How DPMs are sold in corporate vs. noncorporate states

2013 05 07 15 48 08 155 Climo Thomas 200

A distinction exists between corporate and noncorporate states when it comes to the practice of dentistry in the U.S.: Corporate states allow the ownership of dental practices by outside entities or groups, including those not licensed in the state as dental practitioners, while noncorporate states mandate that only dentists can own dental practices within their state.

Thomas Climo, PhD, is a dental practice management consultant and a past professor of economics in England.Thomas Climo, PhD, is a dental practice management consultant and a past professor of economics in England.
Thomas Climo, PhD, is a dental practice management consultant and a past professor of economics in England.

States limiting ownership of dental practices to only licensed professionals and requiring services to be provided by licensees include 44 states and the District of Columbia, according to this 2012 survey (see sidebar below).

Six states do not have statutes limiting ownership of dental practices to licensed professionals, even if requiring services to be provided by licensees: Arizona, Mississippi, North Dakota, New Mexico, Ohio, and Utah.

Because of the overwhelming slanting of state laws to noncorporate status, and a similar overwhelming or abundance of available funds to buy dental practices existing outside of licensed dentists with private equity, business ingenuity has created the concept of a dental practice management (DPM) company. In essence, DPMs supply and charge for management services to the practicing dentist and his or her dental practices through an exclusive management contract with the owner-dentist (see "The Emergence of the Dental Practice Management Company," Dental Economics, September 2009).

On the basis of this exclusive contract, through its management fees, private equity can peel net income from the dental practices to become revenue of the DPM they own. The following diagram outlines the process.

Structure of a dental practice management company

','dvPres', 'clsTopBtn', 'true' );" >Structure of a dental practice management company
Click image to enlarge.

In words, a DPM exists above the owner-dentist's own personal corporation (PC) and his or her operating company (the dba) through a mutually exclusive contract allowing the DPM to exercise the management service of running the PC and dba.

It is this DPM that can then be sold to private equity, even as the existing dental practices remain owned by the dentist signing the exclusive contract. Private equity is buying the DPM but, more important, it is buying the exclusive contract to run the dental practices and charge for the management services rendered.

No doubt, at the appropriate moment in time, the private equity buyer replaces the owner-dentist with a state-licensed appointee of its own choosing. However, this is a separate transaction from that of buying the DPM.

The singular problem that remains, and will be a topic of my next contribution to DrBicuspid.com, is how to price the management services of a dental practice management company without falling afoul of state and federal legislation prohibiting fee-splitting, revenue-sharing, and kickback arrangements.

This forthcoming article will emphasize how important it is to retain a healthcare law firm to build the management contract, arrange the arms-length legal separation of the management company from the dental practices, and stay within the rules and boundaries of both state and federal legislation in the pricing of management services of a DPM.

Stay tuned.

Thomas Climo, PhD, is a professor emeritus of accounting and finance at a major university in the U.K. He has published extensively about the importance of modern managerial and financial decision-making for dentistry. He is a consultant to corporate and solo practitioner dental practice management companies in the states of Arizona, California, Connecticut, Nevada, New Hampshire, New York, and Massachusetts. He can be reached by email at thomas.a.climo@cox.net or by telephone at 702-578-2757.

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.

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