Has the pandemic really strengthened DSOs on the U.S. dental market?
LOS ANGELES, U.S.: When dental clinics in the U.S. were forced to close temporarily in early 2020, some heard what they thought was the final death knell of solo dental practice. As it turns out, however, it was simply the howling winds of change in an industry that was already steadily consolidating. Dental Tribune International (DTI) spoke with one of the largest dental service organizations (DSOs) in the country and with a broker from a leading clinic acquisitions firm and combed the latest industry figures in order to ascertain how the market for DSOs may have changed since the pandemic began.
The early months of the pandemic gave dentists a chance—and a reason—to think. Many of them may have thought about joining a DSO. Dr. John Luther, chief dental officer at Western Dental, told DTI that determining their next steps and rethinking their long-term goals have been a part of dentists adapting to the new normal.
Western Dental operates 335 locations across the Southwestern U.S.—around 25 more than it operated before the SARS-CoV-2 outbreak in the country. When asked whether the health crisis had resulted in a shift in strategy for the DSO, Dr. Luther said that the group’s approach of identifying and filling geographic lacunas in dental care remained unchanged. Speaking about the group’s new offices, he explained: “Many of these are in suburban or smaller communities—such as Lemon Grove, Palmdale and Victorville—where there is a critical shortage of general dentists and orthodontists. We have always looked to expand in communities where there is an obvious need for more dental providers.”
In Victorville—a suburban community that has continued to attract new residents—the DSO’s new clinic offers general dentistry and a full range of specialist care, comprehensive orthodontic services, oral surgery, dental implants, oral hygiene services and pediatric care: dentistry for the whole family. Dr. Luther said that the pandemic had triggered shifts in patient preferences—changes that favor the broader treatment offering that many DSO-affiliated clinics offer. “There will definitely be more of an emphasis on providing comprehensive services under one roof,” he said. “DSOs that have proven clinical and operational systems in place that ensure quality care—and reduce health risks—will be in demand, especially as more patients seek to stay closer to home as much as possible.”
Wild times and the growth of alternative DSO models
“COVID has created market factors that we have never seen before,” Stanton Kensinger, lead dental transition broker at mergers and acquisitions advisory firm Professional Transition Strategies (PTS), told DTI. Speaking from his office in Colorado Springs in the U.S., Kensinger said that “there is a different vibe out there compared with what we were dealing with two years ago.”
Competition has increased dramatically, Kensinger said, because DSOs are not only growing but also multiplying. PTS is now working with up to 20 DSOs that were founded shortly before or during the pandemic. “It is about market conditions and changing models and there has been an influx of private equity,” Kensinger commented. “Never again will we have the same opportunity with this much private equity flooding the marketplace.”
Kensinger explained that the DSO model is diversifying, leading to the emergence of what he described as new and more dentist-focused DSOs, such as dental partnership organizations (DPOs), and the pandemic has accentuated the process. Kensinger said that, although these new DSOs launched at the worst possible time, they have come out flying. “Even through the pandemic, we have seen an influx of specialty DSOs and general practitioner DSOs that are giving dentists opportunities that they would not have had otherwise. These groups are also coming up with different ideas; what I mean by that is they are not your traditional DSO, like Aspen or Heartland. A lot of these private equity groups have grasped the fact that it is really about the dentist. It is about the team and the staff, but it is also about the owner dentist often retaining equity in his or her practice.”
Equishared Dental Group is one example of a DPO founded by dental executives to preserve individual dentist ownership within its corporate structure. It launched in June this year, and co-founder Dan Redifer said in a media release that its model “rewards our partners far beyond what an individual practice can do on its own but, most importantly, maintains ownership interest.” Another DPO, Imagen Dental Partners, says its structure aims to remove difficulties in clinic ownership for young solo dentists and to create opportunities for long-term wealth for older dental practitioners.
“Never again will we have the same opportunity with this much private equity flooding the marketplace” – Stanton Kensinger, PTS
In November, emerging DPO United Dental Corporation (UDC) raised $5 million (€4.4 million) in capital to finance its U.S. expansion, and 80% of it came from 61 dentists. “The investment by so many doctors is another validation of our powerful DPO business model,” Dr. Ray Khouri, CEO and founder of UDC, was quoted by dental media as saying. “Not all [DSOs] are the same. UDC’s model enables doctors to accelerate growth and maximize compensation while retaining complete autonomy and gaining an equity stake in UDC, if they so choose,” he explained.
Under the UDC banner, principal dentists enter into financial partnership, but keep their brand, employees, software and autonomy.
Dr. Khouri has some experience. He founded Dental Corp Australia in 2007 and sold it in 2013 for $600 million. Later, he replicated the model in Canada and eventually sold Dental Corp Canada to the country’s pension fund for $400 million. Now, Dr. Khouri is aiming to acquire 100 U.S. dental clinics in the coming 12 months.
Kensinger said that one of the effects of the flurry of corporate activity has been an increase in expressions of interest for dentists who want to sell. “It has been the most competitive market that we have ever seen at PTS,” Kensinger explained. “As an example, I had a dentist in Denver in Colorado who had two locations and just wanted to see how the market was, and which opportunities were out there. We had 35 DSOs reach out to us about his practices, and I had to narrow it down to 12. There were a lot of mom and pop DSOs, and there were also the larger players. If we had taken this practice to the marketplace two years ago, we probably would have only had six to 12 interested parties. These are wild times!”
Patient volumes leveling out across all types of clinics
Factors that could have strengthened the market position of DSOs in the pandemic include their greater purchasing power and corporate structures, allowing them to pool and allocate key resources such as staff, cash and personal protective equipment (PPE). It was also predicted that more older dentists would choose to retire early, owing to the health risks involved in practicing dentistry during the health crisis. Currently, it seems that none of these factors has loosed a cascading effect.
Smaller dental offices have struggled more than their corporate counterparts during the pandemic owing to lesser purchasing power and human resources. Donald M. Casey Jr., CEO of Dentsply Sirona, said in the company’s third-quarter conference call last year that DSOs had struggled less to acquire PPE in order to keep their clinics operating. “DSOs, I think, came back a little faster,” he said, adding that the situation equaled out when PPE became more readily available. Data from the American Dental Association Health Policy Institute (HPI), however, shows that DSO-affiliated clinics still had the upper hand more than 12 months into the pandemic.
According to May figures from HPI, 78.8% of DSO-affiliated dentists said that the clinic that they worked at was open and conducting business at pre-pandemic levels, compared with just 60.1% for non-DSO-affiliated dentists. Clinics run by non-DSO-affiliated solo dentists showed the slowest recovery, and 56.2% of solo dentists reported business as usual. Patient volume was found to have returned to more than 95% for 54.7% of DSO-affiliated clinics. For non-DSO-affiliated solo dentists, just 34.3% said that their patient volume had returned to more than 95%.
Half a pandemic year later, in the Oct. 11 results, HPI data showed that the recovery for non-DSO-affiliated practices and non-DSO-affiliated solo dentists appeared to have changed very little—hovering at around 61.5% and 57.0%, respectively. DSO-affiliated recovery, meanwhile, had slipped back to 65%, and mean patient volume for all of the practice types mentioned had settled at within one percentage point of 89%. U.S. dentistry, it seems, has plateaued in its pandemic recovery, and although DSOs reached the tableland faster, smaller and solo practices eventually joined them.
Uncertainty, breaking point and business as usual?
Despite the challenges that dentists have faced, no wave of early retirees has materialized—a hypothesized trend that some predicted would whet the acquisition mechanisms of U.S. corporate dentistry. Although earlier research had suggested that the pandemic could trigger an increase in retirement rates, HPI said: “This is not the case as of May 2021. Dentist retirement rates have been rising steadily since 2013 and there is no change in this trend due to COVID-19.”
Other factors—such as a looming capital gains tax increase that could deter dentists from selling up—are also influencing consolidation on the U.S. dental market. It will take time to accurately assess the impact of COVID-19 on DSOs, but it can be assumed that the market will steadily continue to consolidate. Last year, 10.4% of all U.S. dentists were affiliated with a DSO, compared with 7.4% in 2015. In the under-35 age group, 49.0% were owners in 2005. This decreased to 42.4% in 2011 and stood at 30.7% in 2019, according to HPI.
“This is not the case as of May 2021. Dentist retirement rates have been rising steadily since 2013 and there is no change in this trend due to COVID-19” – Health Policy Institute
Kensinger said that some of the solo dentists he had spoken with cited difficulties with administrative pressures. “I just want to be a dentist. I didn’t get an MBA; I am not an HR director; I am not an accountant,” he paraphrased. “I think that COVID has just stressed so many good clinicians. Many of these dentists were at a breaking point and they were burned out, and we are still talking to dentists today who are at that breaking point,” he said.
Dr. Luther, however, pointed out that the market for acquisitions during the pandemic had not been without its challenges. When asked whether more dentists had been expressing interest in joining a DSO this year, he summarized: “I believe that, with the uncertainty during the past 18 months, many dental providers are trying to adapt to the so-called new normal and determine their next steps and long-term goals, whether it is continuing as a stand-alone office, partnering with another provider or selling to a DSO.”