Common Issues with the Group Dentistry Business Model, and How to Fix Them
The following interview was conducted by Greg Tice with Ian McNickle, Co-founder and CEO of ICON Dental Partners.
Greg: Who is ICON? Tell me about your group.
Ian: We are a multi-specialty dental group with practices currently located throughout the west coast, Texas, and the Midwest. Part of our initial business model design was based on my prior experience with Seattle Study Club whereby we wanted to have general dentists and specialists all working together, collaborating clinically to deliver the best patient care. However, in our model we take it to the next level and have shared ownership through a parent company so everyone can collaborate on a deeper level. The business model we developed is really innovative, and solves a lot of issues with the current group dentistry approach.
Greg: We’ve spoken a few times about your business model. Can you please explain the difference between a DSO and DPO?
Ian: You bet. There are quite a few different approaches to structuring and running a dental group. The most common approach is the DSO (Dental Support Organization) model. Most groups that have been around for a while have this DSO structure whereby doctors sell their practice to the DSO so there is shared ownership between the DSO and the doctors. The DSO gives the doctor some cash and stock in the DSO in exchange for the sale of their practice. The doctor normally continues to work for a period of at least 5 years as a W2 employee.
The typical approach of a DSO is to have a significant input into the clinical operations of a practice, and often involves limitations in terms of which supply company to use, which labs to use, standardizes most of the software, etc. The DSO usually has control over practice staffing, and production targets. The DSO normally would provide a suite of non-clinical support services such as HR, recruiting, IT, marketing, accounting, payroll administration, etc.
I would categorize the DPO (Dental Partnership Organization) model as the next step in the evolution of group dentistry. Similar to a DSO, a DPO also gives doctors a combination of cash and stock when they sell their practice and join the group, but typically the stock ownership is more beneficial for doctors in a DPO since most (or all) of their stock is at the parent company level. This normally results in better financial returns for doctors.
A DPO model often gives doctors more autonomy over clinical decisions and practice staffing decisions, and ideally would allow doctors to have complete autonomy over these areas as they do in private practice. Essentially the doctor remains in full control of all clinical and staffing decision making, while the DPO support team would handle all the non-clinical support services, thereby reducing the workload and stress on the doctor.
Greg: Treating doctors more like partners than employees certainly makes sense, and we know that for most practitioners, clinical autonomy is a big deal too. My understanding is that most groups have investors. How do investors factor in here?
Ian: Most groups are started by a group of doctors who scale the group to 5 or 10 locations, and sort of hit a wall in terms of scaling it beyond that size. This is usually the stage where they bring on investors to provide more financial resources, and management expertise. The challenge with investors is there often develops a misalignment of incentives between the investors and the doctors.
Professional investors (i.e., private equity, family offices, and venture capital firms) are highly focused on generating a large return on their invested capital so they tend to make decisions from that viewpoint, what will maximize short-term profits. This often results in forcing doctors to use a limited number of suppliers and labs so that volume discounts can be negotiated. Likewise, practice staffing and support team staffing are often reduced to increase profit margins. The problem with these strategies is they are often implemented in an overly aggressive manner that degrades the operational performance of practices, and really aggravates doctors and their teams. The resulting impact on culture is predictably negative.
Most of these investors are looking to sell their ownership stake to another investor within 3 to 5 years so that creates a short-term mindset. Doctors on the other hand, want to focus on patient care, and have the freedom to use whatever labs and supplies they deem appropriate. Thus, conflict is almost inevitable with the traditional investor-backed DSO approach.
Greg: So how does this get fixed? What things have you done at ICON to address these issues?
Ian: Good question. When we started ICON, we believed the key issue to solve was keeping doctors and their team members happy. Organizations that focus on taking great care of their partners and team members typically perform far better than organizations too focused on profits or metrics. Of course profits and metrics matter, but there needs to be proper perspective on the hierarchy of these priorities, and this is where most groups get it wrong in my opinion.
During the research process to design a better group dentistry model, we interviewed well over 200 general dentists and specialists, and asked them questions around what would an ideal dental group business model look like to them, as well as what would turn them off. Over the course of two years, we continued to refine our business model based on doctor input, and this allowed us to solve most of the major issues with the current DSO model.
ICON operates as a DPO so our approach is truly a partnership. Our doctors control the Board, and own 90% of the parent company at this point. We only have one level of shares so our doctors have all their stock at the parent company level. This creates total alignment between the doctors and management.
We had a couple dozen doctors work with us to design, create, and launch ICON so in reality we started with something like 25 co-founder doctors which is pretty cool. We literally drafted the legal paperwork with the doctors and our attorneys, all working together as a team to produce an excellent framework that is really favorable to doctors. As a result, we clearly enshrined in our legal paperwork that doctors have full control over all clinical and practice staffing decisions. They love that.
Likewise, the doctors continue to own their clinical entity (EIN), as well as the patient records and charts. These items will always be owned by the doctors in our model which creates a clear separation between clinical control for the doctors, and non-clinical support from the support team.
We also implemented some pretty clever strategies into our financial design to really reward doctors for their current and future performance. We have a process to review their profit growth (EBITDA) each year, and grant them with additional shares based on that growth. This creates a built-in incentive for doctors to continue to focus on practice performance, and treats everyone fairly based on their performance. In this model, doctors never leave money on the table by joining while they are in growth mode, or have major growth in the future. This approach is very uncommon in the group dentistry space.
Greg: So, do you have investors at ICON?
Ian: Not right now, but we will probably partner with investors in the future. The key is to maintain control over the key aspects that make ICON special such as the doctor autonomy over clinical and practice staffing, parent company level stock, ongoing stock grants based on growth performance, our unique approach to retirement, and several other items. When we do eventually partner with investors, we will make sure to maintain control over those items, or our doctors on the Board will not approve the deal, and neither would I.
One of the great aspects of growing to a significant size before we partner with investors is that we have the potential to capture significant financial upside for all the current shareholders over these first few years together.
Greg: You mentioned something about a unique retirement approach. What is that?
Ian: It is fairly common when doctors retire from their group that they need to have replaced their production by training and ramping up a replacement doctor. However, this can be difficult to do so the result is often a claw back on the payout amount which can dramatically reduce the overall payout amount to doctors.
At ICON we implemented a program whereby our doctors can reduce their time involvement to a lower level, but stay involved in the company in various ways for an extended period of time which is up to them. This creates more time for the newer doctors to ramp up their production, and allows for the retiring doctor to capture the full value of their shares. This is really fair for the doctors and ICON. They want the full value of their shares, and we want our practices to continue performing at a similar level so everyone wins. Again, this is not common in group dentistry.
Greg: There’s lots of different information out there about “stock and valuation,” can you clear this up especially as it relates to DPO?
Ian: The answer to your question is really the main driving force for consolidation in our industry. Historically, when a dental practice is sold the practice valuation is based on a percentage of collections, typically around 70% – 100% of collections. However, investors and groups value practices on a multiple of the practice EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). This is an accounting term to describe the cash flow in a business. Investors like this metric because it helps them analyze margins, and compare investment opportunities within an industry, and between industries.
A single private practice would be valued around 4 to 6 times the practice EBITDA, which often equates to around 70% to 100% of collections. So, the valuation is similar, but often a bit higher with groups. The key driving force for industry consolidation is that as a group scales, the multiple on the EBITDA goes up. For example, a group with $10M in EBITDA might be valued around 10 times EBITDA, and a group with $50M in EBITDA might be valued around 12 to 14 times EBITDA.
Imagine a group that is worth 10 times EBITDA buys a practice for 5 times. The minute that practice is acquired onto the group platform, it has literally doubled in value. As you add more and more practices to your platform, the incremental valuation gains become huge. The typical target investors expect is to get a 3 to 5 times return on their investment within 3 to 5 years. Consider what other options you have to generate a 500% return in 5 years? That is the power of arbitrage. This consolidation phenomenon is happening in many other industries right now such as veterinary, plastic surgery, med spas, accounting firms, optometrists, and so on.
Greg: Thank you Ian, I am excited by what you are bringing to the table.
Ian: Yes, the combination of financial upside and operational synergies really do create a game-changing situation for doctors. The key is to design a model that doctors will want to be a part of, and I believe we have done exactly that at ICON.
If you would like to learn more about this topic, please contact Ian McNickle at ian@icondentalpartners.com, or online at https://www.icondentalpartners.com/learn.
