDS
I received a concerned call late one Friday afternoon from a woman I’ll call Jane Samuels. Jane’s husband, Tom, was a dentist who had passed away suddenly from a heart attack nine months previously. Since that time Jane’s brother-in-law, an attorney, was trying to manage Tom’s dental practice. However, it was becoming apparent to Jane that something was wrong. She had not received any money from the practice in the last three months, and according to her brother-in-law, the practice production had declined 50 percent and was now operating at a deficit. He seemed confident that he could stabilize things and wanted Jane to postpone making any big decisions. Jane was not convinced. She asked me to review the practice data and see what was really going on.
When I talked with Jane’s brother–in-law, Richard, two things were very apparent to me. First, he was absolutely committed to making sure his brother’s family was completely taken care of. Second, he knew absolutely nothing about running a dental practice. Initially, after his brother’s passing, he had closed the practice for one month, leaving no staff to continue basic operations. During the time that the practice was closed, Richard arranged to have four of Tom’s dentist friends each work at the office a half day per week. After a couple months of temporary coverage two of the temporary doctors decided that they could not continue to take the time away from their own practices. This now left only one full day of coverage each week. Finally, Richard found a “permanent doctor” to work at the practice two days per week.
The new dentist, Dr. Dey, was a young associate from the practice around the corner from Tom’s office. He began working two days per week in Tom’s practice and two days per week in his original office. Initially, it seemed like a good fit for the practice. Then, after just three months, Dr. Dey’s original dentist employer offered him a partnership and Dr. Dey approached Richard and informed him that he would be leaving. That was when Jane brought me on board.
I had seen similar situations many times before. The stress of dealing with a major loss or illness is difficult enough. Trying to maintain a dental practice or transition it to sell on top of this trauma can be overwhelming, to say the least. Without the right systems in place to make up for the loss of the dental production, practice value can plummet in a very short period of time.
Much of the business fallout from situations such as the Samuels case can be avoided if the right preventive arrangements are put in place. I advise every owner dentist to develop a Catastrophic Plan. The creation of such a plan provides security for the practice and its value should a critical situation occur. A good plan incorporates much more than disability or life insurance and constructs an action strategy to address various situations.
There are four basic scenarios that could occur that would necessitate implementation of a Catastrophic Plan. These scenarios are:
- loss of a dental license;
- an environmental or facility type disaster such as a fire, flood, or tornado;
- a short or long-term disability of a dentist; and finally
- the death of a practicing dentist.
For the purposes of this article, I will concentrate on the consequences of the death of a practicing owner dentist or long-term, permanent disability.
Facts you should know
Here are a few facts about death and disability. According to the National Vital Statistics System, in 2009 approximately 35 out of every 1,000 people between the ages of 40 and 70 died that year. Those numbers would equate to approximately 113 practicing dentists in the state of Michigan passing away that year. According to dentist death statistics, it was actually worse because dentists had a death rate 2 to 3 per-thousand higher than the general population. Sixty-five percent of all dentists nationwide are above the age of 45, increasing the death rate as well. As for disability, one in four 20-year-olds will become disabled before the age of 65, and currently 36 million Americans are disabled, which equates to approximately 12 percent of the population. An individual in the United States is five times as likely to become disabled as he or she is to die. These numbers represent a reality check. No one really ever thinks that these crisis situations will happen to them. But they do. Unfortunately, I have seen the detrimental fallout inflicted on dentists and their families who were caught unprepared.
The first step is to be aware of certain dental “truths” that substantiate the creation of an individualized Catastrophic Plan. Two major edicts that hold true. The first reality is: A dental practice is perishable. Practice value and earning power have a very short shelf life if a calamity occurs. Studies indicate the value of a practice decreases 5-10% per month if it is idle and has no doctor coverage. Personally, I have seen practice value decrease up to 30 percent in the first month. Another truth in these circumstances is this: The death of a practicing dentist or long-term disability always means the practice needs to be sold.
In 15 years of consulting I have never seen a family member or well-meaning friend be able to manage a dental practice successfully following a crisis situation. By successfully, I mean that the practice was able to cover its overhead and still produce a reasonable profit. The reason for this really comes down to common sense and math. When a dentist takes a week or two off from his/her practice for reasons such as vacation or illness, income is not produced during the absence. Once he or she returns to work and starts producing, after a period of time production and cash flow return to normal levels. Now consider being gone for two months and then coming back to work part-time. It is easy to see why Tom’s practice quickly ran into problems. The only reason it survived the first two months was that the practice was not paying any of the temporary dentists. Once they began paying the associate doctor, the practice’s financial outlook began to fade quickly.
Written directive
What exactly is a Catastrophic Plan and what does it include? A Catastrophic Plan is written directive that details for your family, friends, and/or plan administrator what should be done in the event you are not able to make decisions about your practice, you are severely disabled, or die. It includes administration, legal, and financial guidelines that should be enacted in the case of a catastrophic event. This plan specifies advisers who must be contacted to enact the plan, lists of contact information for all business pertaining to the practice, and includes a communication plan for dealing with patients and staff. A Catastrophic Plan is an emergency management blueprint that will designate how the practice will be maintained until it can be sold.
Five of these crucial plan ingredients involve administration, legal guidelines, designated doctor coverage, communication, an adviser network, and practice evaluation. We’ll cover each below:
Administration. One of the most critical aspects of creating a plan is designating an administrator to carry out all necessary measures. A fundamental misstep in these cases is having a spouse or family member act as administrator. This is usually never a good business decision. Most family members and friends will not be familiar with how dental offices run, and a crisis situation is not the time for them to learn. Time and know-how are vital to success. The best administrator is someone who is well versed in business, ideally another dentist, who could be trusted to carry out and implement all aspects of the plan. Normally, a designated administrator is paid. This provides an additional incentive to act and fairly compensates the individual for his or her time if it takes several months to arrange the sale of the practice. The administrator should not be the doctor working in the practice and providing dentist coverage. This creates an inherent conflict of interest. The plan administrator should be someone who has the best interests of the practice and the best interests of the family as the top priority.
Legal issues. The second important component of a plan involves legal issues. Laws can vary from state to state, and it is mandatory to know what rules govern dental practices where you work. For example, it is illegal for a non-dentist to own a dental practice in the state of Michigan. There is no deadline specifying when a practice must be sold in the event of death or disability of the practicing dentist, but it should be noted that the law is quite clear that ownership must be transferred to a licensed dentist. There are also significant fines that the state can impose if it is not notified of a dentist’s death and the disposition of the dental records involved.
Coverage. A third necessary part of the plan should outline instructions for both short- and long-term doctor coverage. The reality is that, ideally, you want the practice to be open within a week of the catastrophic event and operating as close as possible to a complete schedule. Of course, colleagues can be called on for coverage for a short period of time. I recommend no more than 60 days. I advise that colleagues be paid and usually recommend paying them a straight per-day fee to cover the office. This makes it easier for these doctors to justify their time away from their own office and generally enhances their commitment to the arrangement. For long-term coverage it is best to find a nucleus doctor, one who will cover most if not all of the time the office is open. This doctor should not be from the same town or area as the practice is located and should be willing to sign not only an employment contract but a Covenant Not to Compete or at the very least a Non-Solicitation Contract for patients and staff. You can find these nucleus doctors as associate doctors in nearby towns or better yet by using a temporary doctor staffing company. The most important point here is to get doctor coverage as soon as possible.
Communication. A fourth integral piece of a catastrophic plan is a communication plan. This would detail communication with staff, patients, and all companies and individuals who have business with the dental practice. This directive would cover such things as who will notify the staff, who will notify the patients, and what information will be given to them. The most thorough plans include sample correspondence that can be distributed to the patients in the event of a catastrophic situation. This heading would also include a complete list of all staff members, including their phone numbers and emails, and a short list of their job responsibilities. All suppliers, laboratories, and their associated representatives should be detailed as well, and contact information provided for any landlords, utility companies and contracted insurance companies. It may seem like a laborious task to undertake, but the more specific and complete the design is, the easier the plan will be to administer. Remember, the goal is to maintain the value of the practice until it can be sold.
Adviser network. A fifth ingredient should be a list of all professional advisers and their contact information. This would include your accountant, attorney, and any business advisors you may have. Again, in the event of a practice sale being necessary, time is of the essence. It is also advisable to have the dental practice broker of your choice listed to be called to handle the sale of your practice. If you have worked with a broker/consultant and are comfortable with him or her, include that information within this section. It is much better for your administrator to have a dependable dental advisor to contact immediately to expedite the sale of the practice.
Practice evaluation. Finally, your plan should include any formal Practice Valuation of your dental practice that has been previously completed. I am always asked the question, “Why should I pay for a practice valuation when I’m not selling my practice?” I reply that there are two excellent reasons for having a practice valuation done prior to the sale of your practice — first, for planning purposes such as retirement planning and for planning for any catastrophes. Second, it makes sense so that your family and plan administrator know what your practice is worth. I have seen several practice sales sabotaged because the family did not know the value of what was being sold. In some cases, good offers have been refused, and in others, practices ended up being shut down because the family waited too long and the practice value plummeted. Practice valuations are an excellent investment. On average, you can get a good valuation for around $5,000.
Once you have your plan complete it should be kept in a safe place that is known to a family member and/or plan administrator. The contents and requirements of the plan should be reviewed with your designated administrator as soon as possible. Do not wait until an acute situation to unveil your plan. It can be a difficult discussion to have, but all involved will be better served if you detail your plan and your rationale for its contents and structure. In addition, you want the administrator to be fully cognizant of the scope of responsibilities so that they can make an informed decision regarding their role.
Once your plan is in place, it should be reviewed on a regular basis. Some dentists find it beneficial to update their plan while they are preparing information for their tax returns. It also can be done at the end of the calendar or fiscal year. Updating does not have to take much time, but it is imperative to make sure all information is current and the decisions outlined in the plan are still valid and in the best interest of your business.
In summary, the decision to have a Catastrophic Plan for your dental practice is one of the most important safeguards you can provide for yourself and your family. We hope you won’t ever have to use it. But in the event that something unforeseen happens, it will provide a thoughtful procedural blueprint for maintaining your practice until more permanent arrangements can be made.
About the Author
Dr. Patrick Houlihan has been in private practice for more than 30 years in the metro Detroit area. He has been a dental consultant for the past 18 years. Dr. Houlihan is a guest professor at the University of Michigan and University of Detroit Mercy dental schools and is a past chair of the MDA Annual Session. He is also a member of the Dental Forensic Unit, U.S. Department of Homeland Security.
