Dental Support Organizations: An Overview of DSO Functions and Various DSO Models

Dental Support Organization Functions

     The dental attorneys at Nardone Limited routinely advise dentists on the best organizational structure for their particular dental practice organization. For some dentists, it makes sense to own or to contract with a dental support organization.  Dental support organizations (DSOs) have taken root in the United States in recent years and are becoming a popular organizational model for operating dental practices and delivering dental services to patients. Generally speaking, a DSO is a management services company that provides practice management services to dentists and dental practices pursuant to a written contract. Those practice management services commonly include human resources and employee benefits management; billing, accounts receivable, and other bookkeeping functions; marketing and public relations; information technology; purchasing of supplies and equipment; negotiation of vendor agreements; and many other back-office business functions. While all DSOs share the common function of providing centralized business management services, the ownership and structure of dental organizations that utilize DSOs can vary significantly.

Third-Party DSOs

     One of the most widely known and debated DSO models involves third-party DSOs that are owned by private equity firms—or by one or more individuals who may or may not be dentists—and either (1) contract with dentists or privately held dental practices to provide the centralized business services described above or (2) actually own dental practices and employ dentists and other clinical staff such as hygienists or dental assistants. In states like Ohio, where only a licensed dentist may own a dental practice, the DSO will generally act as a service provider to a professional corporation that employs the clinical staff of multiple dental practices. The DSO simply controls the operational functions of the practices, while the professional corporation retains control of clinical decisions through its licensed owners and employees. This DSO model is commonly equated with “corporate dentistry,” and often draws criticism from some individuals in the dental community. In particular, some criticize this model—especially the DSOs that are owned by private equity firms and directly employ dentists at multiple dental practices—for the increased pressure on dentists to produce and increase profit, instead of focusing on quality patient care. Others tout this model as a great way for more seasoned dentists to transition their practices—when there may not otherwise be a market to sell their practice—and for new dentists to gain experience and make a nice salary without the burdens of ownership. Additionally, some advocates prefer this structure because it alleviates the headaches that inevitably come along with managing the business operations of a dental practice and allows the dentist to focus primarily on the clinical operations.

Internal DSOs

     A lesser known DSO model involves the formation and ownership of a DSO by dentists who also own the dental practices that are supported by the DSO. Each supported dental practice generally enters into a management agreement with the DSO to provide the operational support services in return for payment of a flat fee, or an alternative payment structure, such as a percentage of the practice’s net collections. The attorneys at Nardone Limited only recommend this structure to doctors that own several dental practices and intend to continue growing, as it allows the owning doctors to create operational efficiencies and implement consistent procedures and systems across all of their supported dental practices. This DSO structure only makes sense if the long-term savings and operational efficiencies outweigh the time and cost involved in setting up and implementing the structure. The key difference between this model and the model discussed above is that the dental practice owners retain control of the business operational decisions. Thus, the internal DSO structure likely would not appeal to the doctor who wants to exclusively be a clinician and avoid the headaches of running a business.

     At first glance, the internal DSO structure may not be distinguishable from a general group practice. But, this model offers many advantages and cost savings over a group practice that does not utilize an internal DSO. As an example, by centralizing the purchasing of dental supplies, consumables, and equipment under the DSO, the DSO is able to reduce costs through economies of scale. Additionally, in the event the original owning doctors bring on additional partners with respect to a supported dental practice, the DSO becomes an additional revenue source for the owners of the DSO. That is, the DSO would continue to receive its fee under the management agreement, which is paid by the dental practice as a practice expense before distributing net profit to the practice owners. Another benefit of this model is that the DSO could be used as a finance company by lending the supported dental practices money when the practices are experiencing short-term cash flow issues, or to fund the purchase of additional practices. The interest paid on those loans by the supported practices would be another source of unearned income for the owners of the DSO. These are just a few examples of the many benefits that the internal DSO structure provides.

Contact Nardone Limited

     If you would like to learn more about how a DSO structure could potentially benefit your practice, contact the experienced dental attorneys at Nardone Limited for a consultation.