Corporate Dentistry: Making an Informed Practice Decision W. Carter Brown, DMD, FAGD AGD President-Elect Chair, AGD Practice Models Task Force and Corporate Dentistry Task Force Aaron Bumann, DDS Member, AGD New Dentist Committee The Academy of General Dentistry’s “Corporate Dentistry Task Force” has developed this presentation based on some of its findings from its Investigative Report on Practice Modalities. The task force went on from a single meeting concept to working through an entire year. This presentation explains some of its findings as they might relate to career options. It’s important to note that the task force did not recommend any policy or position, and nothing we talk about here is intended to suggest that we like or dislike any model over any other. The Task Force was comprised of the AGD Division Coordinator in Advocacy, former chairs and current members of the AGD’s Legislative & Governmental Affairs (LGA) and Dental Practice (DP) Councils, a state dental board member who was involved in this issue, a former state AGD president, chair of AGD Regional Directors, a former national dental director of a large corporate practice, a practicing dentist who has worked closely with legislators on corporate dentistry, a member of AGD’s New Dentist Committee, members of the ADA’s Dental Practice and Communications Councils, plus esteemed consultants. The Task Force began with literature review that assisted our main activity, which included face-to face interviews and discussions with owners or heads of 6 large dental corporations, current/former dental directors from some of these, head of an association of DSOs, a consultant that works with corporate practices, current and former employees and owners of corporate practices, corporations that service these organizations, as well as an attorney involved in national litigation on the subject. So let’s begin…

Weighing the Options Associate, Small/Solo Practice Practice Ownership Public Health Specialization Corporate Dentistry There are various options for a career in dentistry in many modalities. Selection of which options are always part of the equation whether it is the new graduate or experienced dentists. Historically, the private industry career options have been to either work for or own a traditional practice – solo, small, or large. Alternatively, dentists had the option of going back to school to specialize or enter the public health realm. Today, a number of different models, that we group together as corporate dentistry, offer the alternative option of working in a private setting, but without having to deal directly with the management side of dentistry. This presentation will try to provide some information about these models. Associate, Traditional Large Group Practice

Trends in Insurance Benefits Changes in Oral Health Status Dentistry Trends in Insurance Benefits The Economy Corporate Practices Health Care Reform Act Changes in Oral Health Status Midlevel Providers Rising Student Debt New Dental Schools This slide from the ADA illustrates some of the influences, seen and unseen, which may guide some of these decisions. There are many unknowns – the effects of health care reform, and the general preferences/priorities of future graduating classes are two such unknowns. The investigative report did not deal with speculation and prediction, and instead reported what we found. Source: American Dental Association, “Shedding Light on the Invisible Hand,” by Marco Vujicic, PhD, 2011

Projected Growth Largest Groups Hypothetical Market Share of the Largest Groups Among Private Practitioners In 2009, the ADA predicted continued growth of the largest group practices through 2015. This statistic is not just corporate practices. It includes all of the largest group practices, including those that may be large geographical or multi-specialty models that only combine resources of smaller practices without imposing any separate management modality. During the Investigation we heard some experts project continued growth in perpetuity, while others claim that growth will plateau around 20% of market share. We will discuss the plateau later. The fact is we do not know what will happen 5 or 10 years down the road. Thus, it is important that we stay abreast of the issue. Source: American Dental Association, Health Policy Resources Center, Large Group Practices, Sampling Frame, Unpublished Data, July 2009

A Few Definitions Dental Service Organization (DSO): The structure which deals with the delivery of patient care Can be a large group practice or multiple PC units They often contract with a DMO for management services One of the largest challenges during the investigation was a lack of consistent definitions for many of the terms used in this model. For purposes of our investigation we used our working definition of corporate dentistry as: a variety of practice modalities in which management services, at a minimum, are provided in a manner that is organizationally distinct from the scope of activities performed by a dentist within only his or her practice. “Corporate dentistry” is sometimes used synonymously with managed group practices, and the management organization may be referred to as a dental management organization or company (DMO), or dental service organization (DSO). Some people refer to the management company as a DMO – dental management organization – and the large group practice (a professional corporation) as the DSO, where the DSO signs a contract with the DMO. Together, the model is sometimes referred to as DMSO – or Dental Management Service Organization. Some models have dental directors. Again, the functionality and structure of dental directors varies quite broadly. In some models, they are employees of the management organization and in others they are the directors of the large group practice that contracts with the management organization. In some models, they are responsible for quality assurance. Usually, they are licensed dentists, but we heard of an occasion where a dental director was a hygienist and another occasion where a dental director was a dentist who was not licensed in a state that he oversaw. Dentists and students should also know that, in almost every case, when a DSO talked about the opportunity for dentists to “own” a dental practice, they were referring to ownership of patient records only. Ownership generally does not include the building or equipment.

A Few Definitions Management Service Organization (MSO): The top-tier structure for decisions affecting the overall business aspects of the corporation They make money from the DSO components One of the largest challenges during the investigation was a lack of consistent definitions for many of the terms used in this model. For purposes of our investigation we used our working definition of corporate dentistry as: a variety of practice modalities in which management services, at a minimum, are provided in a manner that is organizationally distinct from the scope of activities performed by a dentist within only his or her practice. “Corporate dentistry” is sometimes used synonymously with managed group practices, and the management organization may be referred to as a dental management organization or company (DMO), or dental service organization (DSO). Some people refer to the management company as a DMO – dental management organization – and the large group practice (a professional corporation) as the DSO, where the DSO signs a contract with the DMO. Together, the model is sometimes referred to as DMSO – or Dental Management Service Organization. Some models have dental directors. Again, the functionality and structure of dental directors varies quite broadly. In some models, they are employees of the management organization and in others they are the directors of the large group practice that contracts with the management organization. In some models, they are responsible for quality assurance. Usually, they are licensed dentists, but we heard of an occasion where a dental director was a hygienist and another occasion where a dental director was a dentist who was not licensed in a state that he oversaw. Dentists and students should also know that, in almost every case, when a DSO talked about the opportunity for dentists to “own” a dental practice, they were referring to ownership of patient records only. Ownership generally does not include the building or equipment.

A Few Definitions Dental Management Service Organization (DMSO): A structure where both the business decisions and patient care are combined One of the largest challenges during the investigation was a lack of consistent definitions for many of the terms used in this model. For purposes of our investigation we used our working definition of corporate dentistry as: a variety of practice modalities in which management services, at a minimum, are provided in a manner that is organizationally distinct from the scope of activities performed by a dentist within only his or her practice. “Corporate dentistry” is sometimes used synonymously with managed group practices, and the management organization may be referred to as a dental management organization or company (DMO), or dental service organization (DSO). Some people refer to the management company as a DMO – dental management organization – and the large group practice (a professional corporation) as the DSO, where the DSO signs a contract with the DMO. Together, the model is sometimes referred to as DMSO – or Dental Management Service Organization. Some models have dental directors. Again, the functionality and structure of dental directors varies quite broadly. In some models, they are employees of the management organization and in others they are the directors of the large group practice that contracts with the management organization. In some models, they are responsible for quality assurance. Usually, they are licensed dentists, but we heard of an occasion where a dental director was a hygienist and another occasion where a dental director was a dentist who was not licensed in a state that he oversaw. Dentists and students should also know that, in almost every case, when a DSO talked about the opportunity for dentists to “own” a dental practice, they were referring to ownership of patient records only. Ownership generally does not include the building or equipment.

A Few Definitions Dental Directors: In some models, they are employees of the management organization and in others they are the directors of the large group practice that contracts with the management organization In some models, they are responsible for quality assurance One of the largest challenges during the investigation was a lack of consistent definitions for many of the terms used in this model. For purposes of our investigation we used our working definition of corporate dentistry as: a variety of practice modalities in which management services, at a minimum, are provided in a manner that is organizationally distinct from the scope of activities performed by a dentist within only his or her practice. “Corporate dentistry” is sometimes used synonymously with managed group practices, and the management organization may be referred to as a dental management organization or company (DMO), or dental service organization (DSO). Some people refer to the management company as a DMO – dental management organization – and the large group practice (a professional corporation) as the DSO, where the DSO signs a contract with the DMO. Together, the model is sometimes referred to as DMSO – or Dental Management Service Organization. Some models have dental directors. Again, the functionality and structure of dental directors varies quite broadly. In some models, they are employees of the management organization and in others they are the directors of the large group practice that contracts with the management organization. In some models, they are responsible for quality assurance. Usually, they are licensed dentists, but we heard of an occasion where a dental director was a hygienist and another occasion where a dental director was a dentist who was not licensed in a state that he oversaw. Dentists and students should also know that, in almost every case, when a DSO talked about the opportunity for dentists to “own” a dental practice, they were referring to ownership of patient records only. Ownership generally does not include the building or equipment.

A Few Definitions Practice Ownership: In almost every case, when a DSO talked about the opportunity for dentists to “own” a dental practice, they were referring to ownership of patient records only Ownership generally does not include the building or equipment One of the largest challenges during the investigation was a lack of consistent definitions for many of the terms used in this model. For purposes of our investigation we used our working definition of corporate dentistry as: a variety of practice modalities in which management services, at a minimum, are provided in a manner that is organizationally distinct from the scope of activities performed by a dentist within only his or her practice. “Corporate dentistry” is sometimes used synonymously with managed group practices, and the management organization may be referred to as a dental management organization or company (DMO), or dental service organization (DSO). Some people refer to the management company as a DMO – dental management organization – and the large group practice (a professional corporation) as the DSO, where the DSO signs a contract with the DMO. Together, the model is sometimes referred to as DMSO – or Dental Management Service Organization. Some models have dental directors. Again, the functionality and structure of dental directors varies quite broadly. In some models, they are employees of the management organization and in others they are the directors of the large group practice that contracts with the management organization. In some models, they are responsible for quality assurance. Usually, they are licensed dentists, but we heard of an occasion where a dental director was a hygienist and another occasion where a dental director was a dentist who was not licensed in a state that he oversaw. Dentists and students should also know that, in almost every case, when a DSO talked about the opportunity for dentists to “own” a dental practice, they were referring to ownership of patient records only. Ownership generally does not include the building or equipment.

A Few Definitions Corporate Dentistry: “A variety of practice modalities in which management services, at a minimum, are provided in a manner that is organizationally distinct from the scope of activities performed by a dentist within only his or her practice” One of the largest challenges during the investigation was a lack of consistent definitions for many of the terms used in this model. For purposes of our investigation we used our working definition of corporate dentistry as: a variety of practice modalities in which management services, at a minimum, are provided in a manner that is organizationally distinct from the scope of activities performed by a dentist within only his or her practice. “Corporate dentistry” is sometimes used synonymously with managed group practices, and the management organization may be referred to as a dental management organization or company (DMO), or dental service organization (DSO). Some people refer to the management company as a DMO – dental management organization – and the large group practice (a professional corporation) as the DSO, where the DSO signs a contract with the DMO. Together, the model is sometimes referred to as DMSO – or Dental Management Service Organization. Some models have dental directors. Again, the functionality and structure of dental directors varies quite broadly. In some models, they are employees of the management organization and in others they are the directors of the large group practice that contracts with the management organization. In some models, they are responsible for quality assurance. Usually, they are licensed dentists, but we heard of an occasion where a dental director was a hygienist and another occasion where a dental director was a dentist who was not licensed in a state that he oversaw. Dentists and students should also know that, in almost every case, when a DSO talked about the opportunity for dentists to “own” a dental practice, they were referring to ownership of patient records only. Ownership generally does not include the building or equipment.

A Few Definitions EBITDA and EBITA: Earnings Before Interest, Taxes, Depreciation, or Amortization The way equity firms (for-profit) determine market value Resale value in five years or so versus net revenue EBITDA or EBITA refers to Earnings Before Interest, Taxes, Depreciation, or Amortization (exclude the Depreciation in the case of EBITA). Our investigative report goes into depth as to what that means, but the most important thing you need to know is that, with DSOs that have outside equity companies as investors, the value of the company is based on a stock market valuation, where it’s based more on the present value of expected future revenue rather than real net revenue. A major goal of this valuation is to make the practice more valuable for resale in 5 years or so. What could this mean to dentists? First, theoretically, this kind of valuation could increase pressure to meet productivity goals while minimizing overhead costs (such as use of supplies). Second, it brings to question the long-term viability of this kind valuation – will it create a dental market bubble, similar to the housing bubble? We do not know. An equity firm is an outside for-profit investor that raises capital for a DSO. You could have a private or publically-traded equity firm. Finally, as you know, a PC is the corporate form of choice for most professional practices, from dentists to medical physicians to lawyers. In the DSO context, the management company would sign a business services contract with one or more PCs that each run one or more dental offices. Some models use one PC per state. Others use one PC for multiple states. Others use multiple PCs per state.

A Few Definitions Equity Firm: An outside, for-profit investor Raises capital for the DSO Privately- or publically-traded EBITDA or EBITA refers to Earnings Before Interest, Taxes, Depreciation, or Amortization (exclude the Depreciation in the case of EBITA). Our investigative report goes into depth as to what that means, but the most important thing you need to know is that, with DSOs that have outside equity companies as investors, the value of the company is based on a stock market valuation, where it’s based more on the present value of expected future revenue rather than real net revenue. A major goal of this valuation is to make the practice more valuable for resale in 5 years or so. What could this mean to dentists? First, theoretically, this kind of valuation could increase pressure to meet productivity goals while minimizing overhead costs (such as use of supplies). Second, it brings to question the long-term viability of this kind valuation – will it create a dental market bubble, similar to the housing bubble? We do not know. An equity firm is an outside for-profit investor that raises capital for a DSO. You could have a private or publically-traded equity firm. Finally, as you know, a PC is the corporate form of choice for most professional practices, from dentists to medical physicians to lawyers. In the DSO context, the management company would sign a business services contract with one or more PCs that each run one or more dental offices. Some models use one PC per state. Others use one PC for multiple states. Others use multiple PCs per state.

A Few Definitions Professional Corporation (PC): Many dentists form PCs even for a single doctor, single office Relative to DSOs, the management company has business contracts with one or more PCs Each PC could run multiple offices—there may be a single PC owning all offices within a state, or even multiple PCs owning offices across multiple states EBITDA or EBITA refers to Earnings Before Interest, Taxes, Depreciation, or Amortization (exclude the Depreciation in the case of EBITA). Our investigative report goes into depth as to what that means, but the most important thing you need to know is that, with DSOs that have outside equity companies as investors, the value of the company is based on a stock market valuation, where it’s based more on the present value of expected future revenue rather than real net revenue. A major goal of this valuation is to make the practice more valuable for resale in 5 years or so. What could this mean to dentists? First, theoretically, this kind of valuation could increase pressure to meet productivity goals while minimizing overhead costs (such as use of supplies). Second, it brings to question the long-term viability of this kind valuation – will it create a dental market bubble, similar to the housing bubble? We do not know. An equity firm is an outside for-profit investor that raises capital for a DSO. You could have a private or publically-traded equity firm. Finally, as you know, a PC is the corporate form of choice for most professional practices, from dentists to medical physicians to lawyers. In the DSO context, the management company would sign a business services contract with one or more PCs that each run one or more dental offices. Some models use one PC per state. Others use one PC for multiple states. Others use multiple PCs per state.

Reasons for Choosing DSO or Non-DSO So, what are some of the drivers for choosing to participate or not participate in DSOs? This chart shows some of the data produced in early 2012 by the ADA from a survey of its members. As we’re looking at this chart, it’s important to keep in mind that this reflects the dentists’ own reasons for choosing different work settings, and not necessarily the reality of those work settings. The strongest reasons for choosing non-DSO settings were the opportunity to be a future owner and flexible schedule. On the other hand, the strongest reasons stated for choosing DSOs were having no business responsibility and having less personal involvement with insurance companies. Of course, dentists must keep in mind that a reduction in business responsibility does not mean a reduction in professional or ethical responsibility. Interestingly, two other factors - work/life balance and opportunities for interactions with other dentists - ranked very highly, over 50% each, as both the reasons to choose DSO settings as well as reasons to choose non-DSO settings! You’ll also note something else: Students loans were not a significant reason that dentists cited for deciding between DSO or non-DSO modalities. Source: American Dental Association, Group Practice Survey, Unpublished Data, January 2012

Reasons for Choosing DSO or Non-DSO The question of “Work-Life Balance” ended up 50/50, so this was a factor no matter which model or group you are in. So, what are some of the drivers for choosing to participate or not participate in DSOs? This chart shows some of the data produced in early 2012 by the ADA from a survey of its members. As we’re looking at this chart, it’s important to keep in mind that this reflects the dentists’ own reasons for choosing different work settings, and not necessarily the reality of those work settings. The strongest reasons for choosing non-DSO settings were the opportunity to be a future owner and flexible schedule. On the other hand, the strongest reasons stated for choosing DSOs were having no business responsibility and having less personal involvement with insurance companies. Of course, dentists must keep in mind that a reduction in business responsibility does not mean a reduction in professional or ethical responsibility. Interestingly, two other factors - work/life balance and opportunities for interactions with other dentists - ranked very highly, over 50% each, as both the reasons to choose DSO settings as well as reasons to choose non-DSO settings! You’ll also note something else: Students loans were not a significant reason that dentists cited for deciding between DSO or non-DSO modalities.

Number of Establishments Overall decrease of 240 corporations, but numbers of establishments grew, meaning that there is movement toward fewer, but larger corporations This slide is a little confusing, but the important takeaway is that the largest corporations are growing larger the fastest, with each corporation having more establishments or locations for practices. However, the number of distinct corporations appears to be shrinking. There may be, at some point in the future, only a handful of very large corporations. This trend toward a buyer’s market can ultimately affect the market valuations. Also note a reduction in revenue sharing. In other words, there is a reduction in the income opportunity between stakeholders. If valuation outpaces growth, we could be talking about a bubble. This plays into the discussions about a plateau effect in the growth. A second large factor in the plateau discussion is relative to how long employees stay with the corporation. If there is significant turnover, this creates a plateau effect that growth cannot expand beyond. Source: U.S. Census Bureau, Economic Census, www.census.gov/econ/census07, Accessed March 14, 2011

Types of Corporate Dentistry DSO with internal management (no management contract) DMSO (with management contract) without outside equity owners DMSO (with management contract) with outside equity owners Geographic/multispecialty group practice (not a true corporate model) Our studies showed hundreds of model parameters and dynamics in corporate practice. We will reduce our discussion to four main groupings of the predominant models that we observed during the course of our investigation. Over the next three slides, we’ll discuss the first three DSO types, but I’d like to take a second to explain that last one – Geographic / Multispecialty Group Practice. This last one is not a true DSO in that the management of the business of the practice is not conducted distinctively from the clinical practice. However, we’ve included this model on this list because this model is often included in conversation as part of “corporate dentistry,” although it really isn’t. This model is implemented by a very large traditional group practice with either multiple offices spread out over one or more states, and/or by a single large dental mall that includes multiple specialties within the same physical structure. Ultimately, what differentiates this model from the traditional solo or small group practice is the consolidation of overhead and volume purchasing discounts, resulting in lower expenditures (than if each office or dentist functioned independently), and therefore, higher profit margins. Now, let’s talk about the 3 broad DSO practice structures.

Types of Corporate Dentistry Geographic/multispecialty group practice (not a true corporate model) Often grouped in with Corporate discussions, but will not be a major part of this presentation Our studies showed hundreds of model parameters and dynamics in corporate practice. We will reduce our discussion to four main groupings of the predominant models that we observed during the course of our investigation. Over the next three slides, we’ll discuss the first three DSO types, but I’d like to take a second to explain that last one – Geographic / Multispecialty Group Practice. This last one is not a true DSO in that the management of the business of the practice is not conducted distinctively from the clinical practice. However, we’ve included this model on this list because this model is often included in conversation as part of “corporate dentistry,” although it really isn’t. This model is implemented by a very large traditional group practice with either multiple offices spread out over one or more states, and/or by a single large dental mall that includes multiple specialties within the same physical structure. Ultimately, what differentiates this model from the traditional solo or small group practice is the consolidation of overhead and volume purchasing discounts, resulting in lower expenditures (than if each office or dentist functioned independently), and therefore, higher profit margins. Now, let’s talk about the 3 broad DSO practice structures.

DSO With Internal Management Board of Directors Dentist practice owners are the shareholders of the DSO Common mission, values, guidelines/protocols set by Board Business management through a centralized, internal team President Chief Administrator Group Doctor Mentor Regional Operations Manager This first model is the DSO with internal management. The organizational chart is an actual flow diagram from one of the guests that our task force interviewed. They allowed us to use their presentation materials including this chart. In this model, dentist owners of the practices are also the sole shareholders of the DSO. These shareholders may elect a Board, who then set policy, determine budgets, and establish common mission, vision, values, and guidelines/protocols. This model seeks to maximize revenue of each practice by bringing practice management relief not only in the form of some shared office management services, but also through the shared internal management guidelines and protocols. What distinguishes this “DSO with Internal Management” from the models we’ll discuss next is that a “DSO with Internal Management” does not utilize a business services agreement with any separate business corporation. Practice Doctors Practice Managers Collaborative Practice Management Team

DMSO (With Management Contract) Without Outside Equity Owners PC/DSO 1 2 Dental Office 1 Dental Office 2 Dental Office 3 Dental Office 4 3 Business Services Contracts Our second model is the DMSO without outside equity owners. Keep in mind that you may not see companies presenting themselves as “DMSOs.” The terminology really varies and any of these models may be called just DSO or just corporate practice or something else. In upcoming slides, we will share with you some questions that the task force came up with to ask, to get the answers to better understand what model you are looking at. In the DMSO, although the whole thing is sometimes called a DSO, there is actually a DSO component and an MSO or management component. The DSO component is comprised of one or more PCs that each run one or more dental offices. The PC is usually headed by an ‘owner dentist’ who owns the patient records and is responsible for the clinical functions of the dental offices that he or she oversees. Each PC has a business services agreement with the same outside management company, the MSO, and the PC owners are responsible for administering/implementing the business direction of the MSO with the individual dental offices. What separates this model from the last model (“DSO with internal management”) is that the company with primary corporate revenue interest is not the same as the dentists that have the primary clinical interest. However, in this model, instead of MSO ownership by outside equity investors, the MSO may be owned by one or more individuals who may be dentists or non-dentists. So, this model is distinguishable from the next one we’ll talk about (“DSMO with outside equity owners”) in that the profitability of the company is based entirely upon business service agreement fees that vary directly with each practice’s revenue stream, and are generally not tied to any Wall Street valuation in preparation for sale of the MSO between private or publically-held investors.

DMSO (With Management Contract) Without Outside Equity Owners PC-owner dentists own the patient records and are responsible for clinical functions Each PC contracted with same outside management company (MSO) PC owners administer/implement the business direction from the MSO NOTE: The company with the primary corporate revenue interest is not the same as the dentists who have the primary clinical interest The management company may be owned by one or more individuals who may or may not be dentists The profitability of the company is based entirely on business service agreement fees instead of market valuation; fees vary with each practice’s income stream Our second model is the DMSO without outside equity owners. Keep in mind that you may not see companies presenting themselves as “DMSOs.” The terminology really varies and any of these models may be called just DSO or just corporate practice or something else. In upcoming slides, we will share with you some questions that the task force came up with to ask, to get the answers to better understand what model you are looking at. In the DMSO, although the whole thing is sometimes called a DSO, there is actually a DSO component and an MSO or management component. The DSO component is comprised of one or more PCs that each run one or more dental offices. The PC is usually headed by an ‘owner dentist’ who owns the patient records and is responsible for the clinical functions of the dental offices that he or she oversees. Each PC has a business services agreement with the same outside management company, the MSO, and the PC owners are responsible for administering/implementing the business direction of the MSO with the individual dental offices. What separates this model from the last model (“DSO with internal management”) is that the company with primary corporate revenue interest is not the same as the dentists that have the primary clinical interest. However, in this model, instead of MSO ownership by outside equity investors, the MSO may be owned by one or more individuals who may be dentists or non-dentists. So, this model is distinguishable from the next one we’ll talk about (“DSMO with outside equity owners”) in that the profitability of the company is based entirely upon business service agreement fees that vary directly with each practice’s revenue stream, and are generally not tied to any Wall Street valuation in preparation for sale of the MSO between private or publically-held investors.

DMSO (With Management Contract) With Outside Equity Owners Equity Firm(s) DSO/ MSO Dental Office 1 Dental Office n Business Services Contract Finally, we have the DMSO with outside equity owners. While similar to the previous model, the distinguishing factor is in the ownership of the MSO. Note that the extent of equity ownership may vary by DMSO. However, where there is outside equity ownership, the interest of the equity firm is in maximizing the enterprise value of the acquisition in order to make it most attractive for sale. Enterprise value is the present value of future cash from business operations reflected as a multiple of EBITDA or EBITA to reflect the growth expectation of the acquisition in the industry. While the exclusion of taxes and interest provide for better comparison between companies in the same industry, it may also paint an unrealistic picture of value of the company by including only present value of current and future business operations. Continued use of enterprise value, without other measures for valuation of the business modalities whose primary services are providing business services to dental practices, may be vulnerable to the causation of a market ‘bubble’ due to repeatedly inflated valuations by equity firms over the course of multiple sales, unless overhead costs are fully driven by the needs of avoiding an inflated valuation rather than by the needs of dentistry. That is, the drive to maximize enterprise value may be inherently at odds with the provision of quality of care, and it is unclear as to how to bridge this gap for the benefit of both over a sustainable long-term future, without bursting that bubble. For comparison, the difference between an equity firm investing financially in a dental practice versus a bank providing a loan for a practice, is that, with the latter, the dentist may attain full ownership by repayment of the loan. An outside equity investor is not a lender, but rather a company with the responsibility to its own private or public shareholders to maximize the outlook and enterprise value of the company.

DMSO (With Management Contract) With Outside Equity Owners There will now be interest in maximizing the “enterprise value” Enterprise value is the present value of future cash from the business operations reflected as a multiple of EBITDA or EBITA Bubble Increasing enterprise value versus patient care Finally, we have the DMSO with outside equity owners. While similar to the previous model, the distinguishing factor is in the ownership of the MSO. Note that the extent of equity ownership may vary by DMSO. However, where there is outside equity ownership, the interest of the equity firm is in maximizing the enterprise value of the acquisition in order to make it most attractive for sale. Enterprise value is the present value of future cash from business operations reflected as a multiple of EBITDA or EBITA to reflect the growth expectation of the acquisition in the industry. While the exclusion of taxes and interest provide for better comparison between companies in the same industry, it may also paint an unrealistic picture of value of the company by including only present value of current and future business operations. Continued use of enterprise value, without other measures for valuation of the business modalities whose primary services are providing business services to dental practices, may be vulnerable to the causation of a market ‘bubble’ due to repeatedly inflated valuations by equity firms over the course of multiple sales, unless overhead costs are fully driven by the needs of avoiding an inflated valuation rather than by the needs of dentistry. That is, the drive to maximize enterprise value may be inherently at odds with the provision of quality of care, and it is unclear as to how to bridge this gap for the benefit of both over a sustainable long-term future, without bursting that bubble. For comparison, the difference between an equity firm investing financially in a dental practice versus a bank providing a loan for a practice, is that, with the latter, the dentist may attain full ownership by repayment of the loan. An outside equity investor is not a lender, but rather a company with the responsibility to its own private or public shareholders to maximize the outlook and enterprise value of the company.

Key Observations From Interviews DSO – Internal Management – No External Management Contract DMSO – Business Services Contract – No Outside Equity Ownership DMSO – Business Services Contract – With Outside Equity Ownership Ownership (Beyond Patient Records) Licensed dentists as S/H The management entity (MSO) Private equity firms (varying % ownership) Contract For Business Services No – but centralized protocols established by board of S/H Yes – with MSO Productivity/ Revenue Goals Yes – set by licensed owner dentists Yes, revenue goals administered by PC Yes – volume expectations (number of patients, supply limits, etc.) set by DMSO Career Growth Associate to S/H Associate to PC owner Associate to dental director To summarize, this chart shows these three models over four factors (walk through the content of the matrix for each of the following): Who owns the practice (building, equipment, etc., not just patient records)? Is there a separate contract with another organization for providing the business services? How are productivity or revenue goals set? What is the career ladder for a dentist who starts out as an associate (noting that the dentist always starts out as an associate)?

Commonalities Between Models CE in clinical and practice (varies by company [not model-consistent] based on internal or external) Entry into modality as dental associate Control of business services by someone other than the practicing dentist of a given practice Revenue expectations (although the details differ) Shift in focus to populations between Medicaid- eligible and employer-insured These are some on the similarities. First, all the models focus on providing continuing education; in fact, this seems to be one of the items they present to students to attract them to this modality. Another guest company provided 200 hours of internal CE both on clinical dentistry and practice management. Another model paid for dentists to take external CE. One thing we noted is that our corporate guests all mentioned the value of the AGD not only for our provision of CE but also for our Fellowship and Mastership tracks. Second, in all models, the dentist, whether a new graduate or an experienced dentist who is selling his practice, enters a DSO as an associate. Third, and this is the fundamental differentiation between DSO and non-DSO, is the control of business services by someone other than the practicing dentist or dentists of a given practice. Fourth, DSOs have revenue expectations. This is not necessarily all that dissimilar from traditional practices that also may have revenue or productivity expectations for associates. Finally, we noticed that many of our corporate guests indicated a shift in focus to patient populations between Medicaid-eligible and employer-insured. This thought process appeared to be driven by the implementation of the Affordable Care Act. This is something that we will continue to monitor.

Takeaways From The Presentation The AGD’s pamphlet of questions to ask Consult with your own independent counsel or accountant who is knowledgeable in the field Clinical decision-making and understanding your ultimate responsibility We would like to take a few minute to share with you the takeaways from the presentation. The AGD has laid out pamphlets to help you better understand your career choices. Consult with your own independent counsel or accountant who is knowledgeable in the field. Regardless of who makes the business decisions, clinical decision-making and understanding your ultimate responsibility.

Making Informed Decisions: Questions to Ask Who owns patient records? What are my employer’s expectations regarding my productivity, patient volume, and revenue? And more… Now, let’s look at some of the questions in the AGD’s careers options pamphlet. (Read through each of the questions on the pamphlet itself and explain why the questions are important).

Responsibility Regardless of who holds the responsibility for business decisions, dentists hold the responsibility for their clinical and ethical decisions, whether before a state dental board, a court of law, or the court of public opinion.  Every dentist should consult with his or her own independent attorney, accountant, or other appropriate professional who is familiar with varying modalities of business practices in health care delivery, regardless of the modality of practice that he or she may be considering. As we near the end of this presentation, I wanted to give you two key points that you must always remember, regardless of the type of practice you choose. First, regardless of who holds the responsibility for business decisions, the treating dentists hold the responsibility for their clinical and ethical decisions, whether before a state dental board, a court of law, or the court of public opinion. Second, every dentist should consult with his or her own independent attorney, accountant, or other appropriate professional who is familiar with varying modalities of business practices in healthcare delivery, regardless of the modality of practice that he or she may be considering.

What Can the AGD Do For You? Contract review for members Practice management assistance Education to help you become the best dentist possible, regardless of practice modality CE-based awards: Fellowship! Mastership! So, what can the AGD do for you? The AGD provides a contract review service for our members. We have expanded our review of insurance participation contracts and now also include employment contracts and DSO business services agreements. However, just as with our review of insurance contracts, it is important for you to understand that the decision is yours; as an association, we can not and will not suggest which decision to make… we can only explain the terms to you so that you can make an informed decision. Practice management – we can offer training and information to assist you in your practice. As always, the AGD has been a leader in connecting dentists with excellent CE for over 60 years. The Fellowship and Mastership awards can only be attained at the AGD. And, as we have just done here, we are your source to gain an understanding of the ever-changing world of dentistry, including corporate modalities.

AGD Practice Models Task Force Thank You! AGD Practice Models Task Force W. Carter Brown, DMD, FAGD, Chair/AGD President-Elect Craig S. Armstrong, DDS, MAGD Myron J. Bromberg, DDS Richard W. Dycus, DDS, MAGD Willis S. Hardesty, Jr., DDS, FAGD Dr. Edgar Radjabli, DDS  Consultants to the Task Force L. Jackson Brown, DDS, PhD Jerry Caudill, DMD, MAGD Jeffrey M. Cole, DDS, MBA, FAGD, AGD Immediate Past President W. Mark Donald, DMD, MAGD, AGD Vice-President Linda J. Edgar, DDS, MEd, MAGD, AGD President I have enjoyed bringing this information to you. Please contact the AGD at practice@agd.org if you would like any further information on this topic. Thank you! Any questions?

Questions? practice@agd.org www.agd.org 888.AGD.DENT (888.243.3368)