Inflation hasn't been an immediate concern for dental practice owners, but it is looming for 2022 and some fear that inflation could lead to large interest rate increases, cooling down patient billing as household expenses increase.
The problem is that non-insurance billing increases can only go so far to keep pace with rising inflation.
Rising inflation has become a top concern for corporate CEOs, and now dental market analysts fear it will hurt the profitability of both large and small practices with higher expenses, debt servicing costs, and a potential slowing of patient flow through the practice.
Although inflation may not be the most pressing issue for most dental practice owners right now, it is triggering some anxiety about 2022 and beyond as it’s likely that we’ll be seeing multiple interest rate increases from the U.S. Federal Reserve. This is not only making it more expensive to service debt, but it also raises business costs and it potentially reduces the interest to buy practices by private equity firms.
I can say for certain that for many of the private equity companies that I represent, inflation is absolutely on top of mind especially since a report published this week by The Conference Board, a business research group, stated: “inflation was the second-biggest threat to business, having moved 20 spots up the list since last year.” The 900+ CEOs that were surveyed also believed pressure from increasing prices would last until mid-2023 and that they were actively working to mitigate the upward pressures for things like wages and raw materials for manufacturing, due to supply-chain bottlenecks, labor shortages and volatile energy prices.
To cope, large businesses like Henry Schein or McKesson will likely plan on passing increases down to practices and to a lesser degree – if at all - absorbing price increases into profit margins. Jumping to new suppliers is not an option for the practice owners I chat with as they do not see changing vendors as a viable solution—usually, because they’re unwilling to risk deliverability from a new vendor when already coping with tight supplies.
Even last year, practices owners reported that were seeing requests from vendors to update contracts and raise prices, frequently by double digits. In 2022, that trend will not only continue but I expect it to accelerate. Because of that, inflation is going to negatively affect the profitability of practices as they are heavily labor based.
As mentioned previously, billing rate increases can only go so far to keep up with costs. Inflation jumped at its fastest pace in nearly 40 years last year, a 7% spike from a year earlier. With inflation, you must look at it in context. If inflation is greater than rate growth, that’s going to reduce the value of your revenues, and by extension, your practice. It may not be much of a concern in the short term, but the longer that high inflation persists, the bigger the loss in practice value could be.
For dentists near retirement that may be thinking of selling the practice, options are quickly shrinking. There is still solid interest in dental practices by private equity firms, but the market is becoming volatile which puts downward pressure on the sale price of the practice. Therefore, it behooves the practice owner that is considering retirement or selling to act now before the double-whammy of inflation and interest rates further cools interest in the acquisition of dental practices. Otherwise, if the economy does indeed slow precipitously, the only option the practice owner may have is to retain the practice until a time when the economy is recovering and expanding.
Stan Kinder specializes in connecting dental practice owners that are considering selling with private equity firms looking for practices to acquire. To get an idea of the worth of your practice, download our 'Adapt or Die!' report and receive our 'Dental Practice Value Cheat Sheet' as a bonus.