PPO (Preferred Provider Organization) participation has become standard for most dental practices. Many practices participate with so many insurance plans that they don’t accurately understand the financial impact of that participation. Over 30 years of dental consulting, I’ve observed that the practices most surprised by their profitability shortfalls are often those with heavy insurance participation and low fee schedules.
Understanding how PPO participation affects profitability requires looking beyond the fee schedule to the entire financial impact, including write-offs, administrative burden, delayed payment, and opportunity cost.
The Mechanics of PPO Profitability Impact
When you participate in a PPO, the financial impact happens through several mechanisms.
Fee Schedule Reduction (The Direct Impact)
The most visible impact is fee schedule reduction. You agree to provide services at the insurance company’s allowed fees, which are typically 20 to 40 percent below your standard fees.
Example comparison:
Your standard fee: $250 PPO allowed fee: $180 Reduction per procedure: $70 (28 percent reduction)
If you perform 200 of this procedure annually: Annual revenue reduction: $14,000
Multiply this across your entire case mix and the financial impact is substantial.
Insurance Adjustments (The Hidden Impact)
When a patient has insurance coverage and you submit a claim for your standard fee, the insurance company’s “allowed amount” is less than your fee. You must write off the difference. This write-off appears on your profit and loss statement as an insurance adjustment or contractual adjustment.
The challenge is that many dentists don’t fully track or understand these adjustments. They appear as a line item on the P&L but aren’t always clearly connected to PPO participation.
Request a report from your practice management software breaking down insurance adjustments by carrier. You’ll likely discover that PPO participation results in substantial adjustments.
Administrative Costs (The System Impact)
PPO participation requires administrative infrastructure. Someone must:
- Verify insurance coverage and benefits
- Submit claims to multiple carriers with different requirements
- Follow up on denied claims
- Manage patient cost estimates and payment expectations
- Process explanations of benefits
- Collect patient portions of costs
These tasks consume staff time. A typical practice might invest 0.5 to 1.0 full-time equivalent staff position in insurance administration.
At $25 per hour, that’s $13,000 to $26,000 annually in staff cost dedicated to insurance processing.
If participating in PPOs generates, say, $300,000 annually (30 percent of a $1 million practice), and administrative cost is $20,000, that’s 6.7 percent of PPO revenue consumed by administration.
Collection Challenges (The Cash Flow Impact)
Insurance participation affects your cash flow through collection timing and percentage collected.
Insurance claims might take 30 to 60 days to pay (or longer if denied and resubmitted). Patient portions might never be collected (many patients don’t pay their out-of-pocket costs).
A practice with 40 percent of revenue from insurance might have significant accounts receivable from pending insurance claims and uncollected patient portions.
If you had $150,000 in accounts receivable aging 30 to 90 days primarily from insurance claims, that represents significant working capital investment and cash flow delay.
Opportunity Cost (The Strategic Impact)
PPO participation locks you into specific fee schedules, often for multi-year terms. This opportunity cost might not show on your P&L, but it’s real.
If you’re locked into a fee schedule 30 percent below your standard fees for three years, you’re forgoing revenue growth or fee increases for that period.
If your standard fees increase 3 percent annually but your PPO fees are locked, the gap widens each year.
Calculating the True Cost of PPO Participation
To understand the true cost, conduct a comprehensive analysis.
Revenue Component
- Identify revenue from each major PPO
- Calculate the fee schedule discount percentage (allowed fee vs. standard fee)
- Calculate annual revenue “haircut” from that discount
- Sum across all PPOs
Example:
- PPO 1: $100,000 revenue, 25 percent discount = $25,000 annual reduction
- PPO 2: $80,000 revenue, 30 percent discount = $24,000 annual reduction
- PPO 3: $60,000 revenue, 20 percent discount = $12,000 annual reduction
- Total PPO revenue: $240,000
- Total fee schedule impact: $61,000 annual reduction
Administrative Cost Component
- Identify all staff costs related to insurance administration (coding, claims submission, follow-up, patient estimates)
- Estimate the percentage of this role dedicated to PPO administration versus direct patient care support
- Calculate annual cost
Example:
- Insurance coordinator salary and benefits: $35,000
- Percentage of time on PPO-specific work (vs. direct patient care): 50 percent
- Annual PPO administrative cost: $17,500
Collection and Write-Off Component
- Review your accounts receivable aging
- Estimate how much aging receivable is from insurance companies (pending claims, delayed payments)
- Calculate the working capital investment (money outstanding)
- Estimate the percentage that becomes write-offs (never collected)
Example:
- Total accounts receivable: $80,000
- Percentage from insurance companies: 60 percent = $48,000
- Estimated ultimate uncollectable write-off rate: 8 percent = $3,840 annual loss
- Average collection delay: 45 days (affects working capital)
Total Cost Analysis
Total annual cost of PPO participation for this example:
- Fee schedule impact: $61,000
- Administrative cost: $17,500
- Uncollectable write-offs: $3,840
- Total: $82,340
For a practice with $240,000 in PPO revenue, this represents 34.3 percent of PPO revenue consumed by PPO participation costs.
In other words, the practice is truly collecting $240,000 - $82,340 = $157,660 from $240,000 in billed PPO services.
The Profitability Comparison: PPO vs. Non-Participating
Understanding how profitability differs between PPO and non-PPO patients reveals the financial impact.
Let’s compare two scenarios for the same clinical services:
PPO Patient Scenario:
- Billed amount (standard fees): $1,000
- PPO allowed amount: $700
- Insurance pays: $560 (80 percent of allowed)
- Patient owes: $140
- Your collection from insurance: $560
- Your collection from patient: $70 (50 percent of patient’s portion collected)
- Total collected: $630
- You wrote off: $370
- Actual net revenue: $630
Non-PPO Patient Scenario:
- Billed amount: $1,000
- Insurance doesn’t participate; patient is out-of-network
- Insurance reimbursement to patient: $500 (they might not seek reimbursement)
- Patient pays your office: $850
- You receive: $850
- Write-off or adjustment: $150
- Actual net revenue: $850
The non-PPO scenario generates $220 more revenue (35 percent more) for identical clinical services.
However, the non-PPO patient might be unhappy about out-of-network status and might switch providers or decline treatment. The calculation is complex, but the general principle holds: PPO participation reduces revenue significantly.
Insurance Mix and Profitability
Your overall profitability is heavily influenced by your insurance mix.
A practice where 60 percent of revenue is PPO and 40 percent is cash/non-participating will have significantly lower profitability than one where 40 percent is PPO and 60 percent is cash/non-participating, assuming identical case volume and overhead.
The profitability gap might be 15 to 20 percentage points (e.g., 25 percent net profit margin vs. 40 percent net profit margin).
Understanding your insurance mix is critical to understanding your profitability. If your profitability is lower than you’d expect, heavy PPO participation is often the culprit.
What Practices Can Do About PPO Profitability Impact
If PPO participation is reducing profitability, you have several options.
Option One: Reduce PPO Participation
Evaluate whether participating in all PPOs makes financial sense. Analyze each PPO’s contribution to revenue and profitability. Drop PPOs with the lowest profitability contribution.
The challenge is that dropping PPOs risks patient loss. Use the analysis from the Should You Drop Delta Dental article to make informed decisions.
Option Two: Increase Standard Fees and Adjust PPO Discounts
If you haven’t increased your standard fees in several years, they might be below market. Increasing your standard fees (which increases the basis for PPO calculations) effectively increases PPO fees if PPOs are based on a percentage of standard fees.
However, many PPOs use fixed allowed amounts, not percentage-based calculations. Check your contracts.
Option Three: Improve Administrative Efficiency
If PPO administration is consuming significant staff time, improve efficiency. Implement better systems for verification, claims submission, and follow-up.
Some practices use technology to automate insurance verification and claim submission. This reduces staff time and improves collection percentage.
Option Four: Focus on Non-PPO Revenue
Actively build a patient base with non-PPO insurance or cash patients. These patients are more profitable and reduce PPO dependence.
Develop cosmetic and implant services that attract cash patients. Create membership plans that provide alternatives to insurance.
Option Five: Restructure Your Payer Mix
Over time, intentionally shift your payer mix toward less insurance and more cash/non-participating patients.
This requires deliberate marketing to attract higher-income patients and development of services that appeal to them.
The Strategic Perspective
The practices most successful at profitability often have strategically managed PPO participation. They:
- Participate in high-volume, reasonable-fee PPOs
- Carefully evaluate marginal PPOs before participating
- Drop unprofitable PPOs rather than keeping them out of inertia
- Build alternative revenue sources (cosmetic, implants, membership)
- Manage their payer mix strategically over time
Many practices approach PPO participation passively, participating in every plan that will have them. Strategic practices make deliberate participation decisions based on financial analysis.
Planning for PPO Profitability
If you’re trying to improve profitability, analyze your PPO situation:
- Calculate PPO participation costs (fees, administration, write-offs, collection delays)
- Identify your lowest-profitability PPOs
- Evaluate whether dropping them makes sense
- Consider renegotiating fees with major PPOs
- Develop alternative revenue sources to reduce PPO dependence
PPO participation is necessary for most practices to attract adequate patients. But it’s critical to understand the financial cost and make strategic decisions about participation rather than accepting every PPO that approaches you.
The practices with the highest profitability are often those with the most intentional approach to PPO participation and the most developed non-PPO revenue sources.
Contact JoAnne to analyze your PPO profitability and develop a strategy for optimizing your insurance strategy. With expertise in practice economics and 30+ years of consulting, JoAnne helps dentists understand the true cost of PPO participation and make strategic decisions about their payer mix.