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Tags: dental practice | private equity investment

Private Equity Disrupting the Dental Industry

Private Equity Disrupting the Dental Industry

By    |   Wednesday, 13 September 2023 11:06 AM EDT

As private equity firms, like BlackRock, search for new markets to extract profits in a slow and uncertain economy, their recent entry into the dental industry is causing radical changes. More specifically, small dental practices run by individual owner/operators are being gobbled up by PE firms like a frantic game of Hungry, Hungry Hippos.

For example, Blackrock just acquired Paradigm for $900 million-plus, ProMedica Health System acquired HCR ManorCare, and there’s been a slew of other dental acquisitions across the country.

On one hand, this may seem like a good way to inject some new activity and innovation into what some may consider a high-priced cottage industry, and it may even seem like a solid way for aging Baby Boomer dentists to exit the industry gracefully with a substantial war chest to fund their retirement. But the unfortunate reality is that nothing could be further from the truth.

Most people see the situation from the dentist's perspective because that’s all they can see on the surface. They see the opportunity for a business exit with a hefty payday. What most people overlook, however, is how this is affecting the industry as a whole.

How does private equity hurt the dental industry?

The problem is that when private equity firms buy a practice, they force it to run by strict financial guidelines focused on extracting the greatest return on investment possible — often to the detriment of patient care. They don’t take into account the unique niche, personality and culture a founder’s practice may have had, and they certainly don’t care about the patient’s experience. And the more practices private equity acquires, the more the industry becomes consolidated which leads to fewer options for patients.

Another downside to this evolution is that it has dramatically changed the career path for newer dentists. In the past, dentists would typically start working at an established practice, pay their dues while saving capital for a few years, then eventually start their own practice. They would own and manage that practice  until time to retire when they would sell it to a younger dentist.

By contrast, at a recent dental convention, several future dentists (still in school) came up to ask for my input after I presented on stage. They wanted to know how to structure and launch their own dental practice consolidation fund immediately after graduating before they had so much as filled a single tooth. This is the new age of private equity financialization of another healthcare industry. Both practices and their founder dentists are being traded like a commodity.

Essentially, not only are these firms currently hurting the industry and the patients it serves, they’re also fostering a poor mindset, in my opinion, among future dentists, who are becoming licensed not to treat patients, but to own practices that can be rolled up and sold to private equity. Instead of focusing on providing exceptional care to their patients, many of these young dentists are dazzled by the overhyped promises from private equity firms, and are now focused on landing an early multimillion dollar exit. This trend is not a positive for patient care.

This is a sign of a mania that has passed its tipping point.

Private equity is a hungry monster that will devour everything in its path — especially when the market is down, because it needs to achieve a financial arbitrage in order to continue to exist.

This drives players in the industry to take a “by any means necessary” approach. This used to be a widely known fact until fairly recently. These leveraged buyouts used to be known as “corporate raiders” of the 1980s and 90s. Today, they’ve given themselves the cute moniker of “activist investors” which sounds philanthropic and gives the uninitiated a warm and fuzzy feeling. That’s quite the rebrand, right?

(By the way, if you want to see a recent example of this in action, do a little research into Yellow Freight, which was driven into bankruptcy by the private equity firm, Apollo, in conjunction with aggressive union demands, leading to the gutting of its pension fund and leaving its former employees with no retirement plan.)

It’s also worth noting that the original structure of DSOs, or Dental Service Organizations, was generally positive until private equity stepped into the equation. That’s because unlike these PE firms, dentists actually care about the industry and its patients. And to be completely honest, it wasn’t terrible with the PE firms at first, but as they acquired more practices and had to find more ways to achieve a greater ROI, they started getting a lot more aggressive.

It started with setting their own guidelines within the business to maximize profit, but quickly evolved into incredibly complex and ambiguous acquisition agreements that left dentists powerless and forced to chase a rapidly moving target.

Revenue and profit targets were put in place, which is understandable, but these firms would then change the way income and expenses are accounted for within the practice, making it impossible for the dentists to hit their targets.

To top it all off, these acquisitions have significantly reduced the upfront payments to the selling dentists. Instead, they are paid out of the “profit growth” which we just talked about — since their accounting methods are changed, it becomes impossible to hit their targets, so they never get what they thought they agreed to. They will also often saddle these dentists with substantial debt, and even “claw back” any payments made for failure to hit revenue targets. This puts all the risk on the dentists with no correlating benefit.

Essentially, private equity firms are legally stealing dental practices. They lure the dentist-owners with oversized promises of financial gain, but cover themselves with legal documents crafted by some of the best attorneys money can buy.  When the promises are not met, the dentist’s who sold have little or no recourse.  A once viable practice is strangled with debt as private equity extracts all of the profit and then disappears, leaving the ashes to the once proud owner.

It’s a net loss for the industry, dentists, and patients alike.

How do we solve the problems caused by private equity in the dental industry?

So what’s the solution? The first step is to educate dentists about what’s really going on.

These private equity firms are great at presenting a “deal” that seems like the deal of a lifetime, but in reality, they create nebulous rules and constantly changing revenue targets that enable them to avoid paying the dentists, while skimming revenue from the dental practices they acquire, until the practice eventually goes bankrupt and they get to take complete ownership essentially for free.

While I may be a little biased as a former dentist, I believe most dentists are smart. Unfortunately, their education has been focused more on dentistry, and less on financial literacy, so they’re often easy targets for things like this.

Changing that, through education, will be a huge step in reducing, and hopefully eliminating this scourge on the industry. It can be accomplished through a combination of grass roots and industry efforts.

Dental publications, trade organizations, mastermind groups, and dental professionals can all work together to spread the word and educate others in the industry. And those on the patient-facing side of the industry can also educate patients, diplomatically, of course, to let them know their practice isn’t entangled with private equity firms because they are committed to their patients. An educated patient will be less likely to do business with a dental practice owned by a private equity firm.

I believe this the “One if by Land, Two if by Sea” moment for the dental industry.  If we get it right, we can drive the vultures out and save the industry for the dentists and for patients.
Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.

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As private equity firms, like BlackRock, search for new markets to extract profits in a slow and uncertain economy, their recent entry into the dental industry is causing radical changes.
dental practice, private equity investment
Wednesday, 13 September 2023 11:06 AM
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