Building a Dental Group and DSO Platform

When most dentists hear the phrase “building your platform”, they think of the physical plant of the office or perhaps the foundation of the building. In actuality, we refer to building the platform as a term meaning the virtual infrastructure required to operate a dental support organization, serving as the backbone of any investment-grade DSO. It accounts for the key functional areas that support, drive and monitor most non-clinical functions of the business. Platform areas include: Human Resources, Accounting, Finance, Legal, Supply Chain/Vendor Management, Marketing, IT, Revenue Cycle Management, Call Center, and other central support functions depending on the business model. Most entrepreneurial dentists building a group or DSO have a vision of someday monetizing their business for a greater value than their investment. In order to achieve a premium valuation, buyers of or investors in DSOs will want to see a full-scale central operating platform that allows the business to sustainably run without the day to day management of the owner. Without this platform, there is no DSO. Without a DSO structure, all that remains are fractured, individually run and managed dental offices or a group of disparate practices. And ultimately with no platform and infrastructure, there is no premium valuation.

Human Resources is an often overlooked function as dental companies transform from a solo office or small group into a DSOs. HR managers are an expensive investment for any growing company. However, without a structured human resources department, the company cannot effectively manage employee relations, employee performance, recruitment and hiring, benefits administration, pay scale management, or maintain a consistent onboarding process. Compliance with these critical functions becomes more stringent as the practice continues to add employees, and once reaching the threshold of 50, the game changes entirely when health insurance becomes a requirement. Utilizing a PEO (professional employment organization) is a way to cost-effectively build your HR platform before hiring a full-time Human Resources department.

When surveying entrepreneurial dentists who have successfully built and exited from groups and DSOs, consistently the first and most critical hire they made was an experienced CFO. The Accounting and Finance functions within the platform are key foundational areas in building infrastructure and having proper insight into company performance. Correctly illustrating company financials is critical to use with a bank or other capital sources in funding future growth. Many new groups or emerging DSO’s struggle to identify trends in expenses from income statement statements if they have not adopted one single chart of accounts to make month to month comparisons. It is important to fully understand both the balance sheet and income statement and professionally monitor both of these areas in order to monitor performance, identify growth and savings opportunities, and highlight company performance in the best light for current and future investors.

The Legal Structure of a dental company is technically what differentiates a group practice versus a DSO. A group practice generally operates as such with a solo or multiple dentists owners of the PC or multiple PCs (depending on the state) and typically raises capital from bank debt or personal investment from the dentist owners. The reasons for forming a true DSO structure typically revolve around the way the company wishes to either raise capital or share profits of the company. In order for either of the two former goals to be fulfilled by a non-dentist, a separate management company must exist to leave the clinical functions at the PC level, and provide services to the practice(s) through management services agreements. There are many skilled lawyers who operate solely in the DSO space and it will be necessary to consult with one or more prior to executing your vision for growth.

Supply Chain / Vendor Management refers to the centralized purchasing segment of the dental company. Monitoring expenses and purchasing is a critical component to maintaining profitability and controlling costs for a group or DSO. The larger the company gets, the more buying power it holds to leverage best pricing with vendors. In a well-run DSO, dental supplies and lab combined should account for no more 9% of revenue (depending on the amount of crown and bridge, orthodontics, implants, etc.) DSO’s and groups will work with their supply companies to develop a formulary which narrows down a list of items to order and best pricing can be received on that new list of items. The Clinical Director will select a short list of the best laboratories that will provide competitive pricing and support that the dentists can utilize for their lab work. Of course, the procurement of goods and services for dental companies spans more than the just supplies and labs – these are typically the two largest buckets when looking at COGS. Less sophisticated groups have failed to capitalize on these economies of scale through leveraged purchasing and give up significant value when looking to monetize their business.

Marketing and Branding are two distinctly different yet highly correlated functions in dental groups. The age-old question of “to brand or not to brand?” is more relevant today than ever when forming a group or DSO. Both branded and unbranded models successfully exist today in some of the largest DSOs in the country. Groups need to understand the risks of branding their offices before they have a consistent product across all locations. If you were to walk into a McDonalds in Detroit, how would those fries taste compared to the ones you had in Atlanta? In a branded environment, they MUST taste the same! In an unbranded environment, there is no expectation of consistency. Regardless of which option you choose, marketing the office is required to generate your new patient flow. To build your marketing platform, you will need centralized marketing support to provide website, SEO, mailer, newsletter, social media, internal referral strategies, and major media campaigns. Centralized marketing will allow you to best understand your patient flow, the number of new patients your group requires, and to measure the CCA (cost of customer acquisition) from each marketing strategy.

The IT platform consisting of software, hardware, support, and other technology is a critical function in sustaining day to day functionality within the practice. It is commonly thought that all practices in a DSO or group MUST be on the identical practice management software platform. In some cases, that makes sense to implement if your model is to build de novo practices and there is no data migration or downtime required as you aggregate offices. However, our experience is that over half of groups and emerging DSOs today operate on disparate practice management software systems. There are dozens of software companies providing data aggregation and dashboard services that can provide centralized and consolidated practice data without going through a full software transition. Our recommendation is to find a trusted IT company to perform an initial IT assessment to identify weaknesses or areas that need to be upgraded that will ensure you prevent or limit potential downtime within the practice.

As group practices mature and the aforementioned administrative services have been centralized, many emerging DSOs will begin to integrate Revenue Cycle Management as a platform service. Revenue cycle management encompasses all functions related to capturing, managing, and collecting patient revenue from the individual dental practices. This typically begins by synchronizing the credentialing, fee schedule management, and insurance components. This can expand to payment posting, adjustments, and claim denial management. Of course, none of these functions can properly be supported without the right IT infrastructure to provide the technology to allow a centralized team to remotely access this information, and manage the process while providing economies of scale to the labor force.

Call Centers can be one of the toughest platform areas to effectively integrate and centralize for emerging DSOs. Patients of dental offices become very attached to familiar faces in the office, and familiar voices on the phone. Dentistry is a very relationship-based business and with each layer of this relationship that is stretched, the less attached to the doctor and team the patient may feel. Some benefits do exist including fewer missed patient calls, shorter hold times, and longer answering hours than typical practice hours. However, once fully built and integrated, dental call centers are typically still a cost center for the management company and rarely show any immediate return on investment. Immense IT hardware and software costs, staffing issues, and decentralization from patients have caused problems in many emerging DSOs. Conversely, private equity seems to love the concept of a centralized call center and will typically use this as an add-back to value if it has not been successfully integrated into the platform.

These non-clinical support functions are the difference between individually run disparate dental offices and having the necessary platform to grow and scale. The sophistication of the platform drives the speed at which DSO’s and groups can grow. Aligned Dental Partners specifically focuses on building and implementing the necessary platform for entrepreneurial dentists, groups, and emerging DSOs to enable premium valuations.