A force to be reckoned with

May 1, 1998
Are management service companies littering the landscape or do they provide much-needed relief to beleagured practices? The answer probably depends on whether they treat you like a customer or an employee.

Are management service companies littering the landscape or do they provide much-needed relief to beleagured practices? The answer probably depends on whether they treat you like a customer or an employee.

Bernard Fink, DDS

Dental practice management companies (DPMCs) have burst upon our industry`s landscape during the past few years. These companies were founded upon the notion that small businesses, such as dental practices, can gain benefits from the economics of consolidation. Generally, the tools available to larger businesses are too expensive for smaller businesses. The more expensive and sophisticated systems and technologies, it is thought, should drive the consolidated business forward. The benefits include economies of scale, access to capital, access to more sophisticated information technology and focused professional management.

The DPMCs are a force to be reckoned with. According to the investment community, they already represent in excess of one billion dollars in gross yearly practice revenues. Many dentists have heard of the DPMCs, but they are not aware of their nature, form or structure, or of their likely impact upon dentistry.

I have read with great interest many of the articles that have been written about the plethora of dental practice management service companies founded in the last two to three years. Those of us who are on the inside of this growing industry accept one basic axiom about DPMCs: No two are alike. The landscape is littered with 50 to 60 companies, all configured differently, and these companies basically include the good, the bad and the ugly. Of course, beauty is in the eye of the beholder. It is important that each owner of a dental practice approach the DPMC sector with intelligence and due diligence.

The basis of all practice-management companies is consolidation. Consolidation is one of the great driving forces of today`s world economy. One need only look at industries such as banking, travel, food service and financial services. Both the investment community and the business community believe that consolidation of smaller businesses under a larger umbrella of management can improve efficiency, profitability and the quality of the goods or services involved.

Generally, consolidators have thrived in industries, such as dentistry, which:

- Are fragmented in terms of ownership.

- Have needs for capital investments to drive the acquisition of both technology and market share.

- Would benefit from the implementation of professional middle management. Such management would be effective, but too expensive for the small-business owner.

These benefits, along with the dollars being offered up as an inducement to enter the DPMC market, are attractive. Many dentists, however, are worried that involvement with a practice management company could bring with it some daunting sequelae:

- Loss of practice control.

- Interference with the doctor-patient relationship.

- Future financial hardship.

Since there is such a wide variety of DPMCs, it is important to look into each structure to see if the benefits can be gained without the losses. The following are some of the issues I would suggest that you examine in your evaluation of these companies.

Employee or an affiliate?

Most DPMCs fall into two basic models or categories. The first might be termed an "ownership/control model." In this model, the DPMC pays the dentist a consideration in exchange for either the ownership or the control of the practice. The dentist then continues in the practice either as an employee of the DPMC or as the controlled affiliate. The DPMC expects to recoup its investment by driving more dollars to the bottom-line profit of the practice, yielding a profit stream for the DPMC. This is supposedly accomplished in a variety of ways, including advertising, standardization of procedures, improved business practices and, occasionally, increased reliance on discounted fees or managed care. Of course, the presupposition here is that businesspeople can run the practice and make better decisions than the dentist.

For those of us who believe in the ability of dentists to run their own practices, and are concerned about interference in or control of patient treatment by nondentists, this model is not an acceptable choice. Dentists who, for example, believe that fee-for-service dentistry is likely to continue to be a viable and dominant force would not want to give up the right to choose treatment, fee modalities or quality of equipment and supplies.

A second model, however, represents a rapidly growing segment of the DPMC landscape. The affiliation model permits dentists to retain complete control and ownership of their practices. The relationship with the DPMC is limited and defined by a management services agreement, which clearly sets down each party`s rights and responsibilities.

The DPMC, instead of sharing or owning bottom-line profits, charges a fee dependent on the services it provides. That fee usually increases as the size of the practice and the array of services provided by the DPMC expands. Since the DPMC is not dependent on the practice`s bottom line for profits, it has no need to control the flow of money through the business of the practice. Many dentists now employ billing services, buying services, accounting services, etc. The affiliation model is largely a supermarket of service modalities available for the fee charged to the constituent practices.

In this model, the DPMC has no say as to who the dentist treats, how the dentist provides treatment, what fees are charged or what materials are used. In a pure affiliation model, when the owner/operator retires, dies or becomes disabled, and the practice is sold, the dentist, and not the DPMC, gets the money from the sale.

Clearly, in both models, the DPMC is buying an income stream. Whether that income is a fee or a share of the profits, the DPMC needs to bring to the table some benefits in order to justify its "take" (see related article).

Whether or not a dentist receives stock as part of the affiliation or purchase consideration, it is important that the dentist believes the DPMC has the tools and the engine to go where it`s supposed to go. That is obviously toward a successful Initial Public Offering and a profitable existence. Whether or not you own stock in the DPMC, the quality of services provided definitely will be driven by the company`s financial success. Here are some of the things you need to look at:

o Management team. The investment community generally considers the marquee-star quality of the management team the key to predicting the DPMC`s success. Is there a dentist on the management team who has the national credibility to attract practices into the DPMC? Is there someone from the dental industry who has proven the ability to add value to the management of dental practices? Also, are there professional management personnel, people with financial and operations experience in the general business world, preferably at a high level, in a publicly traded company?

In addition, look at the firms the DPMC has hired to support the company. Does the law firm have experience in public company offerings? Does the accounting firm`s signature on a prospectus carry credibility in the public investment community?

o Systems. There is a suspicion even within the DPMC industry that many of the management companies are simply "smoke and mirror" deals. The thought is that there are some companies which have no intention or capability of adding anything but fluff and intangible philosophical advice to their constituent practices. The only thing these companies want is the liquidity afforded by an Initial Public Offering (IPO). Common sense says that long-term success will have to be based on sound and thorough preparation of business systems, systems which require millions of dollars and thousands of hours in investment on the part of the DPMC.

Therefore, it is critical that the potential affiliating dentist understand the DPMC`s armamentarium of dental software and hardware; its accounting information technology; its payroll; billing and payable platforms; its ordering and procurement systems for goods and equipment; and its consultancy capabilities.

o Funding. It takes scads of money to build a DPMC that has any chance of long-term success. Besides the millions of dollars required for acquisition of practices or affiliations and the millions required for the acquisition of information technology, there also is the huge cost of other infrastructure to be considered. Experienced and talented personnel in operations, in development and in the financial end of these businesses are human resources that are extraordinarily expensive to recruit, to hire and to support.

Last but not least, the ancillary fees engendered by consultants, accountants and lawyers make the trip from the germination of the idea to the public market very costly.

It takes very deep pockets to go where these companies want to go and to still support their constituent practices.

o Governance. As an ethical dentist, you should make sure that the control of patient treatment remains in your hands. As a human being, you should think long and hard before ceding any of the control of your working life to any person or company. Look carefully at the contracts and make sure you hire the best possible legal and accounting help to understand both the spirit and the letter of the control issues involved.

o Corporate philosophy. Probably the most difficult thing to figure out about a large company is the agenda and philosophy that is the underlying substance of its business plan and strategy. It is my opinion that there is a world of difference between the corporate philosophy of the ownership/control model and the affiliation model.

The ownership/control model is based on the notion that the principles of business can be better applied to dental practice by letting the professional managers, the MBAs, CPAs, etc. control the operation of the constituent practices. Therefore, the key to that business plan is to expand the physical size of the clinic by wholesale infrastructure investment and to expand the number of patients by advertising, discounting fees and increasing managed-care components.

The key to the affiliation model is quite different. These companies feel that there is no better path to success than through affiliation with dentists who have successfully managed and owned practices. These companies seek to empower and support these practitioners by putting money, materials and systems behind them. Therefore, rather than seeking control of these practices, the affiliation model seeks to provide them with the tools provided by systems, capital and technology that would otherwise not be affordable to the individual dentist.

I believe that properly constructed DPMCs can be part of the solution in dealing with the market forces raging around the average dental practice. The problem, however, is that there is very limited information available about this phenomenon.

Historically, when dentistry has been faced with a new and not clearly understandable idea, everybody in our profession rushes to claim the moral high ground, often not pausing to understand the nature of the idea. When I first went into practice in 1969, nobody understood the new idea of bank credit cards. Unbelievably, a local dental society passed a resolution making it unethical to take a specific credit card as payment for dental services.

Dentists definitely perceive that the barbarians are at the gates. We are faced with the threat of increasing and sometimes senseless government regulations. We see a seemingly endless and explosive growth in the alphabet plague of HMOs, PPOs, IPAs, etc. We see that our physician-cousins have been hammered by the new economics of medical care. And so we turn to organized dentistry. Our organizations are willing to educate us. But, because of legal constraints, they cannot jump into the fray in the support of the traditional fee-for-service dental community. This, in turn, fosters a general feeling of anxiety among dentists, who fear that they are about to be rolled over by the same managed-care engine that changed the face of medicine. Many dentists have begun to despair for the future of their chosen profession and also have begun either to consider leaving practice or to change to practice modalities they don?t like.

I feel differently. My father was a dentist. I was brought up with a fervent belief in the ability of dentists to run their practices well ? to the benefit of both the dentist and the patient. I don?t want to see that change.

So my thought is not, OIf you can?t beat ?em, join ?em.O My thought is, OIf you can?t beat ?em, eat ?em.O Let business do what our professional organizations can?t do. Let qualified, ethically based DPMCs put capital, technology and management at the disposal of dentists who have successfully run their own practices. These resources will help those dentists:

Y To expand.

Y To differentiate themselves by obtaining cutting-edge technology.

Y To increase patient load by buying other fee-for-service practices.

Y To better serve their patients by taking some of the daunting back-office processes like billing, accounting and ordering off their backs, leaving more time to focus on patient treatment.

This is the quintessential role of American business: to put empowerment behind an idea that works. I believe that traditional fee-for-service dentistry is a healthy care delivery system that works. The economics of our free market economy can support that idea.

They taketh, but what do they giveth?

No DPMC should claim that it can make up for what it charges or takes from the practice merely by saving money on expenses. Certainly, there are economies of scale to be had, such as savings on equipment and supplies, as well as savings on accounting and other professional fees. But all savings in total generally will not recoup the loss of profit due to the fee or profit share taken by the DPMC. However, cost savings are not the weight to be put on the scale to counterbalance the DPMC`s piece of the cash flow. In addition, DPMCs can and should provide the following:

Structure. The best information technology often is too expensive for the individual dentist. DPMCs, however, can make millions of dollars by investing in information technology systems. Data given to a good practice owner will provide structure to decisions on labor costs, salary increases, fee structure vs. overhead and staff-incentive programs.

Capital. Access to capital will make it easier for the owner to stay on the cutting edge by buying technology such as digital radiography, better computers and laser technology.

In addition, some DPMCs have "fold-in" programs. In an affiliation model, the DPMC will get a larger fee if the practice grows and requires more management services. Many affiliation DPMCs are willing to provide their affiliates with the funds needed to acquire the practices of other dentists who are leaving due to retirement, disability or death. The affiliated dentist has the benefit of explosive growth to the bottom and top lines without any risk or expenditure of funds. In addition, when the affiliated dentist retires and sells the practice, the value added by the "fold-in" accrues to the owner.

Stock ownership. Finally, many of the ownership/control and the affiliation models offer stock in the DPMC as part of the consideration to the dentist. Many DPMCs, confident of the success of their companies in the public marketplace after an Initial Public Offering (IPO) takes place, will try to limit the amount of stock given and would rather pay the consideration mainly in cash or debt.

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