“I have a memory like an elephant. In fact, elephants consult me.” ~Noel Coward
We have had the honor of speaking at many conferences this year and have fielded too many questions to count. Having said that, one particular question seems to come up with great frequency among those who own one to three or four offices: “What’s the real difference in a group practice versus a DSO, and when does it make sense to form an actual DSO?”
Well, in an effort to spread the word, we posed that question as well as a few others to one of the industry’s noted authorities, Bart Walker of McGuireWoods, LLP. Bart concentrates on mergers, acquisitions, and healthcare regulatory compliance, and has represented lenders, borrowers and equity sponsors in various healthcare-related financing and acquisition transactions. He regularly lectures and writes on transactional and regulatory issues affecting a wide range of healthcare businesses. Needless to say, Bart is an industry expert and we’re thankful for his contribution to this blog post.
First of all, what is the difference between a group dental practice and a Dental Service Organization (“DSO”)?
Typically “DSO” means that there is an entity, separate from the practice, which is providing administrative and management services to the practice. DSOs come in all different shapes and sizes and can vary by state. Some are heavily involved in almost every non-clinical aspect of the business of the practice. Others provide a “lighter touch” in a simple fee for service model. Here, a more limited line of services would be provided by the DSO. Simply having two distinct legal entities does not necessarily make a “DSO”. Calling an organization a “DSO” typically implies that there is significant infrastructure (e.g., a professional management team, IT support, quality and outcomes monitoring, more sophisticated payor relationship management, billing and collections support, human resources, etc.) beyond what would be found in a standalone small practice environment. The value of this infrastructure or platform lies in its ability to deliver efficient processes, standardization and professional business management in a way that is scalable across multiple new locations (either through practice acquisition, affiliation or de novo development).
Is there an appropriate point in time when a group of dentists would need to form an official DSO?
It will vary depending on the goals of the practice. While there is significant opportunity (and value) in forming a DSO, it can be a difficult road and require a significant investment of time and resources.
Are there structural differences in a DSO versus a group practice?
The most significant difference is typically the bifurcation of business and non-clinical functions into a separate legal entity. However, there is no hard-and-fast rule – two legal entities are not necessarily required. The ability to own and operate a dental practice is legally restricted in many states. Careful attention should be paid to both state and federal laws when structuring these arrangements.
Are there considerations for equity-owning dentists versus non-equity associates?
The main difference is that all of the economic benefits of a non-equity associate will flow through their employment agreement. As a result, they will not have any equity interest in the practice. This means that their compensatory payments are both the beginning and end of their potential profitability. An equity owner, by contrast, would share in the profits of the practice after all other expenses have been paid.
What is a “regulatory compliant” DSO? Do they differ by state?
Requirements vary widely by state. This is a very fact-specific analysis and should be undertaken with a high degree of caution.
Thanks, Bart! This is obviously a MAJOR topic of discussion and contemplation for any emerging group to consider. Frankly, it’s a topic that is entirely too large to be tackled in a simple blog post, but Bart has shared enough of his wisdom to give us some food for thought.