Many dental service organizations (DSOs) today proffer the tantalizing opportunity of dental practice ownership to doctors. The doctor’s name will be on the door as the “owner,” featured prominently in advertising, and registered with the state. Such an offer appears to be a chance for dentists to build financial equity in their own practice, but too often it is an illusion.
The structure may vary slightly, but there generally will be a purchase agreement indicating the dentist has “bought” a going practice or a substantial part thereof, though that practice may be in its incipiency. Usually, the DSO or an affiliated entity will carry the note for the purchase price, and the initial cash outlay will usually be nominal, though not always.
The DSO will handle those nagging and unpleasant details of office administration and finances. Under that arrangement, principal and interest payments on the note will be automatically deducted from the doctor’s monthly practice production. Plus, the purchasing doctor is often promised additional monthly payments based on the business’ earnings before interest, tax, depreciation, and amortization (EBITDA). Especially to the young, inexperienced dentist, this presents a picture of veritable dental practice ecstasy.
Who Really Owns the Practice?
Ownership in the dental practice will be expressed either in shares of privately held stock, usually in a professional corporation, or in membership interests in a limited liability company. Regardless, these equity interests are not freely transferrable, with transfer being subject to approval of the DSO or subject to a purchase option by the DSO.
Whether shares of stock or membership interests, these are private securities, and often there is a serious lack of required disclosures. Even when everything is spelled out in writing, there is often a dizzying array of lengthy documents jammed full of complexities that dentists and most lawyers are ill equipped to handle.
Prospective practice owners would be wise to recall the words of Ron Weber, former president of the American Telemarketing Association: “If it’s too good to be true, if it sounds like a quick and easy deal, it’s probably fraud.”
In many cases, the doctor is permitted to purchase only a minority interest of less than 50% in the practice entity. In a simple case, the remaining owner doctors will all be agents of the DSO and hold a majority of the voting rights in the practice entity. The minority holder may not dispose of his or her equity interests without the consent of the majority rights holder or holders—the DSO or its lackeys. That consent will certainly not be forthcoming if the DSO and the dentist are in conflict.
“A minority equity holder in a non-publicly traded company, whether in dentistry or not, possesses the financial equivalent of a bag of snipes,” said attorney Ed Marquette, who specializes in dental practice law.
In some DSO arrangements, the buying dentist holds, or appears to hold, 100% of the equity interests in the practice entity. This, however, is also often an illusion. In these arrangements, the dental practice entity will be shackled by one or more contracts with the DSO or an affiliate. These contracts appear in an array of forms, such as business service agreements (BSAs), management service agreements (MSAs), license agreements, or franchise agreements.
These types of contracts all have long periods of duration of 10 years or more; extensive controls over nearly all aspects of the business, such as payroll, practices and procedures, suppliers and vendors, and staff; and controls over the finances and books and records, such as the DSO prescribing the entity’s income tax preparer.
BSAs and MSAs almost always place effective control (beneficial ownership) not in the doctor’s hands, but rather in the hands of the DSO or its agents. These contracts are almost always slanted to favor the DSO and to allow the DSO to suck the profits and the value out of the practice entity, leaving the doctor owner with a hollow shell.
Who Really Calls the Shots?
A growing body of caselaw has condemned arrangements where doctors masquerade as owners when effective control including control over professional judgment is vested in unlicensed persons. This condemnation has included financial judgments both against the controlling persons and the complicit doctors.
Encouraged by lax or nonexistent enforcement of dental practice laws by state boards, numerous DSOs have crossed the line and control the practice of dentistry. An entire industry has been spawned, with some parts being legitimate and some parts not. Some support elements of the private equity industry, and some are traded openly on public markets.
The ways in which unscrupulous DSOs pressure owner dentists are numerous and varied. Clinical production quotas are often imposed, sometimes subtly and sometimes overtly. The doctor will nearly always be deprived of the choice of laboratories and other suppliers and vendors. Patient visits, especially first visits, may be scripted. Referrals to specialists are often limited to the DSO’s affiliates.
Especially when the dentist is permitted to hold voting control of the practice entity, control of the practice’s bank account will be vested in the DSO and emptied by the DSO several times per week, with an “allowance” meted out to the dentist. The BSA or MSA will often allow the DSO to control the activities of all personnel working at the practice, including the owner dentist. Rewards are offered to top revenue generators, while dentists who produce less face corporate admonishments and professional disparagement.
Auxiliary staff members may hold more loyalty to the person or entity paying their salaries than to the dentist owner. High pressure, high stress, and poor quality dental care—something inevitable when prescribed procedure quotas must be met—lead to high staff turnover. Staffing is usually controlled by the management company, whose goals, which are usually maximizing EBIDTA in the short term, may conflict with the dentist owner, who wants to build a practice and a relationship with his or her patients.
Symptomatic of management company controls over staff is the prevalent demand for production by hygienists, regardless of patient need. This may include clinically meaningless sulcular antibiotic placements, overly aggressive scaling and root planning therapy, and needless patient charges for irrigation with chlorhexidine.
MSA and BSA contracts impose control not only through these ownership and operational restrictions, but also by ensuring the dentists bear all the risk of the arrangement. For example, while the DSO seeks to control the minutiae of the dental practice, the DSO ensures that reimbursement claims to payors are submitted in the dentist’s name and that all professional licensure and professional liability risk are borne solely by the dentist.
“The cruel irony of this scenario,” says attorney Thomas Kenny, “is that the DSO often demands slipshod practices and shortcuts, which maximize DSO profits, while leaving dentists in the crosshairs of regulators, whistleblowers, and dental boards.”
DSO management has been known to pit doctors’ offices against each other, hoping the competition will generate increased revenue and EBIDTA. Unlicensed personnel, from office managers to senior DSO management, frequently “mentor” dentists who fail to reach monthly production goals. This “mentoring” often comes down to sales techniques for needless treatments upon uninformed patients. DSOs too often cynically portray this patient deceit as a positive, termed “economy of scale.”
The beneficial owner and/or the controlling force behind the practice, the DSO or private equity firm, is usually laser-focused on maximizing EBIDTA. Too often in the process of expanding revenue, minimizing cost, and maximizing EBIDTA, something important is lost, and that something is patient care. Maximizing short-term EBIDTA increases the anticipated three-year to five-year cashout price, or the price paid by the next investor group interested in wringing out more profits from the practice.
The Consequences and How to Avoid Them
Licensed dentists are ethically and legally charged with placing the interests of their patients at the forefront. One must question whether a dentist working in such an environment can really put patient interests first. Have such dentists complied with their statutory obligation not to contract away influence over their professional judgment? Furthermore, from a purely practical perspective, if patients suffer negative clinical outcomes, at whom will the finger of blame be pointed? Whose reputation will be stained?
As noted earlier, too often there is no market for the shares of stock or membership interests that the dentist purchased. The practice is virtually unmarketable except by the DSO. Frequently, the dentist just walks away with nothing, but it is worse than that. The dentist may still be obligated on a promissory note for hundreds of thousands of dollars and be bound by a covenant against competition. Often, the dentist must relocate completely. In the meantime, the DSO is then free to sell the practice interest all over again to its next victim.
In fairness, a few DSO-aligned dentists, depending on the specific DSO, have thrived financially in this environment—though at what cost to patient care, one wonders. They are the exceptions, but they become the poster children for the DSO.
When legal disputes arise between the dentist and the DSO, a decidedly unfair contest ensues. DSOs, which are organized and funded on a national scale, often face a debt-ridden and exhausted challenger, a lone dentist. Individual dentists acting alone are outnumbered, outspent, and demoralized. In seeking relief, dentists often turn to lawyer friends or local attorneys unversed in the complex web of DSO arrangements, an array of one-sided agreements usually requiring litigation in a distant state or in DSO-chosen private arbitration.
Marquette offers practical tips for avoiding the DSO nightmare.
“Not every multiple-practice organization is a serial ripoff scheme. If one must, the dentist should look for organizations, usually local or regional, that furnish dentists an opportunity to start out as employees or contractors. Even then, beware of surrendering professional judgment. But if the dentist is just an employee or contractor, the dentist has not indentured himself or herself with a fat promissory note,” Marquette said.
“After two or three years in the organization, an astute dentist should be able to judge whether the organization is interested in patient care and in building a practice or just in short-term EBIDTA. A dentist should never be part of an organization where the practice is controlled by an unlicensed person such that the dentist’s professional judgement will be improperly influenced,” said Marquette.
“Before a dentist commits to purchase an interest in any practice, he or she should avoid holding a minority interest unless he or she implicitly trusts the majority holder like a family member and is content to own only a share of profits with virtually no expectation of ever being able to divest his or her investment. This should be very rare,” said Marquette.
“When buying a majority interest, the dentist should be certain he or she is getting real equity, that no one other than the dentist controls bank accounts, and that the dentist’s right to sell his or her equity is unfettered,” Marquette said.
“Buying a dental practice is a complex undertaking and should not be attempted without competent consel, and that means counsel (almost certainly a team) possessing expertise in corporate, healthcare, employment, and possibly franchise law. For those dentists already shackled to an unscrupulous DSO and seeking to escape, it will take legal counsel with that same expertise, plus litigation,” said Marquette.
I wish to thank attorneys Ed Marquette and Thomas Kenny of Kutak Rock Law for assistance in the review of this article. Both are respected as experts in dental legal issues. Kutak Rock’s Dental Dispute Team has litigated against DSOs, analyzed dental practice and other laws, and handled regulatory proceedings involving dentists in numerous states, including Missouri, Kansas, Arkansas, Colorado, Nebraska, North Carolina, New Mexico, Washington, New Jersey, Texas, Indiana, Kentucky, Michigan, Wisconsin, and Nevada and before numerous federal regulatory bodies. I am not a retained agent for Kutak Rock Law.
Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at email@example.com or smilesofsantafe.com.