Last week, David Mayzel and I attended the 4th Annual Definitive Conference on Dental Service Organizations in New Orleans put on by the leading U.S. law firm in that space, Dykema. It was packed (probably over 1,000 attendees) with vendors, DSOs, dentists, investors, and lawyers…. lots of lawyers ;-).
By way of background, DSOs are typically non-dentist corporate entities that provide business and administrative support to dental offices which they are affiliated with. They may own certain parts of the dental practice (not the professional goodwill), but they team up with a dentist who acquires the professional goodwill through a professional corporation. There’s also a business services agreement between the DSO entity and the dentist who owns the professional goodwill for the provision of such services to the dental office. The DSO can own the equipment and rent it back to the dentist, provide marketing and HR support, provide custom and enterprise level practice management solutions, etc.
Here’s what we learned:
- The Americans are about 10 years ahead of us when it comes to dental service organizations.
- About 7.5% of dental practices in the U.S. are affiliated with DSOs (compared to about less than 1.0% in Canada by our estimates). The top 20 DSOs in the U.S. account for 4% of the market.
- The advantages to having a DSO include: allowing dentists to focus on practicing dentistry while allowing the DSO to handle all the business / admin side of things. The DSO will also have buying power with vendors and suppliers, which reduces its costs which in turn should translate into greater access to care for patients because the cost-savings are transferred over to them. DSOs are also capable of raising private financing, which means that they can invest in the capital to establish new dental practices, thereby driving up competition (again, good for the consumer) and even entering into markets that have been long-forgotten. DSOs can also make practices more profitable, which should lead to reinvestment by the dentist into their own practice (education, equipment, staff training, etc.). Bottom line: DSOs bring innovation, economies of scale, profit, and cost-savings.
- There have been THREE PHASES of DSOs in the U.S. The first phases was problematic because the lawyers didn’t seem to check the regulations (which resulted in illegal fee splitting, non-dental ownership of a dental practice, etc.) and no services were ACTUALLY being provided by the DSOs to the dental practice!
- Lessons learned from the first phase: get along with your dentist (otherwise, they can leave and sue and it may put the DSO in a difficult position having to explain its actions in front of a judge), provide services, don’t engage in illegal fee-splitting, pay doctors first, and have ongoing regulatory compliance. These things were incorporated into the SECOND PHASE of U.S. DSOs.
- Some of the problems with the SECOND PHASE included: illegal fee-splitting, single branded DSOs and practices, bad reputation from the first generation, and also there wasn’t much protection from complaints started by patients / employees / competition. This led to more regulation (like in North Carolina, where DSOs are effectively banned!) concerning DSOs, which makes it much harder for them to operate due to administrative barriers they must surpass. And with more regulation there’s more scrutiny by Dental Boards and other governmental bodies.
- So that led to the THIRD PHASE (current phase). The idea here is to have regulatory complaint structures (no illegal fee splitting) which provide actual services and have good relations with their doctor. They also have ongoing / integrated regulatory compliance.
So what does this tell us about DSOs in Canada? Well, we believe that they will start to make significant inroads into the dental marketplace. Right now, there are only a few players operating north of the border, but we believe there will be an influx for these reasons:
- Practices are great investments here in Canada. In 2015, the average dental practice had a 33% return (based on tax return information), but that’s probably closer to 40%. If you take out the dentist’s compensation from that 40%, there would be about 15% remaining for an owner of that practice (just assume it’s purely associate run). A 15% return is WAY better than what you can get in stocks and bonds per year.
- We don’t have a strong Preferred Provider Organization (PPO) presence in Canada. Basically, these entities can help send LOTS of patients to a practice BUT they demand lower pricing on the fees charged when you compare them to what dentists COULD have charged or what the State’s suggested fee guide could have stated as the market price (e.g. for a crown).
- Practices are recession resistant.
- There are many rural communities in Canada which don’t have enough dental practices and which need more competition to meet the very large need.
- As interest rates inevitably go up, prices will come down for many practices. They will stay longer for sale. There will be less interest from dentists looking to pay what sellers think they’re worth… until a DSO comes knocking. A DSO model is theoretically capable of managing a more profitable practice than a one-off dentist and will therefore recognize a higher value for the practice. They won’t be afraid to invest and will have access to non-bank funds to do so (e.g. self-funding or private equity).
Over the next series of blogs, I’m going to get more and more into what’s been happening over the past few decades in the U.S. and talk about how things are coming along in Canada.