Although private equity has the ability to encourage growth and innovation in the dental industry, many dentists still believe there could be disadvantages to the field.
Private equity has boomed in the dental industry as companies see high potential in dental companies. Several deals have taken place in the industry this year, including private equity-backed DSOs launching.
Most recently, a private equity firm focused on orthodontists and pediatric dentists launched through a collaboration with investment firm DuneGlass Capital and Colorado-based practices Williams Orthodontics and Kohrs Orthodontics.
Ten dentists recently spoke with Becker's about private equity's role in dentistry.
Editor's note: Responses were lightly edited for clarity and length.
Manny Chopra, DMD. Center for Dental Health (Cincinnati): The answer to that question is multifaceted. As more private equity money is funded in dental practices, a majority of those funds is directed to the continued growth of the DSO-model dental practice. My concern is, as these practices grow, will there be enough providers and staff to work at these practices? Further, as the DSO model grows with this private equity money, will there be a long-term concern for the retiring dentist in his/her ability to sell the dental practice to a younger dentist with substantial student loan debt? This may hinder their ability to purchase the retiring dentist's practice. It would be easier to go and work at a DSO practice that offers work-life balance and minimal added financial risk.
Michael Davis, DDS. Smiles of Santa Fe (N.M.): This all depends on one's perspective. The private equity industry has in many situations forced up market evaluations on dental practices. This has benefited numbers of retiring doctors, or those seeking to sell their practice for a variety of reasons.
By contrast, a young dentist seeking to own the means of capital for their labor (a dental practice) will generally see dental practices offered at higher multiples.
The PE industry benefits because they have a new industry for economic resourcing, which some might term exploitation. The public will face the uncertainty of a diminished doctor/patient relationship. The patient must always face the unknown of upon whose interest is their doctor acting.
No PE investor would invest in a dental practice without substantial assurances of exactly how that practice was run. Yes, doctors are free to make decisions in line with their patients' best interests, as long as those interests are fully in line with private equity investors and their interests. Doctor production metrics of corporate "daily dashboards" monitor that. Frank discussions with associate doctors guarantee their compliance, or contrastingly, a path out the door.
Andy Droel, DDS. Droel Family Dentistry (Lino Lakes, Minn.): It is common knowledge that private equity money is seeking predictable and consistent returns via investments in dental enterprises. Certain stakeholders within the dental industry are taking advantage of historically high premiums being paid in practice acquisitions and other deals, and then in some cases are enjoying massive payouts from additional equity events. This is making for great financial outcomes for a relatively small number of established doctors/owners who opt to sell to [private equity] investors. Over time, if this trend continues to run concurrently with massive increases in educational debt, there will be less and less financial incentive for young people to pursue dental careers. At the same time, established doctors who are already full or partial owners of private practices will be increasingly averse to letting new doctors take over ownership, so the associateship concept will increasingly dominate the landscape in terms of available work opportunities for young, debt-strapped dentists.
Long term, it's possible to envision many possible outcomes. What they all have to seem in common is this: Costs to consumers for quality dental care will continue to increase, dental careers will not offer the same level of financial stability as they have in the past and large investors who have significant market share will probably continue to extract substantial profits from the practice networks they control but do not manage. In other words, over time a very small number of people will profit handsomely, but the overall outlook for the dental industry is bleak. One hopes that there is a silver lining in terms of improved quality of care, as it is theoretically possible that large DSO-type practice networks will be motivated to maintain very high standards as a competitive advantage ... but I think it's more likely that dental care will become increasingly commoditized, lower-quality, less prevention-oriented and more expensive because of consolidation that is being driven by private equity.
Janet Hatcher Rice, DDS. Rice Dental Arts (Bristol, Tenn.): I believe that the worst thing for dentistry is not DSOs but the private equity that is funding them. With this newfound money, DSOs can pay young dentists — and let's be real, young women dentists — enormous salaries that they so desperately need to pay down student debt. But now, these young dentists are serfs and will have to work for decades and sell more than what the patient needs and in the process, sell their integrity, honesty and self esteem in exchange for money to service debt. I have a fee-for-service, insurance-free, unencumbered private practice. Yes, I had the huge benefit of getting a debt-free education and taking over my father's practice, but I have not cut corners. I spent my early years learning advanced procedures and spent years building my confidence in performing these difficult procedures. I purchased top notch products, advanced technology equipment and most importantly, worked nonstop to develop skills that were valued by my patients. My building, equipment, supplies and staff have been costly. I had to scrimp and save. There are no shortcuts! I realize the hardships of this new economy but when I started, interest rates were 18 percent and inflation was out of control. So we had some hard times, too. Not to mention the stock market losses in 1989, 2000, 2008 and today. But even with setbacks, I never wanted to work for someone else. I made less but I refused to sell out, and at the end of the day, I can rest my head on my pillow and know that I have done the best for the people who trust me with their dental health. And in a small way, I have tried to help propel dentistry forward into better treatments and outcomes. I think Wall Street and private equity will never care about people, only profits. Not a good thing for dentistry. Medicine has already sold its soul to government, insurance and pharmaceutical companies at the loss to the health of their patients and our nation.
Jason Hirsch, DMD. Dr. J Pediatric Dentistry (Royal Palm Beach, Fla.): I am unsure if private investors have helped or hurt the profession, because it's too soon and not enough inquiry from academia has ensued to determine this, but interest rates rising has to have an impact at some point in this new scheme. The thesis for investment in dentistry was the low cost of capital and healthy profit margins. These reasons have all but vanished now, so it is too soon to tell at this point if this trend is about to fall on its face. If the roll up and out stops because of lower valuations, then we might see real pressures on these PE-invested entities. Time will tell.
Steven Hymovitch, DDS. Valley Endodontics & Oral Surgery (Phoenix): It's like asking if "going public" helps or hurts a corporation. Not a simple answer. It can provide necessary funding to accomplish a practice's vision to more people and areas quicker. On the other hand, practice founders might have less control. Private equity groups are as individualized as fingerprints. I guess it might be said that how a private equity company contributes to benefiting the dental industry is like a box of chocolates. You're never really sure what you're going to get.
Rajdeep Randhawa, DDS. Innovative Dentistry (Colts Neck, N.J.): Private equity has entered dental industry for the long-term profits of its investors so that they can extract high yearly rate of returns ranging from 20 percent to 35 percent and then much higher rate of returns that range from 15 to 20 times their initial investment when they group all the practices they buy and start from scratch into groups of 1,000 or more practices that can be bundled and sold to Wall Street investors making billions of dollars in their transactions. It is the same concept of Wall Street investors buying thousands of mortgages from the banks, bundling them and selling it again to another set of investors. When this game of extreme musical chairs of playing with investors' money stops like it did in the housing crisis, there is going to be a lot of damage to the dental industry. Nobody knows when this stops and how many private equity investors and their front organizations, many of whom operate like DSOs, are going to be hurt.
For private equity-supported DSOs to operate profitably, they have to squeeze enough profits out of all dental professionals working for them, the insurance companies and the thousands of patients that their dental practices see everyday. This is heavily dependent on patients accepting profitable insurance and non-insurance procedures, something that becomes a major stress point in the day-to-day functioning, in case the patients start opting only for loss-making basic dental procedures due to economic stress. Many DSOs are operating as front ends for private equity, are under a lot of pressure to perform well, and they pass on this extreme pressure to perform to the dental offices, their dentist operators, other dentists, dental hygienists, other staff and managers at all levels. DSO management can see on a daily basis if thousands of dental practices are performing well or not according to well-laid parameters. The parameters that are used to oversee the functioning, production and profitability of these dental practices are the same that private equity and other Wall Street investors are looking for to buy large DSOs and thousands of their practices.
Charles Rim, DDS. Oregon State Hospital (Salem): Dental industry can be positively and negatively impacted by private equity investment.
Positive
- Ability to leverage purchasing power to invest in infrastructure development and growth
- Increase access for dental services with multispecialty and integration of healthcare systems
- Strategic planning and management with well-organized operation and innovation of fast-paced technology
Negative
- Major incentive for production in lieu of personalized dental service
- Uncertain long-term sustainability of corporation with extensive non-clinical executive overhead and competition
- Potential low provider satisfaction and burnout resulting in emotional and physical exhaustion
- The complexity of the healthcare system leads to wide variation in clinical practice. The clinical intervention by healthcare providers for patients requires accurate clinical diagnosis and appropriate treatment care plan. Private equity investment can be positive for the dental industry if the influx of capital can improve access, quality and value.
Robert Trager, DDS. Dentist at JFK and LaGuardia Airports (New York City): Private equity has a history of a checkered past resulting in both positive and negative results. The principals seek out private investors who put up hundreds of millions of dollars. Their goal is to buy out as many dental practices deemed successfully profitable or have the potential to become highly profitable if they are managed correctly. The main goal of private equity is to reward their investors by selling the business within five years for huge profits. There have been situations where this has occurred and also other scenarios where they have been bankrupted. These private equity partnerships have helped the dental supply companies by buying new and modern equipment as well as dental laboratories, albeit by negotiating both.
These private partnerships are also buying up specialty offices (endodontist, periodontist, oral surgery and orthodontist). These dentists are receiving upfront a large sum of money but have to wait for the remaining funds over a number of years. If the equity partnerships are sold to someone else during this time, then the original contracts are not enforceable. The equity partnerships who are attracting young dentists to work for them are creating a generation of dentists who have no idea how to administer, finance and manage a dental practice. These partnerships spend a lot of money on administrative and management fees and in the end, any profits remaining go to the limited partners. My philosophy is that if you can maintain your own solo or partnership practice by utilizing skills in administration, financial and marketing, you can succeed and maintain your own independence. Would you prefer to be an employee or an employer?
Rick Troxler, DMD, MD. Private practice in Williamsport, Pa.: Private equity is helping and at the same time hurting dentistry. Pouring investment funds into some dental practices helps the owner of that practice to continue working and at the same time to get the patients used to having small changes from the new owners. This is good for the large dental offices where a single dentist, especially right out of school, could never afford to purchase that dental practice. So private equity is great for large practices. But for the solo practice that is low to mid-size, this hurts. In order for these practices to grow includes the need to attract a new dentist to come and work. The dental practice just cannot afford to pay the income of the larger, equity obtained practice. So it becomes more difficult for them to grow.
Practices that are located in more rural areas is another area where this is hurting dentistry. The private equity groups are not interested in these smaller offices. Again, for these practices to thrive we must try and find a new dentist to help us grow the practice. That is not happening.
Also, when it comes time for a more rural dentist to retire, there is not a group interested in the rural offices. These offices are usually well-positioned for a new dentist to take over and make a lot of money growing what is already there. This hurts dentistry overall. Rural practices are disappearing.