Affiliating with MSOs and DSOs: Look Before you Leap
If you are a medical and dental provider in today’s healthcare ecosystem, you have likely heard lots of hype around Management Support Organizations (MSOs) or Dental Support Organizations (DSOs). In this article, we explore some of the key elements providers must consider before selling to - or affiliating with - such an organization.
Why Investors Love the MSO/DSO Model
There is no hiding the fact that healthcare is big business. The Centers for Medicaid and Medicare (CMS) predict that national healthcare spending in the United State will hit upwards of $6.2 trillion by 2028. This type of number tends to attract the interest of private equity groups, or what many think of as “Wall Street”. Private equity consists of private individuals, groups, or companies that pool funds to take advantage of alternative investments. Rather than put money into public markets, these entities exist to identify hidden gems in the private sector and scoop them up in hopes of scaling and selling for a hefty premium down the road. Needless to say, the sustainability of a medical or dental practice is highly attractive to folks looking for a safe and profitable play. Thus, the birth of the MSO/DSO model.
The value to the private equity investor is that it is a means to circumvent traditional corporate practice of medicine doctrines that preclude anyone except a licensed provider from retaining an ownership stake in a medical or dental practice. It is important to note those that these groups are not breaking the law…rather, they are just quite creative! Structurally, they are compliant. There is a licensed healthcare provider owning the “clinical assets” - a fancy way of saying anything that a provider must control, such as patient charts. The difference here however, is that the business will be bifurcated into two separate entities; that is, a clinical and non-clinical (or management) entity. The clinical entity continues to treat patients as they did the day before joining an MSO/DSO. A doctor continues to “own” those patient charts, administer treatment, and make all clinical decisions as to the course of a patient’s medical or dental needs. However, the management entity is handling the rest of business. It owns all non-clinical assets and provides support services (hence the name) such as HR, accounting, practice management, and so on. This management group is generally not owned by a physician, but rather by a private equity organization who has built an experienced team of executives to execute these critical functions. The thought process is that, by taking away all the administrative burden from the healthcare provider, the management team can find more efficiencies and economies of scale. As the MSO/DSO acquires more practices, they realize increased buying power. They can negotiate better reimbursements from third-party payors and drive down supply costs because of the sheer volume of practices they represent. You don’t have to be a finance major to realize that increased revenue plus reduced expenses equal a recipe for success, thus the reason it seems everyone wants in.
Why Providers Are Interested
Many providers go to medical or dental school with the hopes and dreams of one day opening or acquiring their own practice. Thankfully, med/dental schools do a fantastic job of preparing doctors to own and run a business…wait, they don’t??? You mean they only have one class on practice management and it was an elective?!?! Ahh, now we see why providers are flocking to the DSO/MSO model.
Doctors generally want to stick to providing high-quality treatment to patients. When they finally realize the dream of “hanging their own shingle,” they may not be prepared for the onslaught of administrative nightmares that await. Despite trying to hire a great practice manager and supporting team, it seems the doctor cannot escape playing HR specialist, CFO, marketing director, and on and on. You are probably beginning to see why the idea of handing off all the non-clinical duties sounds so attractive. You may not be surprised to learn that this MSO/DSO model is not unique to healthcare. In seemingly every industry across the globe, organizations are building out a similar infrastructure to support the respective service, accelerate growth and allow technicians to do what they do best. Oh, and by the way, practice and business owners will be compensated handsomely for affiliating with the management organization.
Not So Fast – Consider the Risks
With so much upside to the MSO/DSO model, it almost seems to be a no-brainer to hop on the bandwagon! Not so fast. Providers must carefully scrutinize the potential MSO/DSO partner that has come calling. Once the doctor sells to this organization, they now become an employee…a word that most entrepreneurial providers hate. There will likely be a Clinical Director and even a Board of Directors to which the doctor must report. All MSO/DSOs differ in how hands-on they will be at the practice level, thus it is imperative that the doctor call references who have sold to the group previously. And don’t just call the list they give you! Find other folks who affiliated with the MSO/DSO and find out the good, the bad and the ugly.
Many of the management companies will offer a bit of equity (ownership) in their organization. This could mean a potential second (or even third) payday when that company sells down the road. But in order to do so, the organization must be well run. Like any investment, there is a major risk associated with putting your hard-earned money into an illiquid position, and you should discuss such a decision with your financial advisors. Additionally, providers should be able to have some input into decision-making, particularly if it affects any changes to their practice. Sadly, this is often not the case. This is not to say that all MSO/DSOs are ill-intentioned, but rather, like any partner in business or life, you must do your homework. Exiting an employment arrangement with the MSO/DSO early can be costly, and frankly, it can be hard to stomach watching the business you spent years building turn into something you are not proud of.
As you can see there are both upsides and potential pitfalls to affiliating with an MSO/DSO. It is important you do your research to make sure you find the right partner. Marti Law Group is the only law firm founded by an individual who was in your shoes as an owner/operator of practices before selling to a private equity management group. As such, we get it! We work daily with providers selling to MSO/DSOs - and plenty who prefer buying or selling in a “doctor-to-doctor” scenario - and are familiar with how these transactions should be structured. We offer a unique Value Based Pricing Model that allows us to work one-on-one with you in evaluating a transaction minus the surprise legal bill at the end. For a free consultation to discuss a potential transaction on either the buy or sell side, call us at (860) 552-7770 or email firstname.lastname@example.org.