DSOs are facing several economic headwinds that could make it difficult to manage acquisitions and other investments.
Barry Lyon, DDS, dental director for Main Street Children’s Dentistry and Orthodontics and Dental Care Alliance, recently spoke with Becker’s about the economic factors DSOs are monitoring as they navigate the shifting M&A market.
Editor’s note: This Q&A is part of a weekly series featuring Dr. Lyon focused on topics in the dental industry and DSO field. The views expressed are those of Dr. Lyon and do not necessarily reflect those of Main Street Children’s Dentistry and Orthodontics or Dental Care Alliance.
This response was lightly edited for clarity and length.
Dr. Barry Lyon:
As DSOs evolve, their operational complexity increases. While there continues to be growth, the environment surrounding DSOs presents challenges. The costs of doing business and the regulations with which DSOs must comply mean there’s less latitude for improper management. Let’s examine a few red flags capturing the attention of DSOs.
The economics of dentistry are ever changing and DSOs must adapt. With interest rates remaining high, the costs of capital have increased. As a result, acquisitions have become much more expensive and require enhanced justification. Margins are being compressed as labor and supply costs increase, further aggravating economic insecurity. With insurance reimbursement rates remaining sluggish, there is an imbalance between revenue and operating expenses. This may endanger DSOs depending on inorganic growth.
Further influencing DSOs walking financial tightropes are fee-splitting concerns, ambiguous management service agreements, regulatory threats and poor compliance programs. Nonetheless, DSOs are managed by well-educated, savvy and experienced individuals who have the skill to weather the changes in the economic climate. The DSO model continues to thrive, but there is less room for operational miscalculations.