Oral surgery isn’t a prospect that patients usually approach with much enthusiasm.
But the specialty is starting to generate excitement among private equity investors as they wake up to its potential to emulate the success they’ve enjoyed with other types of medical practices.
Beginning with dermatology and dentistry and moving on to areas such as ophthalmology, private equity has been a powerful force in partnering with physician practices, driving efficiency and consolidating their operations over the past decade.
Now it could be oral surgery’s moment in the spotlight, thanks to a few key factors.
First, demand for oral surgery is outstripping supply and is likely to keep doing so. There are about 9,000 practicing oral surgeons in the U.S., a number that hasn’t changed much in recent years.
Meanwhile, increased access to healthcare is set to drive up demand for their services, especially as oral health is increasingly viewed as integral to overall health. Since oral surgeons get their referrals from dentists, more people getting dental treatment translates directly into more work for them.
Overall access to healthcare, including dentistry, is set to get a fresh boost in the coming years under the Biden administration. This demand-supply imbalance gives oral surgery practices significant pricing power, an attractive feature for PE investors.
The highly fragmented nature of the oral surgery industry is another feature that makes it an attractive target for PE. Practices tend to be very small, consisting of only a handful of physicians. That means there’s broad potential to improve efficiency through consolidation, centralized back-office operations, enhanced referrals, and more advantageous contracting arrangements.
Oral surgery practices tend to have healthy unit economics, with providers among the best-paid doctors in the industry. They generally have a strong payer mix, composed heavily of patients paying out of pocket or through commercial insurance. The high proportion of customers who pay upfront for oral surgery is a major point of attraction for PE, even though Medicare and Medicaid income can still play a role in providers’ revenue mix.
Lastly, oral surgery practices have stood the test of time. More so than some other specialties, they have weathered economic downturns well over the past couple of decades.
Because the connection to patients runs through dentists, oral surgery is more of a “downstream” proposition for private equity than some of the other specialties it has funded. You don’t see billboards promoting oral surgery directly to customers as you do with dermatology or dentistry, for example.
Nevertheless, there’s no reason to think that the PE model can’t reap similar efficiency gains and bring the same financial benefits to physicians that it has in other specialties.
The initial pool of cash provided in a PE deal creates a market for the equity in a small practice that otherwise wouldn’t exist, providing the liquidity for older physicians to eventually cash out and for new providers to build a stake. At the same time, physicians get to focus more on providing healthcare as back-office operations are shifted to others.
PE interest has helped propel the growth of several U.S. oral surgery networks in recent years. Texas-based U.S. Oral Surgery Management was formed by RiverGlade Capital in 2018 and has since expanded across its home state and into others. St. Louis-based Oral Surgery Partners attracted investment from Sheridan Capital Partners in 2019.
We’re still in the early stages of PE’s interest in oral surgery, and the next few years is likely to see a flurry of new deals as momentum behind consolidations builds. We’ve already seen that premium assets, when run with an investment bank in an auction, have been valued at double-digit multiples.
As they consider how to move forward, oral surgery practices should be aware that there is a clear early-mover advantage to be gained. Allowing others to get ahead of them once consolidation begins could reduce their options and limit their ability to get the best terms.
Alex Sauter is a Vice President at Cowen and Company, LLC.