How the FTC's Non-Compete Ruling Affects Dental Practices and Dentist Retention

The FTC’s recent ban on non-competes is making waves in the legal world and is causing many DSOs to worry about its implications.

Without non-competes, dental practices and DSOs envision seeing increased job-hopping among associate dentists, leading to financial instability, lost revenue, and lower valuations. The threat of associate dentists leaving to start competing practices may also be perceived to be higher.

However, the actual effects of this ruling may be minimal.

**What Does the FTC’s Non-Compete Ban Actually Mean for DSO Leaders?**

Right now? Not too much. The FTC ruling is not something that should keep folks up at night, at least not at this stage, for two primary reasons:

Timing – The US Chamber of Commerce is currently suing the FTC, likely pushing back any enforcement for years until the case makes its way through the federal courts. Consequently, the impacts will likely be a fraction of what’s been circulating in news headlines in recent weeks.

Ownership Exemption – The proposed FTC rule to ban non-compete clauses includes an exemption for the sale of a business when the non-compete clause applies to someone who owns at least 25% of the business.

However, just because the threat isn’t imminent doesn’t mean DSOs and dental practices shouldn’t make preemptive adjustments.

How to Proactively Handle the Non-Compete Ruling

DSO leaders should continue to focus on activities that drive their businesses forward, including:

Protecting Your Trade Secrets – If you currently rely on non-compete clauses to protect trade secrets, consider limiting access, preventing access, strengthening your cyber security, and training your employees on the proper use of company information.

Creating Stronger Incentive Structures – Strong incentive structures can make clinicians less likely to leave a dental group by offering financial benefits that they would miss out on if they left. For example, creating an incentive structure based on real or synthetic equity or percentage of collections would create significant opportunity costs for clinicians who leave before the business intends them to exit.

Focusing on Reducing Attrition– Focus on recruiting and retaining the human capital that enables you to achieve your business and address any issues currently causing attrition.

There are several things driving attrition in dentistry, including:

Demographics – 53% of clinicians are at, near, or past retirement age. This trend will only worsen as we don’t have enough graduates coming out of dental schools.

Alignment of Incentives—or the misunderstanding of incentives—can lead to a misalignment of clinician behavior with the broader objectives of the practice group. This misalignment can manifest through various mechanisms, such as traditional performance programs, actual equity, synthetic equity, and more.

Corporate Culture – Culture misalignment or a lack of engagement can lead to higher attrition rates. Attrition rates that lead to greater HR expenditures and increased training needs.

External Economic Factors – Economic downturns can affect patient spending on elective dental procedures, impacting the financial stability of practices and leading to staff reduction.

Educational Debt – Newer clinicians often carry significant student loan debt, and if compensation packages don’t adequately address that burden, it can lead to job dissatisfaction and attrition.

Competition and Market Saturation – Increased competition from new practices and DSOs can lead to market saturation, putting pressure on existing practices and leading to instability and attrition. That competition can also cause dentists to jump ship for greener pastures.

While we can’t necessarily control the macro trends, we can address the correct setup and communication of incentives to capture, retain, and improve the performance of dentists within a DSO.

After all, clinicians can only impact bottom line EBITDA if they understand what it means for them personally now and in the future.

The Value of Preparing Now

While making these adjustments today may seem premature, there are other clear benefits to focusing on things like attrition.

For example, businesses with higher attrition than the broader market can expect to see EBITDA multiples anywhere between 20-35% lower than their counterparts. This stems from the quality of earnings analysis being negatively impacted by clinician turnover, thus increasing uncertainty in the future earnings of the organization.

The question, of course, becomes how. How can practices solve for attrition when there are so many factors in play? One option might be stakeholder capitalism.

“Stakeholder capitalism” is a term coined by Pete Stavros, Co-Head of Global Private Equity at KKR. It involves giving all employees a share of the company’s profits and clearly communicating how their current work impacts their future financial success.

KKR revealed that at each of the portfolio companies where they have pursued this strategy, the investor returns have been materially higher compared to those of its portfolio companies where it has not been implemented. This strategy has been so successful that Blackstone, the world’s largest alternative asset manager, has announced plans to adopt similar compensation structures to enable all employees to benefit from their company’s growth.

To Decrease Attrition, Ensure Clinicians Understand Their Equity and Incentive Programs

To achieve these outcomes, DSOs need to start with the baseline. In other words, do your clinicians understand the equity or incentive programs they are working with? If not, you shouldn’t expect to see material results.

While it’s not uncommon for DSOs to share incentive and equity programs via Excel, PowerPoint, or emails, they don’t always do a great job at articulating value. If this sounds like you, it may be wise to consider upgrading to a better system.

We recommend the platform Pulse Equity because it takes complex concepts, like equity upside and profit interest units, and displays them in an easy-to-digest format for clinicians. Pulse’s mission revolves around aligning clinician incentives with those of the greater practice group and leadership to drive EBITDA growth higher.

To see how Pulse Equity can impact your practice, schedule a quick demo here:

A component of this involves connecting clinicians’ work to their worth so they understand how the decisions they make today impact their bottom line now (on an income basis) and in the future (on a capital gains basis).

This all ties back to attrition. When clinicians can see and understand incentives, they’re less likely to leave – with or without a non-compete clause.

One example where this type of transparency directly impacts attrition is after a merger or acquisition. Too often, clinicians see a drop in their reported income. Maybe they went from low-seven figures to high-six figures, and they assume that it’s an indication they should leave the new group. However, their income is often lower because the larger group now covers expenses like FICA and malpractice insurance. This is just one of the many use cases we see Pulse addressing with their platform.

See You at Dykema!

We’re looking forward to seeing many of you at the 11th Annual Dykema DSO Conference in Denver, Colorado in a couple of weeks.

About the authors:

Brian Colao’s Bio: As the Director of Dykema’s Dental Service Organizations Industry Group, Brian Colao stands at the forefront of expertise in DSO formation and regulatory compliance in the United States. With a comprehensive understanding of DSO business structures and related mergers and acquisitions, Brian Colao is recognized as a leading authority in the field. Brian’s specialization extends to navigating complex regulatory landscapes, including corporate practice of dentistry and HIPAA regulations, ensuring DSOs operate within legal boundaries. He provides invaluable support to DSOs nationwide, crafting regulatory compliant business models and offering ongoing compliance guidance to mitigate risks. Brian’s services also encompass defending DSOs in various legal and regulatory challenges, from State Dental Board investigations to federal complaints, cementing his reputation as a trusted advisor in the dental industry.

Mike White’s Bio: With over 15+ years of experience, Mike serves as a principal within the health firm’s health care industry. Truly passionate about his work, he strives to provide strategic business intelligence by identifying complex, financial, operational, and technical issues while developing comprehensive solutions to enhance the client’s business operations. Mike is one of the national leaders for CLA focused on building teams and financial structure, specifically Dental, MedSpa and Professional Service Organizations. Mike is a highly sought-after speaker sharing his broad knowledge of the healthcare industry while understanding the complexity of health care practices of various sizes.

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