Macroeconomic challenges have forced practice owners and DSO leaders to scrutinize investments and weigh cuts to prevent profit losses and other setbacks.
Smile Makers Dental Center CEO Geith Kallas, DDS, and Fireside Dental Co. CFO John Bell recently spoke with Becker’s about how economic headwinds such as inflation and high interest rates have affected the dental industry over the last few years.
Note: Responses were lightly edited for clarity and length.
Question: What are some of the biggest ways economic challenges have affected the dental industry in the last couple of years?
Dr. Geith Kallas: In the last couple of years, we’ve had different types of issues. The number one issue was the shortage in staffing, especially dental hygienists in Northern Virginia … that caused a huge [impact] on our system and also on patient care. We maneuvered through this by having dentists do hygiene and having the assistant helping, but it became an issue.
We also had issues with the rising cost of supplies that caused our operation to struggle. For expansion, we had issues with high interest rates. Before, when we looked into acquiring offices, [if we saw] there was an opportunity, but there were a couple of issues in that office, we’d take a chance. With high interest rates, we had to wait and pass on those acquisitions. We [also] saw the patients’ behavior change with the high cost of living. They shifted from doing big procedures to doing just what was necessary.
John Bell: It started with Covid in 2020 and everything that came out of there. That really kicked off some of the labor challenges and things of that nature. Then, we had a combination of rising interest rates, a really significant spike in 2022, and then inflation. The cost of everything has been going up. Put all that together, and again, with experience both working within a DSO and then also working with independent dentists, it’s impacted the entire industry. The rising costs, the staffing shortages, labor rates increasing — that impacts everybody in dentistry. I promise it has hit the DSOs, and it certainly hit the independent dentists as well. As Dr. Kallas referenced, the rise in interest rates really slowed down the DSO market. Up until the interest rates jumped up in mid 2022, it was kind of a heyday. The DSOs had a lot of momentum. Many organizations were maturing in terms of their operational and service capabilities, and that particular subset of the market was moving from, “Hey, let’s buy as many practices as we can, kind of slap them together, and we’ve got a group practice.” They’re in the sort of early to mid stages of, “We’ve got to really drive operational value and provide support for the dentists and the practice.” When interest rates shot up for DSOs, that kind of froze the consolidation part of that market, and DSOs switched to “Alright, well, I’ve got to really focus on staying within my covenants of my lender and staying in their good graces.”
For independent dentists, they don’t have some of the leverage, the resources, or all the corporate staff, so it’s been sort of death by a thousand paper cuts. For independent dentists, it has just meant a continual reduction in profits. So, same set of circumstances a little bit, [but] dealing with certain different issues associated with some of the macro headwinds. I think at the end of the day, what I personally have seen is the DSOs, because they have institutional capital, professional management and all of that, they have used the last three years as an opportunity to really cut costs, cut fat, improve how they deliver value to their practices, and they’re sort of on the way back up and have used all these headwinds as an opportunity. I haven’t really seen the same thing with independent practices. It feels like, again, every year, profits are getting a little lower. I can speak specifically to pediatric dentists, which is what my current business focuses on. They’re experiencing the same challenges. The good thing for specialists compared to general practitioners is they do have higher margins, so they’ve kind of moved from, “Hey, I’m making great money,” to, “I’m making good money, not near as good as I was four or five years ago.” So, the pain may not be quite as acute or deep as it is for general dentists, but at the end of the day, everybody’s profits have gone down and we’re forced to sort of respond to it, just put your head down and endure it or use it as an opportunity to cut fat, make changes and make the best in a difficult economy.
Q: Have either of you or the dentists in your network been forced to make any tough financial decisions in the last year?
GK: Yes, absolutely. We had to wait for the [interest rates to be lower] so we can go and acquire with no risk … We said, “Okay, so we cannot do this right now with acquisitions, but let’s concentrate on location growth.” We really concentrated on the patient experience and made it flawless, made it much better. At the same time, we concentrated on developing our existing staff to keep them in house and to equip them with success. We put quite a bit of time and effort in that, and that really paid off. At the same time, when that was happening, some struggling DSOs started to have their staff leave, and they knocked on our doors. [Their staff] wanted to join us.
JB: I haven’t seen a lot of delayed investments or hard decisions yet. I think [the dentists in my network] are starting from a position of being very profitable. The general reality for independent pediatric dentists, and probably more broadly independent specialists, is, “I’m making good money. I’m just not making great money.” They haven’t been forced to make the really, really hard decisions that the DSOs were forced to make … That’s what I’ve seen with the specialists. It’s gotten to be like, “I’d love to do this or do that. I’ll do it, and I’ll just cut into my take home pay.”
I have spoken to a few general dentists who’ve had a very different experience. I talked to a general dentist about a month ago here in Alabama, where I’m based, who said, “I don’t know if I’m going to be able to stay in business. My margins have gotten so tight and it is so difficult right now. I’m having a hard time envisioning how I can continue sustaining business at this level,” and he’s just not making any money. You have to have staff. You have to pay them and prioritize them. Most business owners will sacrifice to keep their employees. If you take that approach, sometimes you get to where there’s just nothing left to take home. I think people are trying to endure and weather this storm, but that’s been my observation with the independent specialists.
