If Pigs Could Fly And Dental Professionals Could Be Turned Bad By Private Equity Investment
Thomas A. Climo
A NONSENSE ARGUMENT MORE IN TUNE WITH LOBBYING THAN COMMON SENSE
On May 30, 2012, DrBicuspid.com provided an article written by Donna Domino, features editor. It was titled “Private equity firms eye big profits in dentistry.” Ms. Domino was the second journalist to reach out to me that month. The first was Sydney Freedberg of Bloomsberg, whose piece was “Dental abuse seen driven by private equity investments” on May 16.
Both journalists were nice, courteous, and consummate professionals. I want to make clear that although I believe I was very helpful in providing them with data and insight from my consulting of both group and solo dental practices, I did not say one negative word about private equity investment into dentistry.
A third journalist, Josh Kosman of the New York Post, will confirm this, even though he also wrote an article with the provocative title that replaced an “S” with a “$” entitled “Private equity firms $ink teeth into dentistry,” published August 27, 2010.
The exaggerations contained in all three articles tying private equity investment to bad dentistry are only anecdotal, and not supported by serious statistical numbers.
But…but…but “Equivalent PhD, Climo, you said, and I’ll quote:
“…private-equity firms are likely to work dentists longer once they take over practices to boost profits and that could lead to worse service.”
What exactly is the implication of citing the bad practices of what 100 or 200 dentists in a crowd of 12,000 dentists, a response rate of less than 1% or 2% of those taking salaries, when a similar response rate can be found with the remaining 130,000 nongroup or solo practitioner dentists?
If the response rate of bad dentistry from solo practitioners canvasses at least as many statistical dentists as the anecdotal evidence against salaried dentists, if not more, then how is it that bad dentistry is causally connected to private equity? How it is that private equity investment is responsible for bad dentistry when evidence demonstrates the same demographic for privately owned solo practitioner dentists? It doesn’t, and all arguments against private equity investment leading to bad dentistry are fallow and not believable.
No private equity investor would deem it wise to diminish hygiene care or bloat dental procedures, if for no other reason than their risk-averseness to the potential of lawsuits. These would turn positive net cash flow into negative owing to the prospect of legal fees and settlement awards. I don’t buy the connection between bad dentistry and private equity investment at all. Instead, I’ll cite my article on “The Emergence of the Dental Practice Management Company” (Dental Economics®, September 2009), where I argue for the inevitability of the dental practice managing company (DPM) owing to economies of scale and centralization of management. That private equity is more inclined to invest in a DPM rather than a solo practitioner owes itself to the random results and mostly unprofitable nature of solo-owned practices.
To say the private equity investors hope to influence the practice of profitable but bad dentistry has no foundation in the manner private equity investors choose their forum of investment — which in health care is usually steady yield and low-risk.
I have reviewed hundreds of financial statements from solo practitioner and group practice offices. There is one uniform fact that emerges — solo practitioners put net income into their pockets as balance sheet draws, while group practices expense dentists’ salaries just like any other corporation and book profit.
As someone with an ear to the ground on happenings in both dentistry and capital markets, my recommendation is to listen more to market forces than to attorneys representing solo practitioners, and to biased dental practitioners representing themselves. This includes lobbying groups such as the ADA, because their vested interest is not in the vested interest of patients, nor is it the right way to run and manage a dental office. Their interest is in preserving the monopoly of solo practitioner dentists. That monopoly is seeing its day, and personally, I’m glad. I want my dental practices to thrive, not wither away to be sold for a song when the founding dentist retires.
Dentists put a lot of effort into building their practices, and only with proper management can this effort be translated into business valuation dollars that make sense. This is unlike the current business valuation of dental practices that is pegged against a less than whole percentage of last year’s net collections. Dentistry is the only industry I know of that allows its operations to be sold for less than the total revenues of the prior year. What company in their right mind, or with any net income, would do this? The answer suggests itself … there is very little genuine net income in solo practices.
To find that, you have to turn to DPMrun practices, which again, invites the attention of the private equity market.
My phone might stop ringing, journalists might abandon me as no longer a favorite source on the topic of private equity in dentistry, and a slew of solo practitioners will jump to the fore in proclaiming their profitability. I’m used to it. I garner my solo practitioner clients through analyzing their past year’s financial statements, and demonstrating the exact dollar amounts they have stolen from the sound running of their practices in terms of absent net income margin.
Once a dental practice is viewed as an economic deliverable, clinic aside, there is no debate about the need to improve the management and operations in dentistry. The fact that the clinic standards remain high in dentistry is one of the reasons private equity likes this branch of health care.
References available upon request
THOMAS A. CLIMO is a past professor of economics in England and has a long tenure in America of consulting to both large group DPMs and solo-owned dental practices in Arizona, California, Connecticut, New Hampshire, Massachusetts, Nevada, and New York. He can be contacted at thomas.a.climo@cox.net.
Equivalent Dr. Tom Climo
Expert Witness – Economics
Dr. Climo Consulting
7300 Cogburn Court (his house)
Las Vegas, NV 89131
702-578-2757
Crooks and Liars:
Wall Street-Owned Dental Management Companies At Center Of Senate InquiryMay 18, 2012
“Allegations like Gagnon’s “are not representative” of the more than 500 cases handled by ReachOut affiliates in Isaac’s school district, said Mickey Mandelbaum, a company spokesman.”
“ReachOut is one of at least 25 dental management-services companies bought or backed by private-equity firms in the last decade. Dentists contract with the companies for marketing, scheduling, staff recruitment, supplies and other services. The companies account for about 12,000, or 8 percent, of U.S. dentists, according to Thomas A. Climo, a Las Vegas dental consultant.”
Dr. Bicuspid:
A tale of two dentists
By Thomas Climo, PhD, DrBicuspid.com contributing writer
What is your practice really worth?
By Thomas Climo, PhD, DrBicuspid.com contributing writer
Dental Economics:
If Pigs Could Fly And Dental Professionals Could Be Turned Bad By Private Equity Investment
Linkedin:
Tom has an “equivalent” Phd. in Accounting, Finance, Econ, and Philosophy. He readily points out he’s a former professor in England, but let’s face it, that was in 1983! Nearly 30 years ago! Mostly he operated a 54 hole golf course that includes an “award winning” club house. Looks like in 2000 he decided he was an expert in dental practice management companies – Corporate Dental Chains – and is a hired “expert”.
Facebook:
Below is one of his facebook posts:
FTISLAND my shitty parent (mom) won't let me go and see you guys in Los Angeles ... where else are you playing in the U.S.? Please post gig list. Thank you. Luv u guys. Alibah's dad
New York Post:
Private-equity firms $ink teeth into dentistry
August 27, 2010
“…Financial consultant Tom Climo said 89 percent of dental services, including preventative care, are covered by insurance, with patients only paying for oral and cosmetic surgery. Healthcare reform that is cutting into reimbursement for medical doctors is not affecting dentists, he said.
An investment banker said private-equity firms like dental offices because they sell for low valuations and one can borrow a fair amount of money against them because of reliable cash flow.
The downside, Climo said, is private-equity firms are likely to work dentists longer once they take over practices to boost profits and that could lead to worse service.
Private equity firms already own the Forba and Bright Now! dental chains. Kool Smiles did not return calls for comment.”
Private-equity firms $ink teeth into dentistry
August 27, 2010
“…Financial consultant Tom Climo said 89 percent of dental services, including preventative care, are covered by insurance, with patients only paying for oral and cosmetic surgery. Healthcare reform that is cutting into reimbursement for medical doctors is not affecting dentists, he said.
An investment banker said private-equity firms like dental offices because they sell for low valuations and one can borrow a fair amount of money against them because of reliable cash flow.
The downside, Climo said, is private-equity firms are likely to work dentists longer once they take over practices to boost profits and that could lead to worse service.
Private equity firms already own the Forba and Bright Now! dental chains. Kool Smiles did not return calls for comment.”
