The Consolidation of Dentistry: Where Does Your Practice Stand?

With more than 60% of community hospitals belonging to a health system, and less than half of physicians owning part of a private practice,¹ it isn't difficult to imagine, then, that the dental industry will probably follow closely in these footsteps. The question is, how many years will this take to happen? The answer depends on a number of factors, most notably the increasing complexity around owning and operating a solo practice, the entities driving merger-and-acquisition activity in the dental sector, and the changing workforce dynamics for both providers and patients.

The practice of dentistry has four of the top 10 "best jobs of 2019," according to US News & World Report.² In light of this, one might think every dentist would want to own his or her own practice. However, small-business ownership is becoming increasingly complicated and costly. A dentist who owns the practice is also the primary economic driver of that business. Providing clinical care 4 to 5 days per week leaves little time to devote to leading the business from an administrative and operational context. It is incredibly difficult to be excellent at everything, especially given the constraints of time.

One of the primary concerns of any small-business owner is generating revenue. A recent Bankers Healthcare Group study indicated 72% of dentists were concerned about declining insurance reimbursement rates.³ This apprehension among dentists is reflected in the recent collaboration between the research departments at the American Dental Association (ADA) and Morgan Stanley, in which a 2.7% decline in reimbursement across the dental industry is being predicted.⁴ Couple a potential decline in revenue with the increasing costs of the equipment or technology often required to perform these clinical functions and one can appreciate the margin pressures many solo dentists may be feeling.

Moreover, the general public seems to be adopting a trend toward the "commoditization of dental care." Another recent ADA study noted that most adults in the United States indicated they prefer lower-cost dental plans that restrict choice of providers and that young adults under age 35 are much less willing to pay more for increased choice of which dentist they can see.⁵ Additionally, while the trends in coverage are moving away from a provider orientation, they seem to be moving toward increasing convenience (eg, expanded hours) in terms of actual access to care.

In short, trying to balance the demands of leading the business with being the primary source of revenue at a time when reimbursement rates are declining and costs are increasing, all while being accessible at the times most convenient to increasingly value-oriented consumers, could be a deterrent to potential future owners.

The same trends that create challenges for solo practice owners also generate upside opportunities for strategic and financial buyers. Strategic buyers (enterprise-level dental support organizations [DSOs]) and financial buyers (private equity groups) look for slightly different characteristics in the businesses they acquire, however they basically try to maximize certain competitive advantages to create similar outcomes. While "bigger" isn't necessarily better, size does have certain advantages. These groups are able to more easily create economies of scale through centralized business services (call centers, insurance and accounts-receivable processing, etc), which typically help reduce overall payroll costs, reduce head count, and lower negotiated costs of equipment, supplies, and laboratory services.

These buyers typically have robust balance sheets and a significantly greater ability to access debt funds to acquire businesses. They also have seasoned operators to lead the businesses in all facets of day-to-day operations, most notably in the field of recruiting associates. Having a deep bench of quality dentists allows them to expand the hours of operation, thereby making it more convenient for patients to access treatment when they want it. These groups also are able to invest heavily in marketing to attract new patients. Finally, they can incorporate specialty treatment into their overall service offering, enabling them to maximize potential revenue streams.

This "flywheel effect" of increasing profitability generates greater velocity for market expansion while services may be offered at competitive price points for an increasingly convenience-driven consumer.

Much has been written about the millennial generation's values and priorities as these individuals enter the workforce. Unfortunately, a lot of the publicity has been negative. However, their ways are not necessarily negative at all-it's up to businesses to figure out how to embrace these young, spirited employees. Be it personal drivers of behavior such as work-life balance or the increasing complexity of owning a small business, trends show that established group practices are doing a good job of catering to the needs of this group of dentists. In fact, a recent ADA study cites that 16.3% of dentists aged 25 to 34 were employed by a DSO.⁶

One additional undeniable consideration of the current generation is the staggering amount of student loan debt they are bringing with them into the workplace. Though private practice dentistry still carries a very low risk of failure or default, it is understandable that these recent graduates may prefer to not take on more debt obligations in the early stages of their new career.

The combination of work-life balance and a general aversion to increased risk has resulted in many newly minted dentists finding a satisfying mix of rewarding income and personal stability in established groups and DSOs.

Dentistry, an industry more noted for its evolutionary, not revolutionary, pace of change, is in the midst of a dynamic era. Though it may be quite unsettling for some, others are realizing the wealth of opportunities that this change brings with it. This gradual transformation is fairly similar to what many other industries or sectors of the US economy are experiencing. The overall result of consolidation in other sectors has been largely positive, and my hunch is the dental industry will experience the same outcome.

Perrin DesPortes
Partner and Cofounder, TUSK Partners, Charlotte, North Carolina. TUSK (tusk-partners.com) provides resources for group dental practices and DSOs, helping clients start, grow, and sell their business.