E1: Podcast: DSOs are neither friend nor foe

Thanks for listening. My name is Dr. Kevin Coughlin. Over the next several minutes, I hope you enjoy the following podcast. This podcast is meant for dentists, for the general population and it’s a combination of insightful information to inform you of a monumental change that is occurring, not just in health care but in particular, dental health care.

I’ve been practicing general dentistry since 1983. And I remember in the early 80s the influx of individuals that had dental insurance. At that point in time, dental insurance was a minor part of dental health care. Our organizations, our profession were promised more patients, better access to care, increased amounts of dental treatment being performed and completed because dental insurance would provide a better access to care and lower fees. We can argue whether they fulfilled their commitment or not, but clearly today between government programs and dental insurances, depending on the region you practice in the United States, between 60 and 80 percent of the population has some form of third party payment, whether it’s PPOs, dental HMOs, indemnity insurance plans, the list goes on and on.

What’s occurring now and has been occurring quietly is corporate dentistry. At this point in time in 2016, it is the fastest segment of the dental health care program. Corporate dentistry is growing at almost 40 to 45 percent each year. Corporate dentistry is a catchall term. It can mean many different things and it can come under many different headings. Some have positive and some have negative connotations. My job is not to tell you whether it’s right or wrong for a profession, but to provide knowledge and information so as clinicians you can make informed consents and decisions based on accurate information of whether you feel it is best for your practice and teach you how to compete with these corporate entities.

At present time, besides corporate dentistry, they many times go under the name of a Dental Service Organization or DSO. Sometimes they’re referred to as an MSO, which stands for Managed Service Organization. I don’t want you to spend too much time getting bogged down with the particulars of the name, although they do have different definitions. In general, a DSO can operate as a standalone entity. A Managed Service Organization can only operate if there is already in existence a DSO or Dental Service Organization.

The critical point, in my personal opinion is, are the DSOs or MSOs influenced, owned or invested by venture capitalists or equity type firms. This is not to say it’s good or bad, but to understand that when a venture capital company or equity firm has dollars invested or actual ownership in these corporate entities, there can perhaps be a conflict of interest. This conflict of interest is brought about because in many cases, equity firms have a much shorter lifespan for investment. In general, dealing with the dental profession, there are trying to triple or quadruple their money in a three to seven year timeframe, then generally they leave that organization and look for other business opportunities or investment opportunities and a different group will take over that initial corporation. They may have the same wants and needs or they may need to modify or change.

As a patient looking for dental care or as dentist looking to invest in Dental Service Organizations, perhaps sell their practice to a Dental Service Organization or perhaps even join a Dental Service Organization, it’s critical that you understand some of the fundamental dimensions that make up a Managed Service or Dental Service Organization. First and foremost, the Dental Service Organization can be formed by a group of dentists. The company is usually owned and operated by practicing dentists, although they don’t necessarily have to be licensed in the state that they’re practicing, in most cases they are large group practices that are run and operated by dentists and your goal is to provide a high level of care and service and to maximize a profit, like any business, within the ethical standards of our profession.

In many cases, these Dental Service Organizations will lack expertise particularly in the management of small, medium and large businesses and will hire what is referred to as a Managed Service Organization. This Managed Service Organization may or may not be run and owned by dentists. Many times there are entrepreneurs and business men and women that are part of the board and the controlling aspect of this aspect of the Managed Service Organization. The critical aspect as discussed earlier in this podcast is, is that Managed Service Organization have an investment firm such as an equity firm or a venture capitalist investing money in that Managed Service Organization, or do they have some kind of ownership in it? My personal opinion is that is the most critical factor in determining whether it may be the right entity for you to join or receive care and service from.

Please keep in mind that like with all things there are excellent corporations, less than excellent corporations and poor corporations. Never lose sight of the fact that corporations are run by men and women. To me the critical aspect is what is their short and long term goal, and what is ultimately their desire. And in most cases venture capitalist firms provide capital but they provide it with one thing in mind, to make a profit. And in my personal opinion, in most cases they’re in it for more of a short term than a long term.

Presently in the United States, the largest corporate entity in dentistry and dental health care is called Heartland Dental, the second largest is Aspen Dental, the third largest is Pacific Dental and the fourth largest is DCA or Dental Care Alliance. These corporate entities have different general philosophies. The two basic philosophies are, one; more or less like a franchise. They go under a specific name like Aspen, Heartland or Pacific, and they are run very much like any franchise. There are specific set of guidelines, rules and regulations that must be followed to maintain any franchise. And there are advantages and disadvantages. The public certainly knows who’s involved and they understand what in most cases they are going to get under those particular types of franchises.

The second group is a little bit more of a gray area. They are the same type of corporate entity but they allow the dental offices to maintain generally their own being, their own essence. They will go under the same company name as Dr. Smith & Jones. The public doesn’t necessarily know that they are owned and operated by a corporation and it’s much less not a franchise but it gives the appearance of being locally owned, managed and operated. This is not to say it’s good, bad or indifferent, there are just two philosophies to care. My personal opinion again is over time more and more will try to consolidate the cost of supplies, laboratory procedures, different aspects of managing and operating a dental office such as billing, infection control, office supplies, clinical supplies, ordering, IT and IS, human resources or HR departments to consolidate costs.

Obviously the single largest expense in the dental profession or running a dental office is employees. Although on the surface many of these corporate ideas may make sound economical sense, you have to understand that generally supplies business and clinical supplies will range between four and six percent. In most cases these corporate entities are able to bring down and reduce those costs by between ten and twenty percent, which is better than no savings. However, in many cases, the single largest way to reduce expenses is to eliminate individuals or team members.

So for those dentists contemplating selling their practice and joining a corporate dental facility, understand that in the short and long term, employees in most cases will be cut or removed to reduce expenses and increase what we refer to as EBITDA which is earnings before interest, taxes, depreciation and amortization. It is an accounting term that is critical for you to understand, not just in your own individual dental practices, but particularly if you get involved with corporate dentistry. Basically you take all of your earnings and then you eliminate taxes, interests, depreciation and amortization.

For those less business minded dentists and health care professionals, the major difference between amortization and depreciation is as follows; depreciation is usually a scale or formula based on government and the life expectancy of hard tangible assets, such as dental chairs, dental equipment. Whereas amortization is the depreciation of intangible or soft assets and most critical is the term goodwill.

And these numbers are how they calculate the actual purchase price of your particular practice if you’re thinking of selling to a Managed Service Organization or corporate entity, or if you decide to partner up in many cases you will receive a percentage of EBITDA on a quarterly basis to offset some of the money lost by joining these companies. In general, you can expect to be paid anywhere between 25 and 40 percent of net collected money. The remainder of profits, if you continue to be somewhat of an owner in these Managed Service Organizations, will be spread out quarterly based on an increase of EBITDA on a set amount.

I hope you enjoyed the following podcast. For this information and additional information, don’t hesitate to look at my website www.ascent-dental-solutions.com. My name is Dr. Kevin Coughlin and thanks for listening.