It has been said that the dental profession is the last cottage industry. Twenty years ago, the predominant business format for a dental practice was a sole proprietorship. Over the years, this trend in dental practice transitions has changed dramatically. Currently approximately 58% of dentists are considered solo practitioners. The remaining 42% consist of two or multi-doctor business entities. It is likely that this will continue, as we have been seeing the trend of recent graduates choosing not to practice alone.
Regarding another type of dental practice transition, some observers believe that a larger percentage of the profession will shift to the corporate model, with many doctors working as employees. According to surveys of graduating dentists by the American Dental Education Association (ADEA), this may not necessarily be true. These surveys report that approximately 62% of recent graduates still prefer to be self-employed.
Even so, there’s no doubt that the Dental Service Organization (DSO) model, also known as Dental Support Organization, will continue to grow in the foreseeable future. Over the last 10 years, the largest dental groups grew at 14% annually, compared to broader dental spending which grew 2% to 4% annually. In 2017, DSO market share was estimated to be approximately 16% of all practices in the United States. We’ve seen several industry analyst reports that have projected a 15% annual growth rate for DSOs over the next five years. This implies a market penetration of at least 30% by 2021!
National companies with over 100 locations comprise between the 7% to 12% of the U.S. dental market. Practices with three to 100 locations make up approximately 12% to 18% of the U.S. dental market. Ranges are used because it is hard to get specific statistics.
What percentage of the market will be DSOs in the future is uncertain. However, what is clear is that the attractive returns offered by the dental profession are attracting private equity capital. Dentistry is a fertile ground for Private Equity (PE) firms. The consolidation that has taken place in many other healthcare arenas pales when compared to the financial opportunities in the dental space. In addition to the higher returns with almost 200,000 practicing dentists, there are many more opportunities for DSOs to expand. The fact that reimbursement is primarily private—not through insurance—is another reason that PE firms are attracted.
One of the largest issues facing DSOs will be the recruitment of doctors and long-term staffing. Often DSOs hire the selling practitioner. However, when the doctor retires and completes the final dental practice transition, it is not so simple to replace him or her, especially in the case of a highly productive dentist. It may take two practitioners to replace that level of productivity. Originally, many DSOs offered new doctors employment, only to discover a high turnover rate. To help ensure doctor retention, DSOs soon learned to offer young doctors an equity position.
In conclusion, the dental profession is in a state of change, particularly in terms of the predominant business structure. While it’s likely that there will be more large and corporate practices, the exact mix is hard to predict with any pinpoint accuracy.