Should commission pay be based on gross or net production?
Dianne Glasscoe Watterson, RDH, BS, MBA
I came across an article that you wrote for a Dental Economics pertaining to base plus commission pay for hygienists. My question is this: Should the commission be based on gross production or production after insurance adjustments? I work for a practice that compensates the hygienists by commission as a percentage of net production.
When we first began this type of pay, everything was great. However, after about 10 months, most of us are unable to make a bonus, although the hygiene department has increased production by $100,000 in one year. Something does not seem right. Could you please explain commission based on gross production versus commission on net production? I need to understand this better.
You’ve asked a great question, one that many of your colleagues have faced. Let’s begin with a little history.
Years ago, all practices were fee-for-service. Doctors charged and received their full fees. Hygienists who were on commission pay were compensated on a percentage of their total (or gross) production.
Then managed care entered the picture. Companies that offered dental benefits switched to plans with preferred provider organizations (PPOs) that mandated participating offices agree to accept a reduced fee for patients with that plan. Some dentists resisted the notion of reduced fees for plans, but as time went on, many dentists found they could not keep busy without accepting some plans. The fact is that most patients want to go where their plan is accepted. So, many dentists capitulated and signed on to plans in order to keep warm bodies in chairs. The statistics are that only about five to 10% of dental offices today are fully fee-for-service.
Over time, PPOs have changed. In the past, participating offices were not allowed to charge a patient the difference between the full fee and what the plan paid. Now, many plans allow offices to charge the patient a portion of the difference. Participating offices still have to reduce their fee somewhat—a discount mandated by the plan—but patients are finding they have to pay more and more out of pocket.
In the past, I was firm in my belief that since hygienists have no part in the business decisions that dentists make with regard to plan participation, commission hygienists should be paid based on their gross (or true) production, based on the full fee. However, I also know that doctors can’t pay out what doesn’t come in. The amount of the discount, often called a “write off,” is subtracted from the full fee. This is the adjusted (or net) production, meaning it is adjusted for write offs. The adjusted amount is what the office can expect to be paid. The reality is that the difference between the doctor’s full fee and what the office actually receives can be significant.
It all depends on the office and the situation. I’ve consulted in offices that write off very little, mostly due to their geographic location, as they are located in areas of the country with little PPO influence. I’ve also been in offices that write off huge amounts. My experience is that offices located in major metropolitan areas tend to be affected by PPO influence to a greater degree than their more rural counterparts. I’ve see offices writing off 35% of their gross, making it very difficult for the practice to stay financially healthy. I actually consulted in an office where the doctor didn’t receive a paycheck for more than a year. By the time he paid his bills and employees, there was nothing left for him, and it was because of such heavy PPO participation with terribly low reimbursement from plans. (That’s another story, as plans differ widely in reimbursement rates.)
My favorite compensation method for hygienists is a base pay plus commission arrangement.
As a consultant, I always want to know how much is being written off each month. If an office can keep its write off amount to 10% or less of the gross production, I (and most offices) can live with that. However, many offices have much higher write off amounts than that. I’ve even been in offices that have no idea of the amounts they are writing off, as they have multiple fee schedules. Again, these are business decisions that doctors make. Some doctors do not monitor their write-off amount because they find it depressing. They just do not want to know. Others cite the difficulty in monitoring because of so much plan participation, which I find a little ridiculous. If an office always charges their full fee, computers will do the work in adjusting for the write-off amount. Still, I think it is wise to monitor and be aware of how much is being written off. Having this information may guide a doctor to drop some plan participation based on business activity, etc.
Although you state the hygiene department production increased by $100,000 in one year, how much was collected? That’s what you need to know. Being paid on production—gross or adjusted—assumes that business assistants are doing their jobs and collecting the money. That assumption may or may not be true, which brings me to another kink in the commission compensation discussion.
Some offices are now paying on collections rather than production. If you are being paid on what is actually collected, I would want you to make sure those collections include what patients have to pay out of pocket and what insurance pays. That is the true collection amount.
Unfortunately, business assistants can make mistakes in allocating collections, especially when a large insurance check has to be split among several providers. All you can do is hope they get it right so you get what you are supposed to get.
Looking at the big picture, computers are great at spitting out data. I know all practice management software programs are not the same quality. Still, you should be able with a few clicks to find out your gross production, adjusted production, and collections attributable to your production for a set period of time.
My favorite compensation method for hygienists is a base pay plus commission arrangement. The base is there to protect the hygienist in case the schedule completely falls apart, and the commission rewards the hygienist when there is a great production day. The commission amount is generally 25-30% of the excess of the production goal. For example, say your daily goal was set at $900. If a hygienist produces $1,000, the excess is $100. 30% of $100 is $30. So, for that day, the compensation would be the base plus $30. The commission is a good incentive to push a little harder. Some hygienists are motivated by it; some are not. I still like having the base, because hygienists are employees and cannot prevent the occasional low production day when the schedule falls apart.
Offices that become financially unhealthy get that way because of business decisions made by management, and while staff members have no input into those decisions, they often suffer the consequences. I hope your situation smooths out and you are compensated in a fair and equitable way for the hard work you do. You deserve no less!
All the best,
DIANNE GLASSCOE WATTERSON,RDH, BS, MBA, is an award-winning author, speaker, and consultant. She has published hundreds of articles, numerous textbook chapters, and three books. Dianne’s new DVD on instrument sharpening is now available on her website at wattersonspeaks.com under the “Products” tab. Visit her website for information about upcoming speaking engagements. Dianne may be contacted at (336) 472-3515 or by e-mail at [email protected].