Myths, Rumors, and Bald Faced Lies- Truths Revealed about the DSO Industry
By: Michael W. Davis, DDS
There exists a great deal of misinformation, as well as intentional misrepresentations, within the dental service organization (DSO) industry. Much, if not most of this of this, is fostered by the DSO industry itself.
Historically in healthcare, dentists were held to ethical and legal standards within the doctor/patient relationship (legal contract) always placing their patient’s interest, above all other interests. Court rulings have determined that because of a doctor’s expert knowledge, which is not easily accessible to the general public, the patient is at a distinct disadvantage within this contract agreement. Obviously, the delivery of healthcare services is a very different matter, than the buying and selling of widgets.
A corporate third party, the DSO, may enter into this contract agreement (doctor/patient relationship). This is usually without the knowledge or consent of the patient. Such an action may invalidate as unlawful, the doctor/patient relationship. (Please reference Fifth Circuit Ruling: 07-30430.) DSOs, which utilize bonus systems and production quotas for professional providers, are engaging in the unlicensed and unlawful practice of dentistry. Such corporate violators are subject to the same regulatory sanctions and disciplinary actions, as individual violators. Unfortunately, too few government regulators have advanced past their current ineptitude and corruption. This must change.
“At XYZ Dental, we allow you to focus on what you do best; provide excellent dental care for patients. We take care of all the rest.” is a common corporate dentist-recruiting message. Even the provider contracts include a proviso waiver that only licensed dentists provide dental care. Unfortunately, contract verbiage is far from the reality.
Unlicensed corporate managers, not doctors, very often make clinical decisions effecting direct patient care. This may include the quantity and quality of dental supplies for a dental clinic. It may include a very limited selection of utilization of dental laboratories, many of which are undisclosed offshore dental lab sweatshops. Unlicensed corporate clinic managers, who are not under any doctor’s supervision, may be utilizing arm-twisting sales techniques, to get patients to sign on for financing of unnecessary dental care. Similar arm-twisting may be used on doctors and hygienists, to increase clinic profits, by selling unneeded dental treatments to their patients.
Hygienists, who lawfully must be working under the direction and supervision of a duly licensed doctor, are today working for whomever writes their paycheck. Periodontal probing measurements are invented, to generate additional cases of unnecessary scaling and root planing (deep cleaning). Sulcular antibiotic therapy is sold to patients, even before assessment of results, to initial therapy of scaling and root planing. Adult cleaning visits are often restricted to 20-30 minutes, which nearly always leaves excessive disease-causing agents. In fact, often unlicensed dental assistants are providing hygiene services.
Generation of corporate profits trumps the interests of patients. Any dental professional employee who dares question the corporate model will soon be out the door. After all, a corporation’s first fiduciary responsibility is to generate maximal returns for shareholders. The interests of patients never enter the picture.
Upper management in the DSO industry will often argue, that numbers of non-corporate doctors are engaging in the same or similar patient abuses, within their smaller businesses. And, this justifies their grand scale abuses, how? It’s the old lame failed argument, of justifying bad behavior, with other examples of bad behavior. Reality: dental regulatory boards have reported a far greater percentage of statute violations originating from corporate dentistry, than from smaller doctor-controlled practices.
Another DSO fallacy often relates to doctor financial compensation. Verbally, their management and doctor-recruiters advise dentists of compensation, clearly based on a percentage of the doctor’s clinical production and/or hourly wage. Yet, the complex legalese of the employment contract, seemingly tells another story. These contracts are often so complicated, only a law firm concurrently expert in business law, contract law, and finance could hope to decipher the maze of legal verbiage.
Fortunately, any American Dental Association (ADA) member can have these contracts reviewed, as a benefit of membership. Few recent grads take advantage, as they not only lack finances to hire an appropriate attorney for contract review, but also are often not ADA members.
Not only does corporate dentistry take advantage of these recently graduating doctors, but also they purchase recruitment ads from the ADA, to further promote their agendas. I have no idea why the ADA is complicit, in this deceit fostered on our junior colleagues.
Most DSOs monitor every dental clinic metric, usually on a daily basis. This means, they monitor the specific production service for each clinical provider daily. They know exactly what services were provided, which supplies were dispensed to each clinic, and the production per patient (PPP). There have been numbers of public record legal cases demonstrating management has pressured doctors to increase PPP (unlicensed & unlawful practice of dentistry). “It’s our way or the highway” and “You only eat what you kill” are two commonly reported phrases utilized by DSO management, to motivate employee dentists.
“We fully cooperated with state and federal investigators and prosecutors”, is the line fed the public, when a dirty corporate dentist gets thrown under the bus. Since the DSO monitors each and every doctor’s daily metric for production, inclusive of related supplies, the DSO knows or reasonably should know, if any employee-doctor is engaged in fraud. Yet, even after many months or years of a doctor’s fraud, the corporation ignores or often lauds their “rainmaker’s” dedication advancing dollar production (based on malpractice and fraud). Shareholders are primarily interested in maximal return on investment, not on how those moneys were generated. Prosecutors are too often only concerned with a lower level felony conviction, to advance their careers. Organized crime and racketeering within corporate America and the healthcare industry isn’t even on their radar.
DSOs often point to “economy of scale” as their competitive advantage, over small business dentistry. This perspective is so ludicrous, as to be laughable. The single greatest overhead expense of any dental business is employee salaries and compensation. Both small practices & corporate dentistry compete for the same labor pool. In fact, corporate dentistry has additional overhead, of levels of middle and senior management, needing compensation. Landlords primarily operate locally, and don’t offer any discount per square foot, based on a small business or larger corporate tenant.
Theoretically, a DSO can purchase dental equipment in bulk, and benefit from discounts. In reality, a small business dental practice will purchase used dental equipment (perhaps slightly mismatched in color scheme, but highly serviceable.), discontinued models of last year, and often the doctor will personally service much of the equipment. Again, the savings and business efficiency favors small business dentistry.
Yes, DSOs can purchase dental supplies in bulk, and benefit from cost savings. However, these savings aren’t as great as one might assume. Individual doctors may join buyer’s clubs, and enjoy a substantial supply cost savings. Others sign on with a major product supplier, with an exclusive agreement, and benefit from significant savings. Further, few DSO doctors are allowed to select which products and dental supplies they may employ, to serve their patients. This again, represents the unlicensed and unlawful practice of dentistry, by an unlicensed corporate manager. The patient is usually fully unaware.
DSOs can and do sign on with discount dental laboratories, enjoying a cost savings. Unfortunately, these savings are too often the result of dental labs generating high-volume questionable-quality work, which is too frequently from poorly regulated offshore sweatshops. Other labs are established as a deceitful mechanism, to benefit a senior corporate manager, either through a kickback or nepotism. Overhead costs are saved, but too often at the expense of patient care. Doctors generally have little to no say in lab selection, or are limited to a handful of choices, to serve patients. Again, patients are usually fully unaware.
The biggest advantage favoring big business DSO dentistry, over small business dentistry, relates to mechanisms for dodging lawful taxation. The DSO will establish for each given dental practice, which they control, a nominee dentist owner (sham-owner). In some cases, the “owner” is never permitted to own more than 49% of the practice. In other cases, the owner-dentist is permitted to “own” the entire practice, but controls nothing of significance.
Dental practices may be “purchased” by beneficial owners, for fees ranging from $5-$100. Since service agreements signed by “owner” doctors stipulate the DSO controls the clinic’s bank account, and who may buy and sell the dental practices they manage, DSOs are effectively the beneficial owner of the dental practice (unlawful in many states, but rarely enforced). In a lawful corporate structure, the owner could freely select how moneys in their clinic’s bank account could be dispersed. In the legal definition of ownership, an owner could freely select, to whom to sell their asset (dental practice). A true legally defined owner could also freely and independently select, to continue with the current DSO’s management services, opt to utilize another DSO’s services, or opt to employee a variety of different contractors, inclusive of self-management by the owner-doctor. Thus, doctor ownership within the current DSO structure is an unlawful sham.
With control of the various dental clinics’ bank accounts, the DSO disperses these moneys, to accounts in Delaware. Profits generated in a variety of states don’t stay in the state where generated, but are misrepresented for in accounting ledgers, as overhead operating expenses of the DSO. Thus, the consequences of individual state taxation on profits are dodged (unlawful, but rarely if ever enforced).
The dodge on federal taxation is slightly more complex (but, not much). The scheme is to funnel dental clinic profits to investors in the DSO (mezzanine financiers & first lien creditors). These are usually private equity investment companies, which benefit from this tax scam. Profits are reassigned to private equity investors, as returns on investment, to be taxed at the federal capital gains rate (25%), versus the earned income rate (38%) paid by small business dentistry. Any additional revenues collected (profits) are assigned to offshore bank accounts, of their foreign registered corporations. This eliminates all federal corporate taxation, and makes collecting on a U.S. jury trial award nearly impossible.
Small business dentistry is clearly more business efficient. Small business dentistry retains more money within local economies where generated. Small business dentistry supports the general funds of the local, state and federal tax base, far more than corporate DSO dentistry. Small business dentistry is generally better designed to support the best interests of patients and the public, far more than corporate DSO dentistry. Small business dentistry is more transparent for regulatory accountability within administrative, civil and criminal law, versus corporate DSO dentistry.
In the final analysis, corporate DSO dentistry does enjoy advantages over small business dentistry. Those advantages include selective, and unfair regulation and enforcement of tax codes by authorities. Other advantages include regulatory blindfolds on the unlicensed and unlawful practice of dentistry by non-dentist corporate managers, a dental profession that is largely ignorant or complacent of the abuses of corporate dentistry, and a public that currently is even more ignorant.
The pendulum may swing in a different direction. The media and numbers of civil attorneys understand the abuse to the public interest. More and more elected representatives also understand the mechanisms, which DSO dentistry negatively impacts the public welfare.
“Duck and Cover” under a tiny wooden school desk was a foolish concept taught children such as myself, during the 1960s, as a defense against a possible nuclear attack from the former Soviet Union. “Duck and Cover” is seemingly the defense tactic currently used by organized dentistry, towards corporate DSO dentistry. “Duck and Cover” is also too often, the regulatory response of state dental boards, insurance industry fraud investigators, Medicaid investigators, and state and federal prosecutors. Any thoughtful and rational individual will soon comprehend; “Duck and Cover” is an irrational response to the DSO industry.
Statutes and tax code need to be enforced uniformly across the board. Crony capitalism, of government regulation favoring one group (DSO dentistry), over another group (small business dentistry), needs to stop. The interests of the private equity investment community (Wall Street) should never trump the interests of the American public (Main Street). No third party, especially an agent controlled by the private equity investment industry, should be allowed to enter into the relationship between doctors and patients.
Jack Nicholson’s character in “A Few Good Men” proclaimed, “The truth. You can’t handle the truth!” Will your reaction be “Duck and Cover”? Or, will you elect to meet the challenge, and serve the best interests of patients and the future of the dental profession? It’s your choice.
This article was originally published by Dental Equities in the September 2014 Newsletter. You can read it in DE’s format here.