How Dental Practices are Dealing with COVID-19 Fallout

Morgan: Welcome to PointByPoint, this is your host Morgan Ribeiro.

Today on the podcast, we are joined by members of the firm’s dental industry team, Don Moody, Eric Scalzo and John Arnold. Partners providing healthcare and M&A counsel to dental clients across the country. Today we are talking about the impact of COVID-19 on dental practices and how dental providers can best position their practice for the future during these uncertain times.

Don and John and Eric, thank you for joining us today. You all work with dental practices and DSOs across the country of all shapes and sizes. To kick things off, regardless of the size of the practice, are there common questions or concerns you’re hearing from your dental clients right now? Don, I’ll start with you.

Don: Thanks, Morgan. It’s a challenging time for most companies in this industry. We’ve heard from some of the largest DSOs in the country down to small start-ups, and all of them are seeing some similar problems. It ranges from, we have providers who have been diagnosed--what do we do about that?--to we don’t have any patient flow, we’re thinking about furloughing or laying off employees. And then increasingly, what about these funding opportunities that are available? Can we take advantage of the Paycheck Protection Program or the EIDL emergency loans, or we’re hearing about these Medicare funds that are being issued, how do we take advantage of those, as people sort of scramble to try to keep their companies and practices in whole.

Morgan: So Don, you mentioned some of the available funds that are happening primarily through the stimulus packages, the Paycheck Protection Program, SBA loans. Eric, any solutions available to dental practices at the moment, and can you speak specifically to any of those available funds, whether or not they’re loans or grants? Anything they should be looking into right now?

Eric: Yeah, I think, to Congress’ credit, they’ve put together a good number of options for folks to take advantage of. We’re recording this the afternoon of April 16, and today the Paycheck Protection Program ran out of initial funding. There is discussions at Congressional level about whether or not that’s going to be replenished, so unfortunately that may be off the table, hopefully temporarily. The idea of the Paycheck Protection Program, PPP, is that money would be lent to small businesses, fewer than 500 employees, in an effort to get them to maintain their employees--to not furlough, to not layoff--and the government would essentially be funding the payroll and part of that loan would be forgivable based on criteria, including continued employment of individuals.

Morgan: Eric, in addition to some of the stimulus funds that you’ve already noted, I’ve heard a lot of discussion in the last week over main street funding; is that something that dental practices should be looking into as well?

Eric: Yeah, Morgan, absolutely. I think the Federal Reserve’s program, the main street lending program, was intended to complement the PPP and the EIDL programs. And now that those have run out of funding, at least maybe for the time being, it’s really the only program that’s left, and it’s for folks who have up to 10,000 employees, or $2.5 billion in annual revenues for 2019. So it really applies to a much wider swath of employers. Don’t know of many large DSOs that would be bumping up against those limits, so they should definitely be looking into the availability of the fed’s pool of money there. It’s a four-year loan, the interest rates are very competitive, I don’t think you’re going to get them in the open market. The amounts can be fairly significant, up to $25 million, depending on your financials, so definitely something folks should be looking into.

Morgan: Great. John, anything you would add to that in terms of funding or other avenues that dental practices should be looking into?

John: Yeah, certainly, on the main street loans, first of all those are not forgivable, unlike the PPP loans, the Paycheck Protection Program loans. For those companies, groups, DSOs that have existing debt, you’re going to need to coordinate with your current lenders about that. There’s also a leverage ratio test, in other words, how much debt you have in comparison to your EBITDA, and so for companies that have existing debt, you may exceed that threshold already. So it’s something we would encourage companies to look at, groups to look at, but if you have existing debt, you’re going to need to coordinate with your lenders about it.

Morgan: So, I’m going to jump to a somewhat related topic here, but I think there’s been a lot of question that you all have received about whether or not practices qualify or don’t qualify for certain loans. And just this week, Modern Healthcare published an article saying that private equity-backed physician practices are shut out of small business stimulus funds. Is that true, or--it seemed very black and white in the article--are there nuances to this? What should dental practices be looking at to kind of weigh their options here? Don, I’ll start with you on that one.

Don: So, a couple of things on that. One is that article really focused on private equity-owned practices, and you certainly see that a lot in the medical professions--dermatology, gastroenterology, vision, things like that--because a lot of states do not have corporate practice of medicine. However, there’s only a handful of states that don’t have the corporate practice of dentistry, and the vast majority of states you’re going to see the more common DSO-PC structure, so that private equity ownership of the practice stuff really isn’t applicable very much in dental. And I would say that certainly DSOs that are owned by private equity, there are restrictions on affiliate rules. The Small Business Administration has some affiliate rules that would aggregate the DSO’s employees with other private equity sponsored companies that are owned by that private equity fund. So that often prevents DSOs from applying, but I will say that we have worked with a number of DSOs where their practices have applied for the PPP loans, and we think there’s an avenue for that, depending on your structure, depending on your agreements. I think there’s an opportunity there for those DSOs that are structured with a separate management company and PLLCs.

Morgan: In another episode of our podcast, I interviewed Beth Pitman and Nathan Kottkamp more generally about telemedicine and HIPAA, but John, can you speak more specifically to teledentistry? What should our listeners know about teledentistry and how does that allow them to continue to allow services to their patients during these pretty challenging times, and what regulations around teledentistry should they be aware of?

John: Thanks, Morgan. That’s a great question. I would encourage listeners to check out what Beth and Nathan had to say. The government’s approach to HIPAA enforcement during the COVID crisis is unique. The Office of Civil Rights, which is effectively the HIPAA police at the federal government level, has stated it’s not going to impose HIPAA penalties if you’re not compliant when serving patients in good faith using Zoom or FaceTime or similar technologies. Of course, you should avoid public-facing technologies. You shouldn’t be on Facebook Live looking in your patient’s mouth.

In terms of teledentistry, outside of orthodontics, dentistry doesn’t necessarily lend itself to telehealth. It’s been explored where you’ve got a hygienist or dental assistant chairside with a patient, but teledentistry does have its place right now. It’s an effective way to continue to engage with and care for patients. It can be used right now to triage patients, conduct problem-focused evaluations, all in order to limit office visits with patients who potentially need urgent or emergency dental care. It can also be used for follow-up consults to check with patients after some procedures have been performed.

And then there’s the potential to do some limited consults with patients. Perhaps it’s for clear liners, dentures, implants--now is a good opportunity to keep them engaged and interested in those products and services. States like Georgia, South Carolina and North Carolina, they’ve really embraced the use of telecommunications to engage with patients during the COVID crisis. Other states like Texas unfortunately have not, so dentists really need to evaluate what is or is not permitted in their state, and more specifically, in the state in which their patient is located when they’re consulting with them, because that’s the state law that governs. So if you’re in Texas talking to a patient in Oklahoma, you need to be licensed in Oklahoma and Oklahoma’s laws are going to govern that.

Assuming the virtual exams and consults are permitted, you’ve still got to be aware of the restrictions and limitations on prescribing based on a virtual visit, particularly with controlled substances. And you still need to think about issues like informed consent, record keeping, as well as ensuring your malpractice policy covers teledentistry services. There could very well be an exclusion for that.

Morgan: So John, this is very interesting to me, and if I’m a dental practice, I’m curious on the reimbursement side, am I going to get paid for these visits and is it the same as if I was in the office and treating patients? How is the government looking at that or commercial payers?

John: A number of dental insurers are expanding coverage to virtual exams during the COIVD crisis. I think United Concordia, for example, but that’s still going to be a payer specific determination. Coverage is not universal for these exams. We think it’s going to be a very important part of how dental care is delivered over the next several months, and it’s really going to be a good test run for the post-COVID world. And it may be a situation where it’s difficult for dental boards and payers to put the teledentistry genie back in the bottle, so I think it’s going to be interesting to watch over the next several months.

Morgan: You all work with a lot of practices, DSOs, investors on both the sell side and buy side of transactions in the dental industry, pre-COVID-19 it was an explosive market, and you and your team have represented hundreds of dental practices across the U.S. Things are quiet at the moment as everyone waits for the pandemic to play out, but where do you see things heading in the near future? Do you have clients that are proceeding with transactions? What’s the market look like right now?

Don: Certainly agree with you about the historical--it was a very active market. We helped clients close over a hundred deals in 2019, and the first quarter of 2020 was shaping up to be equally busy and strong. We’ve generally seen that the transactions that are underway have generally been paused, not all of them. We do have transactions that will continue. But I think for a number of companies, they’re looking at it as being opportunistic, that perhaps once they put the fire out in their own house, that there will be other opportunities to acquire practices or affiliate with practices that haven’t fared as well or are maybe thinking that now would be a good time to align myself with a strong DSO. I’ve seen how hard it is to do this myself, I think a DSO might be a good partner for me on a go-forward basis. We’re hoping that the second half of the year will be very active with folks taking advantage of those opportunities.

Morgan: Eric or John, are you hearing the same thing from your clients? Anything additional to add to that?

John: Thanks, Morgan. We’re having a number of conversations with DSOs and dental groups right now about positioning themselves for growth post-COVID, and then using this time to regroup and tackle projects that are important for long-term success and growth but may have been pushed to the backburner for a variety of reasons, whether it’s just been deal flow is too much or focus too much on establishing new de novo offices, whatever the case may be, now they have some time to focus on issues that have been pushed to the backburner.

Morgan: So John, I think beyond that as we’re looking at those DSOs and dental practices that are in growth mode or expect to be in growth mode in the coming months, is there anything in particular, Eric, that you would recommend to those practices?

Eric: Yeah, we’re getting calls from a lot of folks in terms of focusing on the deal process. We’ve been so busy the last couple of years on the transactions for a number of our clients that we’re utilizing this time while transactions are on a bit of a pause to focus on the process, to work on how to streamline the diligence process and working on the forms with them to make sure that post-COVID, when hopefully there’s a flurry of transactions, that we’re in the best position to really hit the ground running and help them take advantage of that time.

Morgan: It seems a lot of our healthcare clients, particularly physician practices and dental practices, are in a bit of a fog right now, understandably responding to this initial wave of uncertainty and viewing the stimulus funding opportunities. But once they’ve moved past this, say in the next few weeks or months, what can these practices do to best position themselves for the future and use this time to their advantage? John, I’ll start with you.

John: Now is a good time to dust off your to-do list and find those items that have been on there for a long time but that continually get pushed to the bottom. I have to sit at my house and work, too, so now is a good time to find those items and use this time to be productive. Some items we’re getting phone calls about and helping clients with right now are building out their compliance policies and training. If you’re participating in Medicaid, you generally need a written compliance program, you need a HIPAA compliance manual, you need to be doing OSHA training. Now may be a good time to develop improved onboarding processes for new hires, may involve background checks, provider exclusion screening, compliance training, as well as clinical training for new doctors coming on board. Maybe you haven’t gotten around to registering your practice name; now’s a good time to work on that federal trademark registration. Clean up your patient credit balances, kind of get your house in order, and use this as a chance to regroup.

Don: Well yes, in the sense that I think it’s an opportunity or perhaps a good time to revisit compensation models, to take a look at how you are compensating your associate dentist or associate dentists employed by your supported practices. Are they on salary in this environment where they’re not actually working--is that really the right model? Do you have flexibility in changing that in times like this? For some people the answer is yes, for others no. So I think it’s a good time to rethink compensation, rethink your employment agreements. If we face this kind of crisis in the future, are you prepared for the consequences of that.

Morgan: Eric, you had mentioned in some of your comments about investors and those looking to potentially acquire practices in the industry, this might be a good time for that. So I’d love to hear some commentary about private equity and other investors in the dental space. And of course, this isn’t all happy, this is a really challenging and stressful time for a lot of practices, so what should others be contemplating? Whether or not it’s foreclosures, obviously there are a lot of folks stretched for money right now with practices being closed. I’d like to get your perspective on that as well.

Eric: Folks had a lot of cash sitting on the sidelines going into this with plans to deploy it. I think the plans are still there as Don said, things are on pause. People are testing the waters to try to get a feel for when this think is going to let up and what post-COVID life is going to look like. I’ve got a couple of new LOIs in hand, as Don said some of the transactions are still proceeding, but they’re certainly not proceeding with the same speed as they were a month and a half ago. But I think there’s still an opportunity there for folks who are looking to take advantage of the market and the interest in the space. I think the interest remains and will remain when things return to normal, whenever that is.

Morgan: You all have been working in the dental space for several decades. Have you ever seen anything like this happening currently in the DSO space in response to the COVID pandemic? Are there any comparable times in the industry?

Don: I’ll start since I’ve been around the longest. I’ve been working with DSOs for over 25 years. No, I’ve never seen the kind of shut downs that we are seeing where just nationally generally every office shut down except for emergency care. It's unprecedented. I did live through the 90s. So for those who are familiar with the industry, there was a lot of meltdown at the end of the 90s. A lot of companies ended up in bankruptcy or sold off to someone else. And, you know, we were on the buy side of a lot of that representing buyers. So again, there were opportunities back at the end of the 90s to pick up some pretty good assets. And, you know, Smile Brands is an example of a company that was cobbled together from some of those companies in the 90s that didn't fare very well. And then Steve Built was smart enough to put them together, and it's turned into a very dynamic company. So we're hopeful here that things will get brighter of once we get past this sort of crisis.

Eric: I'll add to that, you know, as Don said, we've never seen it to this extent, but we have seen flavors of these types of troubles in the industry before, right, and not every DSO prior to this had stellar balance sheets and never ran into trouble. And so we're able to draw on those experiences. It just happens to be multiples of them hitting at once as opposed to kind of one or two in the past, but never seen it to this extent. But again have seen these flavors of difficulties and troubles in the past and help folks either through them work through them and come on either side or wind up, if that's the ultimate solution, or help folks buy into those, as Don said.

Morgan: Yeah, I've read and heard of a number of physicians, physician practices, in another area of healthcare and that those that are not affiliated with the health system or a large group practice are really struggling, more than those that are part of a system. So I’m curious in the dental space, are you seeing a similar situation where those that are, you know, one, two physician dental practices versus those that are part of a large DSO? Are their issues different, or are they all quite similar?

Don: I think there are some differences. I think that it really amplifies the benefits of being with a DSO, in the sense that DSOs typically have more capital. They've got more expertise. They have an HR department to deal with layoffs and furloughs. And what do you do with staff, and what do you do about compensation, and what is this PPP loan? How they would get that? So a lot of the things that they bring to the table would be very beneficial in this current crisis. And if I were a solo practitioner or one or two folks, you know, I personally would be thinking about that of, you know, we're gonna face this again later in the year, and do I really want to go through this again? I think I'd rather have a strong partner if I'm going to do that.

Morgan: Right. Exactly, which I think is comparable to what other areas of healthcare are seeing whether or not they're aligned with a health system or another large group. I would imagine too, you know, going back to John what you covered earlier in the conversation, just having access to things like telemedicine and that infrastructure and software. I mean, if you're a small practice, I don't really know where you begin to get some of these things off the ground and running and quickly enough to make a real difference. It's definitely a challenge for sure. Anything else that you all wanted to cover today, anything that may not have asked?

John: There will be some positive to come out of this at the end of the day. And I think one of those is gonna be around teledentistry, which we talked about earlier. I think it's gonna be hard to put the genie back in the bottle, and I truly think that's the case. Once providers and dental boards have kind of gotten comfortable with using virtual visits and exams for matters that are conducive to that sort of interaction, it's gonna be really hard to kind of tell doctors after the fact we're no longer reimbursing you for that. You can't do it. It doesn't meet the standard of care. So I think this is gonna be a great trial run. I think teledentistry’s gonna be here for the next several months. It's gonna be a great way they can get patients back into the office. You know, I'm not comfortable going to my dentist right now. I think that kind of comfort level is gonna have to change, and it's gonna take folks time to kind of become comfortable with it again and teledentistry is gonna be a smooth transition and nice bridge for that.

Eric: I do think, John, this is a good opportunity for dentists to advertise, to showcase, why the things they've been doing all along, right? Infection, infectious disease control, is right up there in terms of what's important in a dental practice. And so the practices that have been in place pre-COVID that maybe go behind the scenes, and nobody really sees what happens in between the patients and the use of the stairs cycle and the like. But capitalizing on that might be something that folks could do to reinstill the faith and the comfort in the dental practice sooner than, say, the restaurant down the street or some other open to the public business.