The “Active Patient” Conundrum
Knowing how many active patients a practice has should be one of the most important metrics for virtually all buyers, and correspondingly should be an important metric for all sellers. While most sellers and buyers would agree with that statement, the concept of an active is one fraught with misunderstanding and confusion. The reason for this is pretty simple – there is very little consensus about what an “active patient” actually is. To clearly understand what an active patient is, you need to first understand why it is important to know.
The value of any business, including a dental practice, is directly related to the magnitude of anticipated future profits. Without profits, or at least the anticipation of same, a business is worth nothing. Without patients, a dental practice does not have the ability to produce revenue or profits. Assuming adequate space and staff, it would be correct to assume that a practice will generate more revenue if it has more patients. If a practice were to double its patient base, it would be reasonable to assume that it could also double its gross revenues. The expenses in a dental office are largely fixed, that is, they do not go up as the revenue goes up (i.e. rent, insurance, telephone, etc.) As a result, doubling gross revenues will have the effect of increasing profit by about a factor of four, which in turn will increase the value of a practice by a factor of four. Therefore, patients are an extremely valuable commodity to a dentist and a very useful indicator of future profitability.
Given the above, it should be apparent that knowing how many active patients a practice has is an important part of projecting the value of a practice. The question then is: how do we define an active patient? What we really want to know is how many patients does the practice have that will, on an ongoing basis, contribute to the gross revenues of the practice. After 40 years of observation I would argue that any non-emergency patient who has been treated in the practice within the last twenty-four months is likely to continue to come back. Will they all continue to come – not likely, but there are also patients who may not have been to the practice within the last three years, who will come back to the practice at some point in the future. The number of patients who have been to the practice in the last twelve months is not an ideal indicator because we know that there are patients who will continue to contribute to the practice, but who do not always see their dentist every twelve months. What statistics do tell us is that about 85% of contributing patients come in every 12 months, with the remaining 15% coming in on a 24-month rotation.
What all of this tells us is that if we want to be able to effectively forecast future practice revenues, we need to be able to calculate the number of active patients who will contribute to those future revenues. Knowing the number of active patients can also help with the historical analysis of the practice which can be useful in observing areas of upside potential. For example, if we know that on average a practice should be producing $260 of hygiene revenue per active patient per year, we can measure the practice’s actual production against this metric. If the actual per patient per year hygiene production is lower than the average, then we know that there is some upside potential in the practice. Knowing this would be very useful for a buyer, or for a potential seller looking to increase practice value prior to a sale. Being aware of under performing areas of the practice is useful for any dentist looking to enhance the profitability of his or her practice.
To summarize, active patients are not just the patients who have been treated by a practice in the previous twelve months. True active patients are those patients that will continue to contribute or sustain a practice over an extended period of time. They are the patients that can be reasonably expected to financially contribute to a practice on an ongoing basis. These are active patients for sure, but perhaps more correctly they are Sustaining Patients.