“Those who cannot remember the past are condemned to repeat it.”
—Jorge Agustín Nicolás Ruiz de Santayana y Borrás (George Santayana)
First President Carter, then Clinton, and then both the first and second Bush, eroded (liberalized) the lending requirements under which the FM’s (Fannie Mae/Freddie Mac) purchased mortgage loans from lenders. Their goal was noble, to enable more people to be able to afford and purchase homes. The good news is that it worked! Lots and lots of houses got sold.
However, that wonderful intent backfired horribly. Once proper lending standards were abandoned, banks and other lenders were able to make mortgage loans to, essentially, anyone. They made negative amortization mortgages, “no documentation” mortgages, mortgages to people without jobs, to people without income, and to people these lenders knew would be unable to repay the loan. These lenders were able to do all of that almost entirely risk free because they were able to sell those loans to the FM’s, thereby creating more capital, enabling the lenders to make even more loans and generate greater profits.
We all know the result; the practical dissolution of the housing market, tens of thousands of foreclosures, bankruptcies, ruined futures, and ruined lives.
Of course, the financial world learned its lesson. Appropriate risk identification and down payment requirements (underwriting rules) were reestablished and Freddie Mac, etc., can no longer purchase bad loans so bad mortgage loans are no longer made today. But look at the price we all had to pay to re-learn a very old lesson…Don’t grant inappropriate credit to people unable or unwilling to pay you back!
Fast forward to today and guess what? Orthodontists are being inundated with advice from certain consultants, a well-known study club, and 3-4 appliance manufacturers, all generally saying the same thing. Their theme is that orthodontists should do exactly what the banks and other lenders were doing before the housing crash; to ignore risk, to grant low or $0 down payments and long term financing to all patients, with absolutely no regard to the patient/parent’s stability, credit worthiness, or their ability to pay, all to gain a few points of additional case acceptance.
Their message can be summarized as: “Let’s ignore quality of life within the practice! Let’s ignore poor clinical cooperation, missed appointments, excessive emergencies, and patients in treatment longer than diagnosed! Let’s be willing to live with a 500% increase in the risk of a malpractice suit! Let’s ignore destroyed patient relationships! Let’s put up with all of these problems, just so we can have a slightly ‘bigger’ practice.”
These organizations and their spokespersons demonstrate a total lack of understanding of what it takes to have a healthy and balanced orthodontic practice – a practice that generates a very high degree of profitability, while also creating a high quality of life for the doctor and team. They have focused on simplistic statistics, primarily the low amount of bad debt write off in the profession, as justification for their recommendation of no credit checks, low or $0 down payments on all patients, and long term (greater than treatment time) financing for all patients.
A few weeks ago I had a long call with one of our newer clients who had just reached his first year anniversary on our system of credit management. When this single doctor, single facility, practice hired us a year ago, he was collecting $201,000 per month. He was seeing 66 new exams each month and had a case acceptance rate of 62.9% (a terrible rate but slightly above the national average). His monthly income made his practice, by the standards of almost anyone in orthodontics, highly “successful,” except he and his team were not happy! He had, for the past three years, been following exactly what he had been hearing from persons he considered to be “leaders” in the profession, in this case from a study club. Those so-called leaders recommended low down payments for all who asked, long term financing, and not bothering to learn anything about the risk that certain of his patients presented to the practice well-being. The approach was to do whatever it took to get the patient started.
When he first became our client, 27% of his 659 open accounts (214 patients) were 30 days or more past due, and 65% of his entire account load, 428 patients, were routinely getting one or more days past due every single month! Nevertheless, his bad debt write-off was less than 1% of gross which is not at all unusual for an orthodontic practice, even one with this serious level of delinquency. This doctor’s greatest concern though was not the delinquency. His concern was that due to failed appointments, emergencies, poor clinical cooperation, and patients in treatment longer than diagnosed, his clinic was a mess! The administrative situation was as bad or worse. His Financial Coordinator was overwhelmed with the workload associated with trying to collect from this volume of delinquent patients. His Appointment Coordinator was overwhelmed from trying to keep the schedule productive when 20%+ of all scheduled patients no-showed or cancelled appointments. The lion’s share of these problems were caused directly by his delinquent patients!
Today, this practice has cut 30-day delinquency to 82 patients, still far too high but they are well into the process of eliminating patient delinquency. Clinical cooperation has improved, missed appointments are way down, and the case acceptance rate, after instituting our “draconian” (the term one of the newer consultants on the ortho scene recently used when describing our system) financial policies, has decreased from 62.9% to 62.1% – less than a one point decline. And, due to improved financial arrangements and excellent delinquency reduction efforts, he has enjoyed a $20,000 per month increase in cash flow. In another year, his case acceptance will be up to better than 70%. Reduced delinquency means more new patients referred by existing patients (delinquent patients do not refer!) and every Treatment Coordinator in the country knows that case acceptance rates among patients referred by other patients are the highest of any patient source.
My point is simply that the doctors, appliance salesmen, and consultants teaching this “ignore risk” drivel, typically without one ounce of education or experience in risk management or credit and collection training, are persons who clearly have entirely different goals for their orthodontic audience than do we. Their goal, obviously, is growth but that growth, when it happens, comes with little to no regard to the consequences of the policies that fueled that growth! The purpose of the Zuelke & Associates system (read our Mission Statement to the right) is to attract a group of doctors as clients who measure their success, their achievement, not simply by how big they are, but rather how healthy their practice is overall and how much they and their team enjoy coming to work every morning. I am quite proud of the fact that the clients on our support program are focused on maintaining a highly profitable practice along with an impeccable quality of life within the practice. They do not take shortcuts to growth, shortcuts such as abandoning intelligent practice financial policies simply to get an extra case start on a patient that is among the group that will cause 80%+ of all patient related problems (clinical, administrative, and social) that occur in the practice.
I would like to see our nation’s 2008/2009 housing debacle remain in our history and not see it repeated in our orthodontic profession.
