Dental Service Organizations (DSOs) have been growing rapidly in recent years, driven by changing demographics, advancements in technology and the increasing demand for dental services.
The DSO model has gained popularity due to its potential to improve the efficiency and profitability of dental practices while also improving patient care.
And because of this, it’s worth exploring the potential growth for DSOs going forward and the factors that are involved.
A DSO provides non-clinical support services to dental practices.
These include:
- Administrative support.
- Marketing.
- Accounting and billing.
- IT services.
By outsourcing these to a DSO, dental practices can better focus on patient care, increase their bottom line, and expand service efficiency.
This is what makes DSOs attractive for dentists as they offer economies of scale that individual practices cannot achieve, such as centralized purchasing and billing, lower overhead costs, and shared resources.
DSOs also offer dentists access to a network of colleagues and resources that can support their professional development and growth.
That’s why – according to Institut Straumann AG (a global dental service provider) – the trend of independent dental practices in North America, Europe, and China has declined over the years as demand for DSOs increased.
Some perspective
- According to a report by the National Association of Dental Plans (NADP) – the number of DSO-supported dental practices in the US increased from 5,874 in 2011 to 16,874 in 2019 (12% of all dental practices), representing a compound annual growth rate of 14.2%.
- The DSO industry is expected to continue to grow in the United States, with Bain and Company predicting that DSO-supported dental practices could make up as much as 30% of all dental practices by 2025.
- And according to Grand View Research – the global DSO market size was valued at $141.26 billion in 2022. And it’s expected to compound an annual growth rate (CAGR) of 15.8% between 2023 and 2030.
What’s driving this robust growth?
A major factor is the aging population. As the baby boomer generation grows older, they require more dental services, including preventive care, restorative procedures, and cosmetic treatments. This increase in demand for dental services has created an opportunity for DSOs to expand their services and increase their market share.
Another factor is advancements in technology – which has transformed the dental industry – with innovations such as 3D printing, digital imaging, and CAD/CAM technology making it easier and more cost-effective to provide dental services.
- According to Grand View Research, the CAD/CAM systems market – including digital dentistry solutions such as intraoral scanners and 3D printing technologies – is also expected to grow at a CAGR of 8.4% between 2021 and 2028.
DSOs have been quick to adopt these new technologies, making it easier for them to expand their services and offer new treatments.
The increasing demand for convenience is also driving growth in the DSO industry.
Patients today are busier than ever, and they value convenience and accessibility when it comes to healthcare services. DSOs have responded to this demand by offering extended hours, same-day appointments, and online booking – making it easier for patients to access dental care and has helped DSOs to attract new patients and retain existing ones.
DSOs have also been expanding their services beyond traditional dental procedures.
Many DSOs through their affiliated partnerships now offer cosmetic treatments such as teeth whitening and veneers, as well as orthodontic services such as braces and aligners. By expanding their services, DSOs are able to capture a larger share of the dental market and compete more effectively with traditional dental practices.
Because of these benefits, many DSOs have expanded their footprint significantly over the last few years.
For instance, MB2 Dental – a private DSO with over 1,000 doctors and 500 practices across 38 states – had a record year in 2022.
- The overall MB2 organization expanded by 40% – making them the fastest growing DSO.
- They added 120 new practices and entered three new states (Ohio, North Carolina, and New Hampshire).
- Their organization served more than 2.1 million patients across the U.S.
- The company added nearly 40 practices in Q1-2023 alone.
Investors are taking notice
Meanwhile, investors have found DSOs to be extremely profitable vehicles over the last few years.
According to McGuire Woods, there’s been a wave of recent transactions and consolidation in the dental space that involved private equity firms – some notable ones being:
- Clairvest Group invested $32 million in Bluetree Dental in March 2023.
- HGGC invested in Dentive in January 2023.
- MedEquity Capital and RF Investment invested in Riverside Oral Surgery in November 2022.
- SkyKnight Capital invested in Pearl Street Dental Partners in October 2022.
On the valuation side, McGuire Woods notes that the value of DSOs have increased “dramatically” over the last decade on the back of higher profitability for dental practices.
For instance, a large and highly profitable practice may now command a price of 4-to-7x EBITDA or 100-150% of revenue.
Such an increase in valuation encourages many practices to sell or partner with a DSO.
AJ Shekar, Director at Provident Healthcare Partners – an investment banking firm in healthcare services – notes that, “DSOs that already have size, scale, and infrastructure to efficiently address macro demand are viewed as less risky investments compared to private practices that might require significant upfront investment prior to embarking upon a more robust growth strategy.”
He adds, “Macro trends such as sustained demand for oral health services, recession resiliency, and increased adoption of technology represent significant organic demand drivers for the segment.”
It appears that this trend in DSO consolidation and growth will continue in the coming years.
DSOs offer economies of scale, access to new technologies, and convenient services have made them attractive to dentists, patients and especially investors.
As demand and access to dental services continues to increase globally, DSOs and investors are well-positioned to expand their services and capture a larger share of the market.
Still, one challenge that DSOs face are investor perceptions around pure aggregation strategies, Shekar said. With increasing interest rates and recessionary pressures, groups that do not have the operational capabilities to effectively maintain & grow profitability on a same-store basis will be viewed as riskier investments.
Shekar said, “Given how labor intensive DSOs are, another challenge is in recruiting and retaining employees to effectively address demand – groups that have competitive compensation structures, workplace culture, and retention plans are viewed to be more viable long term investments.”
