I am frequently asked by clients (who have developed anywhere from a single practice location to a hundred practice locations) when is the right time to create a dental service organization (or DSO) and what are the considerations that go into the decision as to whether or not to create a DSO structure. The following provides a high-level analysis of the DSO structure and its advantages, the appropriate time to create a DSO, and other related considerations.
What is a DSO?
A DSO provides non-clinical administrative services to dental practices that are owned, operated, and controlled by licensed dentists. A DSO does not have a dental license and cannot practice dentistry, make clinical decisions, or interfere with patient care. However, a DSO can contract with a dental practice to provide non-clinical services that can increase the efficiency of the practice, lower overhead, and ultimately make the practice more profitable. A DSO may be owned by non-dentists and may be bought and sold by non-dentist investors.
What are the Advantages of a DSO?
A properly structured DSO has a number of advantages, including: (1) centralization of administrative support services; (2) achievement of operational efficiencies; (3) achievement of substantial cost savings through volume-based discounts and superior bargaining power; (4) permissible investment and ownership by non-dentist investors; (5) availability of additional lending and financing options; and (6) the ability to sell the DSO (and its contractual management relationships) for a substantially higher multiple than is typically achievable through the sale of individual practices.
When is the right Time to Create a DSO Structure?
Any dentist who intends to expand beyond a single dental office should strongly consider creating a DSO. For dentists with aspirations of expanding to multiple states and/or who wish to obtain private equity investors or other non-dentist investors, it is imperative that the DSO structure be put in place as soon as possible. It is relatively straightforward and cost effective to create a DSO structure at the early stages of a clinical organization. However, the more practices that are added to an organization without a DSO structure in place, the more difficult and expensive it will be to later convert to a DSO structure.
What Does the Typical DSO Structure look like?
A properly structured DSO separates clinical functions and operations from nonclinical functions and operations. On the one hand, you will typically have a 100% dentist-owned professional corporation that performs all clinical functions and employs all clinical employees that, in turn, contracts through a series of business agreements with a DSO that performs all non-clinical administrative functions and employs all non-clinical employees. Often the DSO will own the dental equipment and hold the leases for the office premises, which can then be subleased to the dental practices for a fee. The DSO will also generally own all intellectual property utilized by the dental practices (including trade names and proprietary systems), which can also be licensed to the practices for a fee.
What regulations Apply to DSOs?
The overwhelming majority of states prohibit the corporate practice of dentistry and prohibit fee splitting between dentists and non-dentists. Therefore, it is imperative that the contractual relationship between the DSO and its affiliated dental practices comply with these regulations. As such, it is critical that the agreements do not allow the DSO to improperly control the dental practices or interfere with the independent professional judgment of the dental practice owners. Both the structure of the DSO relationship and the business agreements between the DSO and the dental practices must comply with these regulations.
What is the First Step in Creating a DSO?
The first step in creating a DSO is to develop a business plan for the future growth of your clinical organization, including determining the number of practices you would like to add and the number of states you would like to conduct business. Once you have a clear idea as to your anticipated plan for clinical growth and expansion, you should sit down with competent dental regulatory counsel to develop a regulatory compliant DSO structure for your organization and to develop regulatory compliant business agreements. Once your organization has been structured in a regulatory compliant manner, it will be much easier to attract investors and realize an attractive return.
Conclusion
The DSO structure can be critical to your ability to grow and expand your organization. Any dentists who plan on expanding beyond a single practice location, in multiple states, and/or intend to seek non-dentist investors should strongly consider creating a regulatory compliant DSO structure.
Brian Colao is the Director of Dykema Cox Smith’s Dental Service Organizations Industry Group. He is widely regarded as one of the foremost authorities in the United States on the laws affecting dental service organizations. He can be reached at (214) 462-6409 or bcolao@dykema.com.
