Interview Synopsis

Dental Service Organisations – Q2 2022 Market Update

  • Private Equity
  • Healthcare
  • North America

US dental service organisations (DSOs) could find it difficult to reach double-digit organic growth this year as rising labour costs and staffing shortages “at all levels” put pressure on the industry, according to a former executive at Benevis.

US dental service organisation labour costs and supply pressure begin to bite

In an Interview with Third Bridge Forum, the specialist said if supply costs rise across the board by 10%, DSOs could see 5% increases, with the rest supplemented by substitute products and partnering with different distributors. 

We were told that there are “real” staffing challenges among all DSOs. The number of DSO dentists are likely down by 5-10% and hygienists by 10-20%, according to the specialist. At the same time, labour costs are increasing, putting margin pressure on many dental organisations, the specialist added. 

The specialist said that individual practices are trending at 3-8x EBITDA margins on the general dentistry side, with higher valuations for “well-run” speciality practices. But we were also told the industry can expect low single-digit organic growth. Although practices are getting “creative” to drive top-line growth such as raising fees, the specialist said there is a limit to how high they can be raised. 

The specialist expects consolidation at “every level” of the DSO industry. They told us large DSOs with 500-plus practices are focusing on acquiring medium-sized DSOs rather than small, regional practices. The top 10 DSOs will continue to grow in size, the specialist said, adding that only a prolonged recession and extremely high interest rates could stop the industry consolidating further. 

We were told that regulatory headwinds affecting DSOs in 2007 still affect them today, but that state-level governments now view DSOs as less aggressive than before – recognising that they are a large group of employers that are “here to stay”. However, the specialist said at a federal level there is “definite noise” about private equity’s involvement in dentistry – as there is in other areas of healthcare

The specialist concluded that the best defence to ensure DSOs do not face the same level of scrutiny from regulators as nursing homes or assisted living is to develop a strong compliance programme and ensure DSO dentists are accountable. 

To access all the human insights in Third Bridge Forum’s Dental Service Organisations – Q2 2022 Market Update & M&A Outlook Interview, click here to view the full transcript.

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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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