Everything Dental Blog July 2019

What’s the buzz behind Formularies, Purchasing Agreements and Buying Clubs?

Great pricing is academic to the buying process but it’s not the end all – be all. Many healthcare providers wait for reimbursement from insurance companies and other institutions, so payment terms (monthly billing) can provide cash flow relief. There are many considerations when selecting where to do your shopping for dental supplies and technology. Most buyers want a robust product offering, good order fill rates, next day delivery, free freight, equipment sales and service and the guidance of a knowledgeable dental sales-consultant.

Whether you buy online, in person or with a sales rep, one stop shopping enhances your efficiency and buying experience. Every organization wants to streamline their inventory and ordering processes. Dental practices should pay attention to their clinical material mix (avoid duplication) and product utilization. You need just the right amount of inventory, so you can profit from procedures you perform before you pay for the materials. The revenue from placing a composite filling or cementing a crown allows you to buy more product and fuels the cycle of profitability. If you have six months’ worth of stock on the shelves because you chased price not cost, then you are diluting your return on investment and adversely affecting your profitability. If you have two associates that use different cements, bonding agents or composites than it doesn’t matter how much you pay. Your duplication is eating into your profitability and cash flow. When every hygienist and dentist get any material they request, it makes for a lucrative work environment but lacks discipline and costs the practice money.

Emerging DSO’S struggle to manage this effectively. They are focused on integrating the newly acquired office and creating good will. They do not want to rock the boat with the seller and staff. Unfortunately, failure to address supply costs, product selection, budgeting and lab preferences can lead to staff resistance and other cultural challenges long after the closing.

We all want great pricing but what we really want, is to turn a great profit. Progressive dental offices should focus on procedure-based buying. Dental groups that scale up realize the difference a buck can make. If you have four offices with two full time hygienists that see seven people a day you would have 56 appointments {4 offices X 14 patients = 56 preventive appointments. If you can shave a dollar on each preventive appointment (materials and set up costs) that would be worth $56 bucks a day to you. $56 X 5 days =$280 a week. $280 X 50 weeks = $14,000.00 annually. Imagine if you had twenty offices with the same conditions. You would save $70,000.00. If you had 50 offices – you would save $175,000.00. 

When you engage in procedure-based buying, you will identify opportunities to leverage your buying power with manufacturers. One manufacturer may have market leading restorative and cosmetic products, and another may have all the preventive products. Most manufacturers will provide deeper discounts in the form of deviated pricing, net pricing, additional free goods and education to get your business exclusively. This is usually a three-way partnership with the manufacturer, distributor and dental practice. It is a win-win-win that is usually orchestrated by the dealer representative!

Many dental suppliers and service organizations offer operational performance and purchasing analytics to their loyal entrepreneurial customers. These practices rely on this data because it provides critical financial and operational information for them. This data may be complimentary, subscription based or provided as a membership perk. These Cloud based dashboards provide a window into your business comparing your operational data against similar organizations and industry norms. *All dental organizations should try to keep dental supply costs within a point (plus or minus) of 5% of their gross production. 

Formularies – Purchase Agreements – Buying Clubs 

What is a Formulary? 

Most Americans were introduced to the term formulary through their medical insurance. If you have medical benefits that include a prescription discount card or special pricing on medications, then you are enrolled in a formulary. While formularies vary in scope and subsidy, most of us welcome the benefit at the checkout counter. Patients know their insurance has guidelines, limitations, and benefits. The formulary adds value by reducing costs on negotiated medicaments and pharmaceuticals. Another aspect of the formulary is the focus on cost containment. Have you noticed that when your pharmacist fills your medicine prescription they are required to use a generic product if available?

Similarly, the dental dealer has negotiated better pricing from the manufacturers on popular, high-market share items in exchange for access to their select clients (large offices, groups and institutions). The dealer, just like the insurance company, will direct all non-essential and non-clinical items to generics (disposables and infection control items). Unfortunately, most of the practices on Formulary pricing fail to maximize their savings because of noncompliance. In some instances, less than 60% of the purchases from these organizations are Formulary items, thus costing the organization lots of money. While there are many other benefits of Formulary buying, monthly budgets and the e-catalog will have the most significant impact on purchasing. The office is assigned a monthly budget for sundries and they can only order from a proprietary, electronic catalog. The catalog only shows the items that have been approved by the organization. No unique purchases are allowed without management approval thus improving efficiency, supply spend and cashflow.

What is a Purchase Agreement?

Purchase agreements are becoming outdated, but they are still very popular with dentists. These agreements originated in a simpler time when dentists negotiated a discount off the catalog price for generic and branded dental materials from their full-service distributor partner. Today, the dentist uses a much broader product mix because their menu of services has grown to include dozens of cosmetic and elective procedures. Years ago, the manufacturers provided the dealer with a flat discount and the dealer sold those materials at retail or passed along a discount to the dentist based on their volume. Today, the gross profit on dental materials varies for a myriad of reasons. The distributor sells every product used in the dental facility from janitorial supplies to CBCT units and practice management software. The private label (House brand) offering is all encompassing and many of these products are sourced globally so currency exchange rates can affect pricing as well.   

Dentists and dental service companies are much more efficient and sophisticated than they were twenty years ago. They are hungry for analytics and focus on execution. Purchase agreements do not curtail unique purchases and duplication of costly products. They do not regulate purchasing and don’t offer a customized e-catalog. If you are looking for a flat discount off the catalog price and transparency in pricing, then a purchase agreement may be right for you.  

What is a buying group?

A buying group or management service organization (MSO) provides many of the same services of a DSO (Dental Service Organization). They may provide access to discounted dental supplies, clinical and practice management education, equipment service, virtual business/administration services and operational expertise for a fee. The fee can be a percentage of the practices monthly gross production (or collections) or a fixed annual membership fee. Many of these services are sold a la carte or in a service bundle. Either way, the dental office benefits from these products and services immediately, without the investment to develop these processes or infrastructure on their own. 

Buying groups acquire their products from the bigger dental dealers and leverage their purchasing power for deeper discounts just like the national DSO’S do. Buying groups and management service organizations use proprietary and third-party software applications to deliver operational and clinical KPI’S (Key Performance Indicators) for their members. 

Several dental distributors have introduced or are developing their own buying clubs now. Independent dentists should speak with their supplier rep and determine which method of procurement is best for them.  

Remember – Purchasing is finite but growth can be infinite! Comprehensive, quality dentistry delivered effectively – wins!