By: Michael W. Davis, DDSJune 5, 2015
The first misnomer and misrepresentation which must be addressed is dental service organizations (DSOs). These are primarily business structures designed to circumvent state laws relating to ownership of dental practices. Most state statutes require only licensed dentists in their states may lawfully own a dental practice. DSOs falsely allege they restrict management to non-clinical areas.
In reality, the corporate entity DSOs own the dental practices they manage. Doctors in those practices are merely employees, whose employment may be terminated at the will of their employer, the DSO. The DSO fully controls the bank accounts of each and every clinic they manage, with accounts usually swept into Delaware banks at least bi-weekly. They establish monetary production quotas and bonuses for patient services. They establish the hours of operation and staff. They usually dictate office equipment, patient clinical supplies, and dental laboratories for patients. They supervise and control patient scheduling. They also dictate numbers of clinical protocols bypassing the doctor/patient relationship, such as mandating crowns over fillings, often unnecessary and more costly “deep cleanings”, antibiotic therapy into alleged “deep gum pockets”, etc.
Most “owner” doctors in these larger corporate practices are sham figureheads. They provide the corporate managers a layer of liability protection, for their unlicensed and unlawful practice of dentistry (see: Federal Fifth Circuit ruling 07-30430). These alleged “owner” doctors are not allowed to freely sell their asset of the dental practice, under their contract service agreements with the DSO. They aren’t as “owners” allowed discontinuing services with the DSO, and must retain the DSO’s services into perpetuity. In effect, the doctor owner(s) represent a façade of nominee ownership. The valid beneficial owner of the dental practices is obviously the DSO.
Initially, most DSOs operate similarly to any other venture capital firm. These start-ups have high potential risk for collapse, as well as high potential for significant growth. The interests and well-being of patients are only a secondary concern at best. The goal for venture capital managers is rapid quarterly increases in profits. Production numbers for the current quarter are paramount. Strategic business plans for 5-years into the future are almost laughable. DSOs commonly hard-sell patients, via employees trained in retail marketing. They arm-twist patients into third party loans with high interest rates, often lacking full disclosures. They hard-sell patients into unnecessary or discretionary dental treatments, with a sense of critical urgency. They lean on their dentist and hygienist employees to maximize dollar production, at the expense of their patients’ best welfare. Sell! Sell! Sell!
Venture capital firms (in this case- newer DSOs) are not always averse to engaging in unlawful “pump and dump” tactics, to artificially pump up the valuation of their company, and then sell out. For example, a number of DSOs have been active in dental Medicaid fraud as a business model. Since it’s well known that government oversight of dental Medicaid is abysmal at best, this was historically (and still is) a classic strategy for corporate dental success. Further, Medicaid fraud is probably the most lucrative business model established in the dental industry.
Even when a handful of employee doctors may have been be disciplined, government regulators routinely gave corporate DSO managers a pass (especially if those managers helped throw employee dentists under the bus). Government fines or penalties were almost always for pennies on the dollar, if public civil actions were even considered. In this scenario, the victims of dental Medicaid fraud and abuses are disadvantaged children, taxpayers, and those private equity firms foolish enough to be left holding the bag, by purchasing a venture capital DSO.
Private equity firms generally seek to hold assets like DSOs for longer periods of time. They may purchase assets (i.e. companies, real estate, etc.) from another private equity firm, a publicly traded company and take it private, or a venture capital firm. As with venture capital firms their funding is generated from outside private investors. Their sole fiduciary responsibility is to their private shareholders. They have absolutely no responsibility to patient treatment and/or favorable patient outcomes. Patient care is held out to be the responsibility of employee doctors, thus generating at least two or three layers of corporate liability protection for the private equity firm, which now pulls the strings of patient care and management.
In conclusion, one can readily view the component parts (DSO, venture capital firms, and private equity firms), as they play out in the models of large scale corporate dental healthcare. There exist a myriad of failed DSOs, which damaged the fiscal bottom lines of venture capital firms and private equity firms. I’ll leave that long list to another future article. This is a business rife with boiler-room con men and “coat-and-tie” professional scam artists.
Unfortunately, it’s the public which takes the biggest hit. Companies fail and patients are abandoned. Taxpayers are cheated. Young dentists are corrupted. Disadvantaged and disabled citizens are harmed. Patients have no idea, if their doctor works in their best interest, or a distant corporate employer. And, if their dentist has been a corporate employee for any length of time, one can be assured the doctor places the company’s interest to the fore. You best hold tightly onto your wallet, because there’s little means to trust your doctor, who ranks very low on the corporate dental totem pole.