While most of this website is oriented towards owners of dental practices, we would be remiss if we didn’t address the topic of associate dentists.
Associates can become embezzlement victims in several ways. First, they can end up being underpaid relative to what they are entitled. As much as we would prefer to believe that this doesn’t happen, sometimes this results from an avaricious practice owner fiddling with the books to the financial detriment of the associate.
At other times, it happens because of mistakes being made at the front desk. For example, if treatment is coded to the wrong provider, this may lower the associate’s pay. Particularly when a dental office first adds a new associate, a kind of thinking is required from front desk staff that may not have been there before. In a solo practice where hygienists are salaried, it makes no financial difference whether a recall exam is coded to the dentist or the hygienist. For this reason, it is understandable that many small offices aren’t used to being careful about certain details. However, when an associate comes on board, the need for more careful recordkeeping suddenly arises, and sometimes front desk team members and even practice owners fail to realize this.
There is also the possibility that embezzlement is happening at a practice and that one or more associate dentists join with the practice owner in becoming victims.
There is a particular danger when different producers in the same practice are compensated asymmetrically. For example if you are paid based on fees collected and another associate working beside you is paid based on productivity, the assymetry creates an opportunity for an enterprising embezzler.
And finally, buying all or part of a practice where a staff member is stealing can provide a buyer with a difficult and unforeseen introduction to practice ownership, when you suddenly realize that you need to pay for and invest time in cleaning up a mess left by your predecessor.
Information that should be provided to an associate
- On making an agreement to become an associate, ensure that the agreement provides sufficient access to practice information to ensure that your compensation is being properly determined. Information sharing is always a touchy subject for a practice owner, who can understandably be expected to give you information that may have commercial value if you establish your own practice nearby or take an associate position with a competitor. However, you need to be firm in insisting that you need sufficient access to the practice management software to confirm that your compensation is being determined properly.
Normally, the compensation formula for an associate is based on one of two measurements: production or collections.
If your pay is calculated on production, you require day-end reports from the practice management software that show both your gross production and any adjustments.
If your pay is calculated based on collections, you need this production report plus the collections report showing who paid and how much. You also need a monthly receivables listing that shows all amounts owing for work performed by you. This report should be “aged” – in other words, it should show how old the amounts owing are, as well as the report showing open insurance claims for your work. Your agreement should also provide you with access to the “ledger” for each patient for which you have a balance. The ledger is a summary of individual transactions on a patient’s account.
We stress that your right to access this information should be enshrined in your associate agreement. If that isn’t done, you will be in a difficult position later if you think you are being underpaid because you will not have access to the information to determine if this is true.
2. Review the production, adjustments, and collections, if paid on collections, daily. Look at the receivables monthly, and compare them to the receivables listing you received the previous month. Some questions to ask yourself when reviewing this information:
In all situations:
- Did all patients seen today show up on the production report?
- Were the procedures performed today accurately recorded in the production report?
- Do you understand and agree with all adjustments against production given to the patients you saw today?
If paid based on collections:
- Did the front desk collect co-pays in accordance with office policy from patients who were in today?
- What efforts are being taken to collect on balances for your work that is overdue? Are there any patients you should call yourself? Should any patients be sent to a collection agency? If you think collection efforts on your patients are inadequate, you may wish to discuss this with the practice owner.
- If insurance claims have been rejected, have they been resubmitted with whatever extra information is needed?
- Are patients with significant balances being reappointed with you? If yes, why?
- Do balances age properly? In other words, if an amount was 30 days past due a month ago, and it hasn’t been paid, it should now show up in the 60 days past due column.
- Is the change in receivables for your work reflected in your pay? If receivables decreased by $15,000 this month, I should receive ($15,000 plus collections for this month’s work) x payment percentage.
- Are payments from patients on whom multiple providers worked being applied to the correct provider? A symptom that this is not being done is when patients have “double balances”. This phenomenon means that a patient has a debit (i.e., positive) balance with one provider and a credit (negative) balance with another provider.
When buying a practice
Many new practice owners have had an unfortunate awakening when they realize that the practice that they just purchased has an embezzlement issue. A second shock ensues when the new practice owner realizes that the people he or she thought were protecting him or her from this eventuality have no responsibility. The new owner is left to their own devices to deal with the mess.
Obviously, a dangerous scenario for buying a practice with active embezzlement is when the buyer is unfamiliar with the practice, but it also happens when the new owner has been with the practice for some time as an associate. In many cases, when embezzlement comes to light after a purchase, we expect that the former owner was unaware that stealing was happening. Unfortunately, there are also situations where the former owner knew or suspected that embezzlement was taking place but didn’t share that knowledge because he or she wanted the sale to you to go through and thought that you might have been scared away if he or she told you what they knew or suspected.
The other scenario that afflicts buyers is that inaccurate information is provided about the purchase – revenue, number of active patients, number of new patients per month, etc. Sometimes this is accidental, and at other times it is a deliberate action of the selling dentist looking to extract every possible dollar from the sale. Sadly, in a typical year, we look at dozens of situations where the buyer of a practice retains us to work with their attorneys to determine if the seller has overstated attributes of the practice.
How to protect yourself when buying
Here are some considerations and steps to take when buying:
- The people who assist you should have specialized dental expertise. Most of us have friends who are lawyers and accountants, and it is often tempting to use them to represent you in a purchase. No matter how well-intended these people are and how reasonable their fees may be, there is no substitute for dental-specific expertise when protecting you. A purchase agreement specifically designed for dental transactions will give you better protection than a generic agreement also used to sell car dealerships. While most embezzlement could not be spotted by a CPA doing a pre-purchase financial review, a dental CPA certainly has a better chance to see that something is amiss than a non-dental one.
- The broker doesn’t work for you. Normally a broker is hired by and compensated by the seller. The broker normally takes information provided by the seller and uses it to determine a price and provide you with an information package. Brokers normally stamp a big disclaimer across all of their information, indicating that they have not verified or audited it in any way. So, if the broker is fed incorrect information by the seller, either deliberately or inadvertently, the broker will quickly point to this disclaimer when challenged.
- Do a chart audit. It amazes me how often this step is not done. As well as helping you plan what you are going to do with the resource you just purchased, chart audits can help you spot where the information you have been provided does not make sense, such as when the practice where 4,000 active patients are claimed, but there is only a single hygienist.
- Review information in the practice management software. You may want to enlist the help of a consultant or software trainer for this.
- Interview the staff. These interviews are often a sensitive area because the selling dentist may not want it publicly known that he or she is selling and certainly does not want to get their staff stirred up if a purchase falls through. The way to make this palatable to a seller is to make it a “condition precedent”. This concern means that buyer and seller have agreed that interviews will occur, but it only happens after there is a signed agreement in place. We can’t promise you that this process will allow you to spot an embezzler, but it may help you spot future problem employees.
- Be alert for “non-replicable” revenue. Sometimes this comes from a special skill that the selling dentist possesses (such as treating temporomandibular disorders or sleep apnea) that you will not be able to replicate, it may be from his or her ability to charge above-market fees for certain procedures, and at other times it may even be from some non-clinical business activity carried on by the dentist, such as speaking fees he or she earns, or even revenue from some kind of multi-level marketing. If the broker has failed to segregate this revenue, you may end up paying for revenue you can’t possibly benefit from. A comparison between revenue according to practice management software and revenue from accountant-prepared financial statements may give some indication of this, as will looking at revenue by procedure code from the practice management software.
- Have a holdback for part of the purchase price. Deferring the payment of some portion of the purchase price provides some incentive for the seller to behave properly. Often the final accounting for a purchase cannot be concluded in real time and needs some time to be finalized. Also, negative information sometimes emerges after the purchase is concluded, and if the seller has already received the full purchase price, the buyer’s position is much weaker than if part of the purchase price can be “frozen” until the dispute is resolved. This holdback is particularly important when the seller has agreed not to compete within a certain radius. As long as escrow funds are still being held, the seller is unlikely to break this restrictive covenant. When funds are held back for the purpose of ensuring seller integrity, the money should be funded and placed in escrow at closing, with a specific escrow agreement dealing with it. This escrowed money is not the same as the seller agreeing to “hold paper” to provide part of the financing for a purchase, which has a different timeline and terms.
- Have a proper, dental-specific, agreement. The benefit of an agreement addressing issues specific to a dental purchase goes back to using an attorney who specializes in dental transactions. The agreement should do a few important things:
- Provide “representations” of any key financial metrics on which you are relying. For example, if you have been told that there are 4,000 active patients and if this is important to you, this number should be stated in the agreement. Don’t assume that because this information is on a broker’s “cut sheet” that you have any ability to hold the seller to it. As mentioned, if the information provided by the broker is inaccurate, the seller will blame the broker, and the broker will blame the seller.
- Define the key terms. Metrics that you rely on such as “active patient” need to be defined in the agreement. If it is not, you will never be successful in getting a partial refund for a deficiency. To correctly determine the number of active patients, you first need a clear and operable definition. The legal system relies heavily on precise wording to express the intent of parties to an agreement, and you should never bet the farm on the concept that everyone can agree on whether a specific patient is active or not in the absence of an operable definition.
- Deal specifically with copayments in the agreement. Many buyers have had bought practices without realizing that the seller was habitually not collecting copayments. This policy puts the buyer in the terrible position of either having to continue the seller’s unethical behavior to deal with a revolt from patients who are suddenly asked to pay for a portion of their dentistry. The seller’s handling of copayments should be made clear in the agreement so that you do not get this kind of surprise.
- The seller should specifically state that he or she is not aware of embezzlement in the practice and either has not consulted any professional about embezzlement in the practice in the past two years, or if a professional has been consulted, outline who and when. If it is clear that the seller has had embezzlement concerns, this might be a time to insist on the seller having a proper investigation done, which should be at her or his expense and completed before the sale closes.
For many dentists, moving from being an associate to a practice owner represents an important milestone in their dental careers. We hate to see what should be such a joyous event smirched by the horrible realization that what you acquired was not what you thought you were getting. Following the steps in this chapter is a great way to minimize this risk and protect yourself. Feel free to reach out to us if you have any concerns.