At McGuireWoods’ 16th annual Healthcare Finance & Growth (HCFG) Conference, a panel of dental industry leaders shared insights with attendees about the market. Panelists included Smiles Ahead COO Sean Barnard, SGA Dental Partners Vice President of M&A Jonathan Mikailonis, Polaris Healthcare Partners Co-founder and Partner Diwakar Sinha, and Edgemont Partners Managing Director Brett Skolnik. The DSO and dental sector panel was moderated by McGuireWoods’ Anna Timmerman.
During their remarks, the panelists confirmed what McGuireWoods sees in practice: DSOs have continued to expand their presence in the market.
Below are a few key takeaways from this session at the 2023 HCFG Conference:
1. As uncertainty continues in the market, buyers are focusing on creating more strategic alignments in the DSO space. In general, dental is a stable industry and is considered a stable investment, as the demand for dental services is relatively inelastic, based on Skolnik’s experiences at Edgemont Partners. That said, buyers have to consider the current economy and weigh the risk of investment against the increasing cost of capital.
Therefore, while buyers continue to be willing to come to the table to do deals, Mikailonis noted that, because of the uncertainty in the economy, buyers have become more selective in the deals they choose. A deal that a DSO may have gone ahead with a year or two ago may not get the green light today. Further, because corporate practice of dentistry and noncompete restrictions vary so widely from state to state, some buyers are choosing to invest in more buyer-friendly states. Overall, dental investors are looking for opportunities that more completely align with their strategic vision, even if that means turning down certain transactions.
2. Antitrust regulations draw concerns across the dental industry. The panel discussed the increasing oversight on transactions involving healthcare entities as state antitrust enforcement has proliferated in recent years. McGuireWoods notes that state attorneys general have become much more involved in transactions that historically would not have required any state review or approval.
For example, in 2022, Oregon implemented the Health Care Market Oversight program which requires healthcare entities to give the Oregon Health Authority 180 days’ notice before closing on material transactions. Also, Washington requires all parties to a transaction to give the Washington Attorney General at least 60 days’ written notice before the effective date of any transaction that would result in a material change to a hospital, hospital system or provider organization. In addition, Maine has introduced legislation that also implicates healthcare transaction reporting requirements.
Therefore, dental transactions that previously may have required no prior state approvals will need to be reviewed by counsel to confirm whether any state attorney general review is necessary. That has the potential of slowing the process, as well as making certain investor information publicly available.
3. The dental sector is still feeling the effects of a tight labor market. Ensuring that dental practices have adequate staff has been an ongoing problem for the dental industry, even more significantly since the pandemic, and it is a big issue for the future, according to Barnard. Vacant positions in dental assisting and dental hygiene have reduced dental practice capacity by an estimated 10% nationally, according to the American Dental Association. In addition, the healthcare industry more generally has seen disruptions and pressures caused by the pandemic take a toll on workers’ mental health, leading to burnout and even workers exiting the profession.
However, according to the panelists, the best way for dental practices to effectively recruit and retain staff is to start with strong leadership and a good culture. Sinha recommends that investors focus on partnering with dentists who can effectively lead their staff and promote stability in the workforce. In addition, investors can support workforce retention by reconsidering compensation, benefits, position responsibility and overall expectations. Offering transparency with respect to market-rate compensation, according to Barnard, and recruiting based on pathways to partnership, according to Mikailonis, provide DSOs and dental practices an opportunity to combat the current employment environment.
Thanks to everyone who attended the HCFG Conference and the DSO and dental sector panel — McGuireWoods looks forward to continuing the dialogue. Please contact one of the authors for additional information on McGuireWoods’ extensive experience assisting clients in the dental sector.
Additional resources:
- Or. Rev. Stat. §§ 415.500 et seq
- RCW 19.390.020; RCW 19.390.030
- American Dental Association’s “Dental Workforce Shortages: Data to Navigate Today’s Labor Market”