Are DSO’s Taking Over?
DSO’s are not taking over the profession. They’d like you to think otherwise!
The reality is that 13% of dentists affiliate with them and this number has remained constant.
Younger dentists are the primary affiliates. Inexperienced and saddled with student loan debt they gravitate to these organizations on the promises of support with management, supplies, regulation, hiring etc . These doctors are enticed by the illusion that they can show up , produce their dentistry and go home . No worries. No headaches. Just do the dentistry!
The reality is that this too good to be true arrangement , is just that. Doctors soon realize that they still have to interact and lead the staff. They don’t get to choose who they work with. Many times they are given fewer staff in an attempt to save money for the corporate owner. This greatly affects their ability to produce . This creates stress for the doctor and the overworked staff.
What about supplies and equipment? The affiliate dentist has little to no say. You will make due with what the boss says you will use. DSO’s will choose your dental lab . They will dictate your schedule and the insurance companies you must be in network with. You soon realize that you just stepped on a treadmill that never shuts off.
Dentist’s compensation is understandably tied to collected production. This is what’s left over after accepting huge 30- 50 % discounts from the PPO’s. Typical associate pay is 20-25% of your personal collected production. You may be responsible for ½ of your lab bill. Say you produce $700,000 with 30% PPO write off. Your production is reduced to $490,000 minus 1/2 your lab bill. Let’s say $20,000 is your half . $490,000- $20,000 = $470,000 × .25% = $117,000 gross before tax. Because you don’t own you get NO business deductions . After your standard deduction and federal and state taxes you are left with approximately $90,000 plus or minus depending on the state . I am not an accountant but have reviewed countless P&L’s.
If you are lucky enough to schedule a lot of dentistry ,you will look at your paycheck and wonder where’s the money? The burnout has begun. The disillusionment with your newly minted profession makes you wonder why you sacrificed 8 of your primary earning years and spent a small fortune in student loan debt to help someone else achieve their dream of practice success. If you are unlucky and have to scrape by with fewer patients you may find that you will have to pay back any income guarantee should you not meet the production requirement of your contract.
You, as the dentist, will still have to get out there and market yourself to patients if you want a full schedule. You only wanted to show up ,do the dentistry, get paid and go home. No worries,no responsibility ,no regulatory headaches. Hold on! You as the LICENSED professional are ,in deed, responsible. The dental boards can only control the licensees . If there are deficiencies in infection control, or a staff member renews their license late , guess who gets sanctioned. You have all the risk while the DSO takes all the profit.
Eventually you throw in the towel, and accept your lot ,or you become determined to exit this misery and chalk it up to a valuable lesson learned.
Most doctors ,in this predicament ,can’t wait to leave and go find a practice to purchase and begin realizing THEIR dream of practice success . They are the owners; they call the shots and reap the rewards.
There are some older experienced dentists who affiliate with the DSO’s. Many of these dentists have owned their practice and are ready to cash out. They are tired and have heard stories of the lottery like huge multiples paid to these older dentists. They want their big payday !
State of the DSO market:
Private equity firms own the DSO companies . They typically hold them for 5-7 years and then exit their investment . Private equity seeks returns of 15-20% . When money was cheap their return was magnified as a result of leverage. Now that interest rates have climbed the deals have slowed and the terms have changed.
Today there is less cash upfront. Typically only 50% is paid in cash at closing .They require the selling doctor to work back for longer . A two year workback was common but that has moved to a required 4-5 year period. Selling doctors are often offered stock and future equity with the promise of future growth and a higher future payout. The promise rarely materializes. To show growth the DSO’s must continue to roll up practices. Buying high and hoping to sell higher. If these deals are so lucrative,why aren’t there a bunch of these trading on the NYSE .
There are production goals that must be met to receive their compensation. The doctor is paid 20- 25% of their personal collected production . Hygiene profit including total practice profit goes to the DSO .
The DSO owns the practice . There will be changes . They are in control and will exact their efficiencies. Changes in compensation of the staff can occur affecting staff morale . Some staff may be let go .This can directly affect the doctor’s production. Supplies and the dental lab used will be mandated to streamline costs. The practice software may be changed which creates significant stress for the team. You can be sure that the DSO can squeeze the overhead costs. They can lower costs in these categories by 20-25%.
Multiples of EBITDA
DSO’s offer a multiple of EBITDA depending on a myriad of factors. EBITDA is the earnings before interest, tax ,depreciation , and amortization. This is after compensation paid to the doctor.
Current multiples are 5 x EBITDA in the $100,000- $300,000 range
7 x EBITDA in the $300,000- $ 500,000 range
DSO’s are interested in urban practices that are showing growth. They are actively pursuing specialty practices like oral surgery and pediatric dentistry. They like to roll up several general dental practices so they can serve as referral sources .
While the DSO model is here to stay , its growth may have reached a peak. To be sure ,there are dentists who choose to work in this model and that is their choice. All DSO’s are not created equal. As with anything ,there are the good and the bad. There is a movement afoot today for independent practices organizing into IDSO’s . They, too, are hoping for a big payday.
I share this content because I believe it is important for dentists to be informed. I have talked to many dentists employed by DSO’s who have shared their stories of frustration, disatisfaction, and regret. I pass no judgment either way! My humble advice to dentists is to take back their profession. Did you REALLY go to dental school and incur all the debt just to work for someone else?
I am so very grateful that I had the opportunity to own my practice. I had way more fun owning and practicing solo. I would urge dentists today to practice in a small town or rural setting. You won’t be competing with the corporates as much, your cost of living is lower, your practice overhead is lower, and the resulting practice net much higher. In the end, it’s not all about the money. It’s about serving a community. It was a great life for me and my family . There was a quiet contentment practicing in the country . Everywhere I went I was called Doc . I was truly blessed! I hope all the readers find their happiness in this great profession . You deserve it !