DENTAL SERVICE ORGANIZATIONS – THE FUTURE OF DENTISTRY IN THE NEXT 5 YEARS?

WHAT ARE THE MAJOR SHIFTS HAPPENING IN THE DENTAL PRACTICES?

Dental services in the US are traditionally provided in private dental practices operating as small business units. These practices generally consist of one or two dentists employing dental hygienists, dental assistants, and administrative support staff. While this continues to be the mode of delivery of dental services at present, organizational structures for oral health service delivery and for managing business functions are changing, resulting in a variety of options for patients seeking dental services from dental provider organizations. The most noticeable change in the dental practice paradigm is the consolidation of small private dental practices into large groups.

Dental support organizations (DSOs) or Dental Service Organizations (DSOs) provide practice management services such as employment and human resources, billing, accounting, regulatory compliance, lease arrangements, purchasing services, and information infrastructure and technical tools for clinical decision-making. DSO affiliated dentists and practices often share clinical information systems to aid in evaluating progress toward meaningful use objectives and monitoring of clinical outcomes in the patient population. The configurations of DSOs vary widely, with some consisting only of DSO-employed dentists and others comprising small private practices that retain individual ownership and contract with a DSO for nonclinical administrative services.

Sources: Centre for Health Workforce Studies School of Public Health, University at Albany, State University of New York

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LEADING DSOS IN THE US

Heartland focuses on acquiring specialty dental practices. In 2021, Heartland Dental experienced unprecedented growth by adding 424 new practices across 38 states. The affiliation of Heartland Dental with American Dental Partners Incorporated (ADPI) was the largest affiliation in 2021, as it added 23 dental group practices spanning 278 locations to Heartland’s network. This DSO anticipates 100% growth in 2022 and plans to open 107 De Novo offices across Florida, Idaho, Georgia, North Carolina, and Texas.

Aspen Dental is focusing on the implementation of digitization in the workflow of all affiliated dental practices. In February 2022, the DSO opened its first digital office in Florida and plans to complete the digital transformation across all locations by 2023. With this digital transformation, Aspen Dental will be the largest network of digital dental offices in the US.

Pacific Dental Services focuses on adopting advanced dental technologies across all locations. The company has implemented the CBCT technology in 365 supported practices for improving diagnosis as well as implant and restorative therapies. The company produced and placed 468,211 dental restorations in 2021 using the CEREC CAD/CAM technology. Also, Pacific Dental Services partnered with Envista to combine its independently developed machine learning capabilities into Envista’s DTX Studio clinic-assisted AI software platform.

Particular	Heartland Dental	Aspen Dental	Pacific Dental Services
Number of Affiliated Practices	More than 1,600	1,032	More than 870
Number of Associated Dentists	More than 2,400	1,931	2,306
Presence in the US (No. of States)	38	45	26

Source: Company Websites, Press Releases, Blogs, Journals, Research Articles, and MnM Analysis

WHAT ARE THE SERVICES OFFERED BY DSOS IN THE US?

BENEFITS PROVIDED BY DSOs TO DENTAL PRACTICES

Dental practices enter contracts with DSOs for critical business management and support, including non-clinical operations. DSOs have allowed dentists to maximize their practice with the support of professional office management. The DSO model enables dentists to focus on patients while delivering excellent dental care. DSOs also provide technologically advanced dental equipment, consumables, and software to associated clinical practices. There are two types of agreements that DSOs sign with dentists:

· COMPLETE ACQUISITION OF THE DENTAL PRACTICE: In this case, a DSO will purchase the dental practice by paying around 6–8 times the annual turnover of that practice. The DSO takes charge of all non-clinical activities and provides equipment, consumables, and software that dentists can use in the clinical workflow. The DSO collects all revenue and pays the dentists a base salary or a percent of the payments received for dental services. The DSO also offers a productivity or profitability bonus.

· NETWORK MODEL: In this case, the DSO partners with dental practitioners to provide support for running their clinical practice in exchange for a fee. The dentist will have autonomy in running the clinical practice. The dentist pays the DSO an agreed-upon amount, such as a percent of the revenue (around 30–40% of the revenue) or a fixed fee for support in non-clinical services.

INCREASING ADOPTION OF THE DSO MODEL BY YOUNG DENTISTS IN THE US

Factors such as high student education debt, limited knowledge of running a solo practice, no requirement of capital investment, attractive salary, and higher potential patient footfall (including from Medicaid patients) are attracting dental students to DSOs. As per DSO executives interviewed by MnM, the high tuition costs for dental school are limiting the ability of dentists to buy their own practice. This is resulting in higher dentist enrollments with DSOs. DSOs benefit by acquiring young dentists as compared to senior and established dental practitioners. Also, there is less financial risk involved for young dentists. DSOs generally offer long-term contracts with lower salaries to young dentists.

US: Estimated growth in the percentage of young dentists willing to join DSOs, 2020–2027

Source: American Dental Education Association Survey of the US Dental School Seniors and MnM Analysis

INCREASING PRIVATE EQUITY FUNDING TO DSOs

Dental practice consolidation has been a lucrative and safe investment for more than 30 years and is attracting new investors. Many DSOs are backed by private equity (PE), family offices, and small business investment companies. Kohlberg Kravis Roberts & Co. L.P. (US), one of the largest private equity firms, has owned Heartland Dental, the largest DSO in the US, since 2018, and has helped Heartland to add more than 400 practices in 2021. In August 2021, DECA Dental Group (US), a leading DSO, announced a strategic investment from funds managed by Blackstone Tactical Opportunities (US). This partnership fueled the expansion of DECA by acquiring more dental practices. Private equity investors have dominated acquisitions in the dental market in the US.

The emergence of the COVID-19 pandemic resulted in reduced funding for DSOs. In 2021, debt capital markets hit a pause on lending as authorities were evaluating the impact of the pandemic on the economy. This pause in lending resulted in a pause in buying, as many deals in the dentistry sector are backed by PE companies and debt (up to 4 to 6 times EBITDA) from a lender. In 2021, many DSOs completed only a fraction of their goal for acquisitions. This increased the demand for new practice and group acquisitions in 2022. In Q1 2022, there were fewer deals in the market than in recent history. Currently, there are more buyers with more capital than ever before. This disequilibrium in supply and demand is driving up prices and creating a sellers’ market. However, this sellers’ market is expected to disappear by Q4 2022 when the supply of businesses for sale returns to equilibrium levels.

REDUCTION IN THE NUMBER OF SOLO DENTAL PRACTICES DUE TO THE UNFAVORABLE INSURANCE, REAL ESTATE, AND REGULATORY ENVIRONMENT

The increasing cost of real estate, supply chain disruptions for dental devices and consumables, increasing supply costs, uncertainties created by events such as COVID-19 lockdowns, changes in government mandates and regulations, rapidly advancing technologies, and fewer employer-sponsored dental insurance plans are increasing the risks for solo practices. The growing shift toward dental groups or DSOs among solo practitioners is a key factor driving the market growth.

According to the American Dental Association’s Health Policy Institute survey, the percentage of dentists in private practices who are owners has reduced from 84.7% in 2005 to 73.0% in 2021. According to a recent survey published by The Vyne State of the Dental Industry Report 2021, around 7% of dentists are considering affiliating with a DSO or merging their practices as a result of the pandemic.

Estimated growth in percentage of dentists associated with DSOs in the US, 2020–2027

Source: ADA-HPI and MnM Analysis

LIST OF SOME RECENT DEALS BACKED BY PRIVATE EQUITY IN THE US, 2019–2022

YEAR	NAME OF DENTAL PRACTICE	ACQUIRED BY	FINANCED BY	DESCRIPTION
2022	Lakewood Ranch Dental	North American Dental Group, LLC (Dental Service Company)	Jacobs Holding AG	North American Dental Group (NADG) acquired Lakewood Ranch Dental (Florida, US) and added it to its network of 250+ affiliated practices across 15 states.
2022	Mid-Atlantic Dental Partners	Sonrava Health (through its affiliate Western Dental & Orthodontics)		This acquisition will help Western Dental to nearly double the number of its affiliated and supported practices and offices in the US and increase its share in the US DSOs market.
2022	Children's Dental Management (CDM)	Spark Dental Management	Rock Mountain Capital	This acquisition helped Spark Dental Management to increase its presence in the US.
2021	PEDIA	Smile Partners USA	Silver Oak Services Partners, LLC	Following this acquisition, Smile Partners has 46 locations across three distinct markets in Michigan, Illinois, and Georgia.
2021	Primary care pediatric physician practices in Newark, New Jersey	ChildSmiles Group, LLC	Clairvest Group	ChildSmiles Group acquired two sizable primary care pediatric physician practices in Newark, New Jersey. This acquisition allowed the group to increase its geographic presence and customer base. Through this acquisition, ChildSmiles changed its name to SmileHealth.
2021	Optim Dental and Vogue Dental (US)	Access Dental Management (Surge Private Equity, LLC)	Corbel Capital Partners	Access Dental acquired Optim Dental and Vogue Dental with a reported transaction value of ~USD 10 million. This transaction marks Access Dental’s entry into Illinois and Indiana.
2020	ClearChoice Management Services (US)	Aspen Dental Management (US)	Ares Management, Leonard Green & Partners, and American Securities	This acquisition helped Aspen Dental to increase its footprint in the dental implants market through the addition of ClearChoice’s network of more than 60 locations.
2019	Access Dental Management and Lacosta Dental	Surge Private Equity, LLC (US)	Corbel Capital Partners	The transaction value was more than USD 30 million (along with a cash component).
2019	North American Dental Group, LLC	Jacobs Holding AG (private equity)	Jacobs Holding AG	NADG (a DSO) has a network of over 200 dental practices in 11 states and 23 regions in the US. This deal significantly expanded the footprint of Jacobs Holding’s dental care activities and created the first transatlantic dental group.
2019	AppleWhite Dental, LLC	CORDENTAL Group (advisory firm)	NMS Capital Services LLC	CORDENTAL Group acquired AppleWhite Dental, LLC, a dental service organization providing support to over 150 dentists and hygienists in 35 offices across Iowa, Wisconsin, Illinois, and Minnesota. This deal has solidified CORDENTAL’s presence in the market with 80 dentists and 48 practice locations.

Sources: Company Website, Press Releases

EMERGENCE OF ALTERNATIVE MODELS TO conventional DSOs IS A KEY CHALLENGE

Several solo and group practices are not ready to affiliate with conventional DSOs as they want to maintain their business autonomy. As a result, several alternative DSO structures have emerged in the marketplace. Alternative DSO structures offer benefits like those of conventional DSOs and allow dentists to focus on patients while businesspeople tackle the non-clinical side of operating a dental practice.