Making a Great DSO Deal
By Harry J. Lew
In our prior DSO article, we painted a picture of dental service organizations on the move. Due to mounting overhead with traditional practices, management challenges, and marketplace opportunities, DSOs have grown significantly over the last few decades. Today, at least 7.8 percent of dentists work for a DSO. That figure increases to 16.3 percent of dentists younger than age 34.
But not all is sweetness and light when it comes to these innovative group practice models. They come in many different formats, some of which might focus less on providing quality patient care than on boosting corporate profits. And not all provide work settings that will satisfy former dental practice owners, who are accustomed to a high degree of both business and clinical autonomy.
Rather than running with the herd of DSO advocates, we suggested dentists—you—think hard about three factors before joining a DSO:
- The broad characteristics of the DSO you’re considering
- Your career stage
- The specifics of the DSO’s offer
After evaluating all of these issues (see “Dental Service Organizations on the Move”), your decision will rest on the contents of the DSO agreements you’re asked to sign. At that point, you need to put the deal under the microscope before making your final decision. It will also be crucial to evaluate how the DSO deals with malpractice insurance. We will discuss this aspect at the end of this article.
William J. Kohler and R. Craig Woods, attorneys with Dykema Gossett PLLC, warn dentists that joining a DSO can be a “smooth and rewarding process or a miserable and disastrous one.” Whether your experience is positive or negative, they say, depends on whether you adhere to deal-making best practices. Writing in DSO News, the Dykema attorneys laid down what they believe is an effective a four-step process:
- Know your personal and professional goals
- Get outside financial advice
- Expedite the deal (but not rashly)
- Stay engaged, without micromanaging
Focus on goals
Kohler and Woods encourage dentists to not place too much emphasis at the outset on the financial specifics of the deal. Yes, getting an attractive buy-out offer is important, but not at the expense of trampling your professional goals. In other words, making a lot of money will be a fool’s bargain if it destroys your passion for dentistry. To this end, dentists considering a DSO offer should consider goal-related questions such as:
- Once you offload business management to a DSO, do you want your clinical job to remain essentially the same?
- Would you consider joining the DSO’s executive ranks (or be headed there within a few years)?
- Are you interested in taking an equity interest in the DSO, along with your clinical duties?
- Finally, if the DSO’s offer falls short, would you consider accepting an earn-out provision (getting additional payment[s] if your practice meets certain performance targets)?
Bring in the experts
In terms of getting outside advice, Kohler and Woods advises dentists to seek accounting, legal, tax, and regulatory experts to make sure their deal doesn’t founder on technicalities. Four concerns are paramount in this regard, they say:
- The valuation of your practice, especially regarding regional and national sales prices
- Tax implications of the deal
- Accounting issues
- State dental regulatory compliance
As you might imagine, having an attorney in your corner can prevent problems from arising down the road. Kohler and Woods say legal counsel will help you to carefully review the purchase, employment, and equity participation agreements, as well as the cash consideration at closing, not to mention your equity participation and earn-out provisions (if any). Your attorney will also advise you on what happens to your existing practice debt, what the transaction expenses will be (fees for outside advisors), and your rights and obligations as a new equity owner (if applicable).
Not to be forgotten is the attorney’s role in shepherding the deal through several discrete phases, including:
- Letter of intent
- Due diligence
- Agreement development and execution
- Closing, including cash transfer
Keep things moving
Expediting the deal, but not rashly, is the next step of the process. Kohler and Woods caution you to not fall prey to indecision, excessive “lawyering,” practice complexities hindering the deal, debt complications, and third-party entanglements.
While you don’t want to let your deal founder in minutiae, you also don’t want to paper over important issues that can blow up the venture later. Finding a happy balance between urgency and diligence will help you to avoid crucial mistakes, Kohler and Woods advise.
Keep tabs without fussing
The final step, staying engaged without micromanaging, is important because it’s your practice and any deal must accommodate your goals and concerns. On the other hand if you inject yourself into every aspect of the transaction, especially if you lack technical expertise, you may grind progress to a halt and increase the likelihood of mistakes.
Although the prior steps focus on evaluating the DSO in terms of its ability to advance your professional goals and on the content of the core agreements, it’s also crucial to look at what the DSO offers regarding business systems, dental team interactions, clinical dentistry, and compensation.
Look hard at business systems
According to David G. Dunning, Kenneth J. Davis, and Brian M. Lange, who jointly wrote an article on the topic in the Journal of Dental Education, the whole idea for joining a large DSO in the first place is to benefit from its enhanced efficiencies. To deliver on that promise, it must have a well-functioning practice management system that can bring in new patients, deliver care profitably, and produce growing revenue and profits to the practice.
To these ends, the authors recommend you find answers to the following questions—detailed answers—before you decide to join a DSO:
- How does the practice schedule and confirm patient appointments?
- What are its financial policies and systems and how successful are they at getting revenue into the practice?
- Is there a process for replacing patient appointments that are cancelled at the last moment?
- What does the DSO’s key performance indicators (KPIs)? What systems are in place to track and report on them?
The last question is especially important because KPIs literally create DSO success. So if you’re considering a DSO, the authors urge you to ask hard questions about how the DSO tracks:
- Gross and net production goals
- How third parties reimburse submitted bills (percentages and adjustments)
- Percentage of bills that end up in collections
- Overhead expenses per category of care (and overall)
- Percentage of available appointments utilized
- New patient growth
How’s the teamwork?
Dental-team interactions are important because, along with a DSO’s business systems, they help to determine the quality of patient care. Just as you’d evaluate any potential employer’s workplace, dentists who are considering a DSO offer should consider its commitment to creating high-performing dental teams. Some indicators of this include:
- Effective use of team meetings and other avenues for formal and informal team communications
- Frequent opportunities for professional skill development
- Structured career paths that encourage staff to remain long term
- A process for tracking and reporting on team job satisfaction
Related issues on which to probe include:
- What does the DSO expect from its dentists regarding production and collections?
- What type of support can the dentist expect to receive from the practice (number of dental assistants, hygienists, front-office staff) and what is the experience of these individuals?
- What specific training will the dentist receive in terms delivering dental care and creating chair-side manner?
- How is the DSO using online and offline marketing channels to grow its brand and to promote sales?
Evaluate clinical dentistry
As important as these questions are, the quality of a DSO’s clinical dentistry is even more crucial. Unless it is fully committed to delivering high-quality care, it may lack long-term sustainability. Dunning, Davis, and Lange point to “horror stories” regarding inequitable allocation of patients among dentists, along with situations in which the clinical staff lacks input into the selection of dental materials and use of laboratory services. To make sure such problems don’t plague you after you join a DSO, be sure to ask these questions:
- What input does the DSO have in the treatment-planning process?
- What dental materials and equipment does the DSO use and do they seek dentist opinions before selecting such resources?
- What dental laboratory does the DSO use and is it a third-party facility or DSO owned? If the latter, is the dentist penalized financially for using an outside facility?
- When the DSO has multiple dentists (typically the case), how are existing and new patients assigned? And will the latter be spread proportionately among all the dentists?
- Finally, what does a typical dentist’s day look like?
How’s does compensation work?
Last but not least is the whole area of compensation. Obviously, you’ll want to know a great deal about the compensation package the DSO is offering, including:
- Pay basis: for example, will you receive a guaranteed salary or will your pay be variable (based on production)? Will it be adjusted after insurance payments? Adjusted for collections?
- Expected workweek: as alluded to earlier, it’s important to know what your typical workweek will look like. Specifically, how many days per week will you have to work and how many hours per day?
- Dental hygienist production: how will it affect your own compensation, if at all?
- Lab expenses: will the DSO pick up the entire lab tab or just a portion? If the latter, does your share get charged when revenue enters the practice (“off the top”) or when you get paid (“off the bottom”). Dunning, Davis, and Lange say an “off-the-bottom” method can cost you tens of thousands of dollars in annual compensation.
Although most of the due diligence items you’ll consider before joining a DSO are either practice management, clinical dentistry, or compensation related, make sure to address one final matter before making your financial decision: evaluate how you’ll receive dental malpractice insurance within the DSO.
Start by asking whether you’ll be allowed to keep your existing dental malpractice insurance policy. This is probably the preferred solution. If not, then you need to determine whether you currently have an occurrence-based policy or a claims-made policy.
With the former, there are no transition issues. You will continue to receive liability protection for any care you provided while the occurrence policy was in force. However, if you have a claims-made policy, then you will lose coverage for your prior acts once that policy terminates. That’s because claims-made policies only pay out when you file claims while they’re in effect. If you cancel your policy and then a patient sues you over care you provided during your prior work, you will be on your own financially.
Solution? Ask your DSO to provide coverage for your prior acts or to cover the costs of an extended reporting period to cover your prior work.
Other insurance matters to consider:
- Make sure the coverage limits are adequate for the type of dental work you do.
- Determine whether the DSO’s malpractice insurance gives you (versus the DSO) the power to refuse to settle cases. This provision is called “consent to settle.” It’s important because your DSO and its insurer may simply decide to settle the case for financial reasons, even though it’s your reputation on the line.
As you can see, doing your due diligence on a DSO deal is no simple matter. The rewards of moving to such an arrangement can be significant, especially in terms of better work-life balance and the financial advantages of working for a more efficient practice.
But if you miss an important detail like having to work every Saturday or being forced to work with a DSO-owned lab, which does shoddy work, then your dream DSO opportunity might easily become a nightmare. Don’t let this happen to you. Do your homework before making your move!