The DSO industry is brimming with private equity money, leading to concerns over patient safety

In recent years, private equity money has saturated the budding dental support organization (DSO) industry.

Private equity firms own 27 of the top 30 DSOs, according to Eileen O’Grady, research and campaign director of Private Equity Stakeholder Project, a nonprofit organization that researches the effect of private equity dollars on various industries. A DSO is a company that takes on all the business-related tasks necessary to run a dental practice, like IT support, accounting and billing, marketing, and facility maintenance.

The rise in private equity ownership of DSOs raises concerns among industry watchdogs and government officials, who claim the business model may incentivize profit over patients and ultimately put patients at risk.

“Payment structures between DSOs and dentists have been found to create perverse incentives that lead to overtreatment of patients, misleading advertising schemes, Medicaid fraud, and other problematic practices in order to reach revenue targets set by DSOs and maximize profit,” O’Grady wrote in a 2021 research report.

DSOs are attractive to private equity firms, according to O’Grady, because the DSO industry is “incredibly fragmented,” and private equity firms often take fragmented industries and consolidate them.

Kyle Francis, founder and president of Professional Transition Strategies, a firm that helps dentists buy and sell practices, said the dental industry grows at a very standard rate over time, and since there are no big spikes or dips in revenue, DSOs are attractive to private equity firms.

“We know for a fact that private equity firms will keep investing in DSOs,” O’Grady said. “Private equity interest in DSOs has not slowed down significantly even during the pandemic.”

Concerns about quantity over quality

Most states have laws that require dentists to own their practices. The idea is that if the clinician is the owner, they will be less likely to make business decisions that negatively affect patient care, like placing profits over quality of care.

DSOs aren’t supposed to make decisions that have a direct effect on patient care in the dental practices they own. Supporters of DSOs claim these organizations don’t affect clinical operations, according to O’Grady’s report. But she says that’s not always the case.

“There’s this kind of fallacy of a division between clinical and nonclinical operations,” O’Grady said.

In 2015, an investigation from the New York Attorney General’s Office found that Aspen Dental, a Chicago-based DSO, routinely made decisions affecting patient care, including “incentivizing and otherwise pressuring staff to increase sales of dental services and products, implementing revenue-oriented patient scheduling systems, and hiring and oversight of clinical staff, including associate dentists and dental hygienists.”

And a 2013 Senate committee report concluded that at least one major private equity-backed DSO increased profits by treating a high volume of patients, which “has a significant impact on the quality of care delivered.”

There have also been multiple instances when DSOs were charged with Medicaid fraud, such as in 2018 when Atlanta-based DSO Benevis and its affiliate Kool Smiles were ordered to pay $23.9 million to settle a federal lawsuit alleging the companies performed medically unnecessary dental procedures on children and then billed Medicaid.

“Private equity firms can still enter into agreements with clinicians that ultimately encourage clinicians or incentivize clinicians—or in some cases pressure clinicians—to do those things that ultimately boost profits at the cost of patient care,” O’Grady said.

Francis said he doesn’t think private equity ownership of DSOs is in itself a problem, as long as dentists are still making the clinical decisions. “It seems to us like the [DSOs] where the doctors are happiest and the patients get the best care are the ones where there’s a very strong wall between clinical and the backend services,” Francis said.

The ‘Wild West’ of regulation

There’s not much regulatory oversight of the DSO industry.

Compared to the regulatory environment for hospitals, the DSO industry is “kind of like the Wild West,” O’Grady said.

“I think part of the reason for that is that it’s a relatively new industry,” she said. “What regulation there is exists mostly at the state level.”

There is growing interest in regulating DSOs, particularly as high-profile lawsuits like Benevis’s come out, she said. “It’s likely that at some point in the next few years, there will be greater sort of scrutiny and action by regulators on private equity and DSOs,” O’Grady said.

Overall, the DSO business model may have some benefits, like increased access for patients, “but lawmakers and regulators must create sufficient oversight to ensure that quantity does not come at the cost of quality of care,” she concluded in her report.