Orthodontic Dreams vs. Realities

Trading time for money – the orthodontic associate hiring decision for an Orthodontist.

The orthodontic market in North America is a rocket ship. For the financially inclined, it’s growing at a 17% CAGR year over year, which is equivalent to the surge in web browsing service growth we saw in the early 2000’s. For anyone that’s been involved in this industry since that time, whether they are a practicing orthodontist or a rep for an equipment manufacturer, life has been good. If you’ve lived in this community for a while, you’ll run into a former Align executive that had equity in the early days, or an OSO/DSO leader who took a bet on accumulating practices and hear some version of the same statement, “I don’t need to work, but I love Ortho too much, so I stay.” It’s a rare thing to find a market sector that can be so lucrative but also fulfilling, but like any giant wave, other surfers have taken notice of the Dental equivalent of Nazaré Beach, and they want to give it a go.

Year of the Ox? Or Year of OSO & DSO?

It is now 2022 and last year was the year of the Ox according to Chinese Zodiac, however, the orthodontic community may call it the year of the OSO & DSO. There has been a dramatic lift in private orthodontic practice acquisition activity heading into this year, with zero foreseeable abatement until the dry powder runs out. With the funds available, a healthy competition for practices, and the macro-economic conditions of the sector unwavering for the next 5 years, multipliers are justifiably insane. When Covid struck in March of 2020, the NASDAQ hit its circuit breaker over 2 days, resulting in a short-lived bear market that re-priced funds into striking distance of many retail investors that had suddenly found themselves out of work.

This created a feeding frenzy that set the table for a bull run that created gamma squeezes not seen since the Volkswagen surge in 2008. However, where that squeeze unlocked 500% growth over two days, AMC theaters stock (AMC) shot from $2.00 to $72 per share – nearly 36 times the original price. Everyone got in on the party, including this author, who’s cost basis is 46.01 (it’s currently traded at 15.35/share). Everyone loves a good short squeeze, especially if you’re on the buy side.

The Orthodontic Bubble?

Does this mean there’s an orthodontic bubble? No, not in sight at this moment. That’s not what this article is about. Group practices are not an existential threat, but there is a cascade effect of “opportunity discovery” in the economic picture. I remember reading articles and seeing educational programs called “protect the profession” (or some version of it) 10 years ago, with subject headers that purported the whole thing was going up in smoke if too many surfers jumped onto the wave, because this would compromise the patient experience, and ultimately, their outcome. Some of the writers and speakers leading that narrative have since joined an OSO and are actively recruiting colleagues to join them in the multiplier and recapitalization sprint. There is no shame in this, because the modern-day food buffet isn’t of the Ryan’s Steakhouse variety, but more like the Cosmopolitan Hotel. You can have top grade prime rib to go with the fried okra if you choose. All OSO’s/DSO’s are not created equal, and while the financial mission is the same (else, why would private equity subsidize?), there are some incredible orthodontists doing terrific work at many of these organizations.

The Trade Off Decision & The Resident

This article is about the orthodontic resident, and where they fit into this picture upon graduation, along with their preferred counterpart: the private practice owner. There are many owners toggling between selling their practice to a group vs. hiring an orthodontic associate so that they can eventually wind it down and have a glass of wine on the porch while ordering a new couch from Pottery Barn. The American orthodontist’s dream.

Realistically, can the owner indulge in that trip while working at modern group practice, where maintaining or increasing production is the “strongly recommended” path? This is a world where the aggregate is measured and production is a team effort, laden with KPI’s and business reviews. A successful 2-year run is defined by same or better production in each practice with multiple new acquisitions where the new doctor-owner reinvests into the group. The prize is the great “rollover” – when chips are cashed or pushed back to the center of the table for another run.

If there is a financial motivation for the owner, is it prudent to pass on that option when the market is white hot and there’s a bidding war for the practice? Or, does it make sense to begin the process of interviews for an orthodontic associate, and find a match that can carry the culture, treatment philosophy and patient service one or more generations forward while extricating oneself from the day to day? This is a material tradeoff decision, as the implications can head down the road of working less, but practice profit and short-term time commitment may be compromised.

3 Catalysts

It could be that most practicing orthodontists themselves don’t know the answer to this question, but the idea of shifting one’s role in a practice is usually predicated on one of 3 catalysts:

An owner has decided that they are willing to trade time for money.
They are growing starts faster than clinical support can maintain.
More time is spent focusing on clinical than business development, stalling growth.

Here Is What We Know

In the US, an orthodontic associate’s salary will be an average of 250k/year, although in denser geographic areas, it is likely to go much higher.
- Whether paid by salary, percent of production, or per diem; orthodontic associate incomes are 30% higher than they were at the beginning of this decade. However they are paid, young orthodontists tend to translate income into per diem rates; and where $1,000/day was the going rate a few years ago, today it is difficult to get a dance for anything less than $1,250.00 to $1,500.00 per day.
Competition for talent is intense – even with 285 residents graduating per year, OSO/DSO’s purchasing power puts the private practice owner at a hiring disadvantage.
- OSO/DOS’s usually have two components to orthodontic associate income; 1.) a per diem or salary as discussed above and 2.) a bonus paid on starts or production. It is also common today to see either a signing bonus (up to $50,000.00) and or a “retention bonus” paid at the anniversary of the orthodontic associates starting date.
Debt for graduates is a mean of $567,000.00 for orthodontic residents.
Starting a practice has costs that begin at about 300K for the frugal and go up from there, which compels former residents to burn down a portion of their 500K + debt while working in a group practice before setting out to start their own.

Orthodontic Associate Demographics

The available pool of orthodontic associates is primarily made up of recent orthodontic resident new graduates 0 – 3 years out of school.
Today, 55% are female, and 45% are male – this has swung the historically male dominated industry pendulum towards a different doctor profile.
Most new graduate orthodontic associates prefer to stay within the perimeter of a denser geographic hub, which can limit availability if a practice is located in a remote area.

Orthodontic Associate Goals

15% of graduates prefer to work in a private practice as an orthodontic associate with a path to equity.
- There is an expected 1:1 mentorship in these configurations.
- The average amount of time it takes to get an orthodontic associate aligned with the private practice owner’s processes and quality of care is 9 months.
- If there is no path to equity, an orthodontic associate typically will turn over every 24 months.
Today, a primary route to practice ownership is to start at a group office as an orthodontic associate and then start their own private practice in the first 3-5 years out of residency.
90% of graduates list work/life balance and flexibility as their number reason to become an orthodontist, 84% earning potential, and 59% skill set according to BC&C, LLC resident survey data for 2021.

THE M&A MEAT MARKET

Mergers & Acquisitions

Each practice owner or hiring manager is more equipped to determine if their goals match that of the futureassociate, but with 10% of Orthodontic starts being done through DSO’s or OSO’s in 2022, the private practice is still a fixture in the conversation.

In the M&A meat market, what is the optimal path for the orthodontic associate that is looking to hang their own shingle? If the private practice owner wishes to work less but maintain production, they have to “give it up” when hiring an orthodontic associate. “It” is time for training/mentoring, and in order for long term stability, equity. Additionally, expectations of increased production from hiring an orthodontic associate should be curtailed until the new orthodontist is embedded and on the equity track, so that they are recognized as a long-term contributor in the practice and community. Unfortunately, it takes years for a new orthodontic associate to drive incremental production in an existing practice unless they enhance the practice’s digital footprint and brand through vendor support.

Ride The Wave

However complicated it all appears, the beauty of waves in the ocean is that if a surfer misses the first one because it’s too crowded, there’s always another behind it. There can be simplicity in optionality, and just now, there is currently no shortage of waves coming in. For the aspiring orthodontist or private practice owner, options won’t be diminished in the near future, but due diligence around which wave to surf is a requirement.

Conclusions

In the new world of hiring an orthodontic associate, the salary/per diem is higher than it’s ever been, the learning adoption curve is steep, and when hiring, the target ROI must be time first (money second) for the partnership to be successful.

The Matchmaking Pond

The matchmaking pond between the private practice owner and orthodontic associate is getting smaller every year, with the group practice ocean getting larger for hiring.
- This may compel an owner to sell to an OSO, thinking of this as a different path to a future transition.
  - There is still a production expectation on this path that may not appeal to the orthodontist looking for more time vs. the doctor targeting growth.

The Associate & Owner Fit

Finding the right fit between associate and owner has several variables that either party may not be considering.
- Self-review of goals and future partner goals is a requirement.
- If an owner wants more time but is lukewarm about parting with equity, the likelihood of a long-term engagement is reduced.

Requirements for the Undecided

For a practice owner who is undecided about their transition plan but is resolved on reducing their practice time, investigating alternatives to associateship is required.

About the Author

Judd Johns has worked in multiple roles in the Orthodontic industry over the last 12 years, including in sales, product management and marketing. Most recently, he founded On Demand Orthodontist with his partner (Dr. John Warford), to further the democratization of orthodontia by supporting other clinicians to treat patients with fewer appointments, utilizing remote monitoring. Judd graduated from the University in Southern California with a BA in Creative Writing.

CREDITS:
Data Support Chris Bentson, Bentson Copple & Associates, LLC