How Allied OMS is flipping private equity in dentistry

Private equity deals have experienced major growth in the dentistry industry in recent years, with several companies operating with different models. One oral surgery group has worked to turn private equity on its head for its partners. 

Southlake, Texas-based Allied OMS was launched in April 2020 to provide practice management services to enable oral surgeons to focus on patient care with the benefits of a private equity-backed company. The organization has grown to include 17 groups and about 35 doctor shareholders with plans to add another five to 10 groups by the end of this year.

Co-founder and CEO Daniel Hosler recently spoke with Becker's about Allied OMS' model and the impact of private equity in dentistry.

Editor's note: Responses were lightly edited for clarity and length. 

Question: How would you describe Allied OMS' model?

Daniel Hosler: We have a model that really teaches the doctors about private equity from the inside out. Matter of fact, we've actually started a trade market. We call it doctor equity instead of private equity. And the idea is, I've spent 14 years where I was co-head of healthcare investing for a middle market fund and had done a number of healthcare partnerships through the years helping buy and sell and generate a lot of returns for investors and for doctors. And we decided it was time really to democratize private equity for the doctor community. Both my partner and I, we grew up with family members as doctors, nurses, dentists, you name it. A lot of this not only stemmed from some of the professional experience we had, but also just some personal experience we had about trying to coach our family members and friends about navigating the complexities that can sometimes surround private equity. 

The doctor equity model, really what it does is it's delayed gratification. Typically in private equity, they're going to ask you to take a pay cut. That creates the basis of EBITDA. They're going to apply a multiple, maybe it's a five, six or seven multiple of that number, and then they're going to cash you out probably of about 70 percent of the value of your practice. Unlike that model, we say delay the pay cut, delay any cash at close and instead you merge 100 percent of your business with Allied OMS. In exchange for that merger, you get a tracking stock. That tracking stock tracks to just your practice's contribution of earnings. You agree to all the things in the future, you agree to a pay cut in the future, but in the meantime we work together to help you grow your EBITDA. The two biggest mistakes we see are doctors selling at too low of an EBITDA and too low of an EBITDA multiple. So this tracking stock concept, this doctor equity model we've created, helps solve those two biggest shortcomings in a traditional private equity model. 

Doctor equity is really transforming the world of private equity for doctor partners and helping them get a more fair shake on the economics that private equity has been largely keeping to themselves and we think there's a great opportunity for doctors to capitalize on some of these trends that are out there. There's too much money chasing too few opportunities and this model really allows the doctors to take advantage of that. 

Q: Why do you think private equity has been beneficial to the dental industry so far?

DH: I know there's been some debate about [whether] private equity is good for healthcare or good for dentistry. I've certainly read my share of articles talking about the pros and cons. I think there's different ways to do it for different people. Our goal is first and foremost on serving our doctor partners. I like to say, when you take great care of your doctors, then they're going to take great care of patients. When patients have great outcomes, they're going to tell their friends and they're really going to make sure that we're helping perpetuate great patient outcomes. So we kind of view this as a virtuous cycle, making sure that we're taking great care of one another. I'm not a fan of consolidation for consolidation's sake. I'll pick a little bit of anesthesia. I know there's some groups out there that have consolidated anesthesia contracts and then they immediately go to raising prices for everybody. We'd rather see the exact opposite.

I love some of my oral surgeons. They talk about coming out of COVID [and] ask the rhetorical question, why do we even have a waiting room? What if we took back that space and added different experiences. Sit in your car, we'll text you when you're ready to come in, have all the paperwork finished so that you're treated, and then you walk out the door and there's no waiting around. The part that I get really excited about in the world of private equity is increasing the efficiencies and really changing the experience for the patients and for the doctors as well.

Q: Why is dentistry an attractive field for private equity?

DH: It almost feels like an inside joke among private equity. Historically, dentistry was often viewed as healthcare light. It didn't have as much of a compliance risk. It didn't have as much of the stark anti-kickback statute risk that you typically find in traditional healthcare services opportunities. So I think that definitely attracted some people. We also view it as a highly recurring revenue model, so the frequency with which people tend to visit the dentist. When I grew up, it was once a year and then every nine months, and now I think the recommendations are every six months. A lot of people have dental benefits, many of whom don't fully utilize those benefits. So I think that definitely looked attractive to private equity. 

Q: What are some of the concerns about private equity deals in dentistry and how does Allied OMS address these?

DH: There's a lot of different models out there. I think what's caused more pause for folks is it can be a great work environment for some, but it just sounds like there tends to be a lot of work quotas. Some of the providers who work for these organizations say, "Wait a second, I don't want to have to be told how many cavities need to be filled or how many patient visits I need to see every single day." It starts to become a little bit more like a factory, so that feels a little bit more like maybe the darker side of private equity investment.

We only invest and partner with doctors who already have existing brands. They've developed the reputation among their referral partners. How do we continue to support and nurture the brands that are already in our environment? So one of the first things we tell our doctors is we will never touch clinical autonomy. I like to say, if the doctor says they've got a favorite type of implant, I just want to know what it is so we can help them get the best price on them. And at the same time, I want to let them know what other doctors are paying for implants of similar quality and then let them ultimately make the decision. 

I think the biggest question is, I like to call it, an information advantage that private equity has over dentists and doctors. I've negotiated probably at this point, maybe a couple hundred different doctor partnerships that have closed or not closed over the last seven years. I've got that information advantage. This is the doctor's only business, or maybe they've done it one other time. We really like to say, bring all of the questions to the forefront. And we talk about the top five questions that people should really ask. What’s the capital structure of your partnership? It really speaks to the debt and equity outstanding. What are the terms, what is the share price? How can I become an equity owner? We think there's a really important alignment of interest that should exist between the doctors and their private equity partners, but not all private equity firms think that way. Sometimes they're trying to keep those returns only for themselves and their investors and we just want to create a different kind of model, one where the doctors get to share more of that economic upside.

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