On this episode of The Capital Corner, McGuireWoods' Geoff Cockrell sits down with Dan Hosler, Managing Partner and Founder at DuneGlass Capital, to discuss the trends for healthcare services companies that are interested in using the private equity playbook to surcharge their growth. 

Dan discusses how the doctor equity model works to provide alignment among all stakeholders, including patients, staff, doctors, and investors. The model starts with knowledge sharing so doctors have a strong base understanding of private equity, before moving on to strategizing on how to keep incentives aligned over time. Aligning incentives is crucial when creating a true alternative to traditional private equity investments. 

“To us, doctor equity starts with knowledge-sharing with all our partners.” Dan says. 

Dan and Geoff also review which subsectors and specialties could be interesting investment areas. Two areas Dan and his team are researching are the biotech and pharmaceutical spaces. Both are areas where there’s an opportunity to reduce costs in the healthcare system while improving patient care. They also talk through investment opportunities in value-based care, an area that has also seen an uptick in interest in recent years, and the complexity and risk-taking that can come along with those investments.

Featured Guest

Name: Dan Hosler

What he does: As Managing Partner and Founder at DuneGlass Capital, Dan has both operational experiences, having started three companies before business school, as well as deep deal experience, having spent 15+ years in private equity. Most recently he led M&A for an eye care rollup where he closed 10 deals in under two years.

Organization: DuneGlass Capital

Connect: LinkedIn

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is the Capital Corner, a McGuireWoods podcast exploring investment strategies, capital structures, and topics relevant in today's middle market private equity. Join McGuireWoods partner, Geoff Cockrell, as he and specialists share practical insights to inform your deal work.

Thank you for joining another episode of the Corner series. I'm your host, Geoff Cockrell, a partner at McGuireWoods. Here at the Corner series, we try to bring together thought leaders and deal makers at the intersection of healthcare and private equity investing, we cover a number of different sectors and some of the trends that we’re seeing in other aspects of investing, and I'm thrilled to be joined today by my good friend, Dan Hosler, at DuneGlass Capital. I've known Dan for a long time and he does a lot of interesting work.

Dan, maybe you could introduce yourself and then we can jump into some questions.

Great. Thanks so much, Geoff. This is Dan Hostler. I'm one of the managing partners and co-founders of DuneGlass Capital and, as Jeff mentioned, we're a healthcare services private equity firm headquartered here in Chicago, and we strive to help founders of healthcare services companies really fulfill their potential using the private equity playbook to accelerate and turbocharge their growth.

So, Dan, maybe to kick us off, you all have done some interesting investing kind of focused into some subspecialties that, in particular, leverage into the performance of surgeries. Could you give a little color of... let's maybe start with your dental platform, kind of the thesis there and how that is evolving.

Sure. So one of our four portfolio companies is called Allied OMS for oral and maxillofacial surgery. And really, the thesis there was we were looking at the aging population, right, the Baby Boomers continuing to age into that 65+ age bracket, and we also looked at the confluence of technology, right? Some of the implant companies continued to find better ways for those implants to firmly seat into the jaw. And we like the fact that, unfortunately, as we all grow older, there's certain things that just age out: the skin, the lenses of the eye, and then certainly, the teeth, right? And so the statistics are that one in four people in their forties have at least one implant and that number jumps up to 50% when you get into your fifties. So we thought, "Gosh, it's a really great growth area. The technology allows for much better, longer lasting implants for bridge appliances," right, things that can go across multiple teeth. And so we really like the macroeconomics behind that particular surgical specialty.

How do you think about the relationship of a kind of more specialized practice for oral surgery versus a general dentistry practice that may be pulling in some specialists? How do you think about that? Is it competitive? Is it complementary? How do you think about that intersection?

Yeah, it really is both. We find it both to be complementary and competitive. I think the way that we look at it is to be outcomes driven, right? The safest, most effective way for somebody to receive an extraction and/or an implant is in an oral surgeon's office full stop, right? They've got more training, they've got better anesthesia equipment, and they've just done more of them. That said, though, there are still indications where having those surgeries done in the general practitioner's office or general dentist's office still can make sense, but we try to focus on the really the outcome side of it.

Frequently, one of the number one cases that we see amongst our surgical partners is they'll get a general dentist that places the occasional implant and maybe it's a tough case or maybe there's a complication. And more often than not, it's our oral surgeons who will come in and say, "Hey, let me help you out here. Let me take care of this" and that tends to be a great way to reinforce the referral nature of those cases from general dentists over to our oral surgeon partners.

So from a trend perspective, we anticipate there will continue to be implants placed by general dentists, that that will tend to be done under local or other forms of anesthesia. But just from a sheer volumes and outcomes perspective, we do think that the oral surgeon's office is the safest location for those services.

In some of the other subspecialties in dentistry, one of the dynamics that I've heard the specialist talk about is that consolidating with a specialist group can have some defensive mechanisms against these large consolidating general dentistry practices that have the ability to pull some of those specialties up internally. Is there any defensive aspect of this sort of roll up?

Yeah, so we've seen that play out in those... I'm going to call them single specialty examples where maybe it's general dentistry and they want to roll in orthodontics as a specialty or roll in the itinerant oral surgeon as well. I think the complicating factor there, right, and when you think about a traveling surgeon going from office to office, it's different staff, it's different equipment, and it's just a different physical plant and that can tend to be difficult to create repeatable, great outcomes for those patients.

And so it definitely makes sense from a defensive posture standpoint, but we also think that there's probably a better way of doing it to not have it travel around. Maybe you could do that with orthodontics or maybe you could do that with some of the other specialties inside of dentistry, but we feel like oral surgery in particular, there's so many facets of it that it's just a little bit more complicated to say, "Hey, let's bring oral surgery into the general dentist's office" versus having centers of excellence really focused exclusively on oral surgery.

One of the recurring themes in provider services consolidation is to navigate the difficult topic of provider alignment. I know you have a model that I think you refer to as doctor equity. Can you describe that a little bit and how maybe you more generally think about doctor alignment?

Doctor alignment is probably the most important thing that we focus on when we sought to create an alternative, right, so a true alternative to traditional private equity. We really started by saying, "What were the things that we had to get right 100% of the time?" And actually, that first item that we wrote on the board was alignment of incentives. How can we make sure that the incentives across the different constituents, right? This could include patients and staff and surgeons and certainly, investors, which could include equity and/or debt holders. So having that alignment of incentive is incredibly important.

One of the ways that we try to do it inside of doctor equity is we teach the doctors about the world of private equity from the inside out. Our model is not about a transaction or a deal or a roll up, right? Those are words that we hardly ever use when we're talking with our partners, right? We very much stress, "This is about partnership. This is about the long haul. How can we make sure that there's an opportunity to gradually monetize the value of your practice over the next 5, 10, 15 years?" We certainly also think about alignment of incentives when you think about stock ownership, right, making sure that the doctors understand how the stock works.

We go so far as to even teach them about different flavors of debt. We had a presentation that took place at Allied OMS that specifically got into senior debt, junior debt, unitranche, pick, concepts that many times, doctors never hear even when they're a part of a private equity-backed group. So to us, doctor equity really starts with knowledge sharing with all of our partners. And then from there, we build upon that to say, "Okay, now that you have a better understanding of private equity, how can we make sure that we continue to keep those incentives aligned as we grow together and get much larger?"

In the dental space, one topic that comes up fairly regularly and I think more often than in some other sectors is the notion of where to place the actual equity. One school of thought is that everyone should own at the tip top and everyone's kind of pulling the oars in the same direction, all for one, one for all sort of model. The differing view on that is to place doctor equity down at, say, a sub-DSO level. How do you think about those dynamics?

One of the ways that we've tried to bridge those gaps is we frankly didn't like either of those as the sole way of aligning incentives. We're very much a believer of making sure that the doctors, right, the shareholders get to participate up at the private equity level, so up at holdco or topco, whatever you might want to call it. But you're right. That can decrease some of the incentives to try to grow at the local level as well.

So one of the ways that we've tried to bridge that gap is all of our doctors own shares at the holdco level, right, at the very top and we do that on purpose because if you don't do it that way, then private equity or the investors can frankly disproportionately get the upside on the backs of the doctor partners and so we didn't like that structure. So what we've done is while all of the doctors own shares at the holdco or the uppermost level, we also provide for incentives at the local level, growth bonuses or compliance-based bonuses that are based on hitting specific operating metrics so that they're fully utilizing what the management services organization or what the dental services organization can provide.

And that's a way that you can grow the local practice level earnings and also, in some ways, also help them be as busy as they'd like to be from a collections or a production standpoint, so they also have some skin in the game there at the local level as well. So we try to do both, right? We want to make sure that the incentives work at the holdco level as well as down at that local level too.

I think that approach is a good mix. The sub-DSO can kind of provide some similar local connection value, but it adds just a ton of complexity, whereas if you're doing the local connection kind of upside through compensatory models, it's a lot more of a streamlined structure.

Yeah, well said.

The use or the investment in kind of surgical specialties in the dental arena is only one of the places where you could focus on surgical specialties. What other areas does DuneGlass have interest in?

Sure. So we try to look at those macro themes, right, the aging population and the continued push, right? This really started with Medicare almost 20 years ago. But that push where Medicare said, "We're going to create reimbursement schema that encourages care to be delivered. If it can be done outside the hospital, we'll create reimbursement programs that encourage moving from an inpatient hospital basis to an ASC or an OBL or some other alternate site location." And frankly, if it can be done in a doctor's office, then they're going to find ways to encourage that same care to be delivered not in the ASC or OBL or alternate site location and actually move it into the doctor's office. And then probably, the ultimate care delivery is in the patient's home, right, and this is where it really is getting interesting where Medicare and other payers are finding ways to try to push that care delivery into the patient's home itself.

And so based on that, we try to find surgical specialties that are outcomes-based or outcomes-driven that can significantly lower the cost of care and to do it in a way that, really, there's a long-term need as well. So a couple other areas where we're spending time include vascular surgery. So there's a business called LifeFlow Partners really focused on treating peripheral artery disease. So this is less on the venous side and more on the arterial conditions. And these can be really expensive procedures that used to be done in the hospital and now, they can be done safely and effectively in an office-based lab or in the ASC.

And then another space that we spend time in is in the bariatric surgery and general surgery space. Very similar case where you're seeing what used to be sort of a couple day, inpatient hospital stay can now be done frequently, either on an overnight basis or in some cases, even moving it into an ambulatory surgery center, saving, certainly, the patient thousands of dollars, but also helping save the system thousands of dollars as well. When you think about chronic obesity, more and more, we're thinking about it as a chronic disease, right? It's not simply an acute episode of care. It's something that takes years to develop. It's got a lot of medical complexity to it and something that we think can ultimately help folks like Medicare and other commercial payers save a lot when you can control that chronic condition.

I totally agree that the reimbursement models can really drive where investment occurs. Another example of that is for the longest time, cardiology practices were not something that investors were investing in. Almost all the procedures were done at the hospital. And then a couple years ago, CMS opened up the types of procedures that could be done at an ASC and that, overnight, created a new market just driven by those changes in how the government is reimbursing. So it's definitely an application that shows up in a lot of places.

Yeah. And we also see, when you think about the quantum of money that was coming from the federal government in a variety of programs and certainly CMS, you think about how, by and large, those programs are done. And so the money that was flowing to the acute care hospitals has now been shut off. And it seems like there is a rationalization maybe of some of the practices that those hospital systems have acquired or ambulatory care networks that those hospitals have acquired. And that rationalization is sometimes including the opportunity for doctors to buy themselves out of that contract, but to still be a close partner with the hospital.

I think cardiovascular is a great example of that because there are examples where admitting and privileges are incredibly important for patient outcomes. And so for doctors, cardiologists, you can still operate independently via your own ownership of your practice and be a good partner with the hospital system and we really like that. That seems like it's a good win-win. We want to be supportive of our hospital systems in all the different regions in which we operate, but we also want to continue to equip our doctors to have ownership opportunities to really help control their own destiny and frankly, to give them both clinical and business autonomy at their local practice level.

Maybe turning a little bit to current market conditions, I feel like every conversation I have with a private equity investor is trying to navigate a number of headwinds in investing, whether that is availability of credit, the cost of credit, which has had impact on pricing, disconnect on sellers' acceptance of that pricing impact. Maybe jumping on that last one, as you look and have conversations with doctors that are looking to sell, do you feel that they are internalizing the fact the cost of credit is going to have an impact on EBITDA multiples in pricing or is that still a tough pill for them to swallow?

Yeah, it's a good question. We still think that we're a couple quarters away from that really coming home to roost. And part of the reason of that is when you think about the debt that a lot of private equity firms have used over the years, number one, it was certainly a lot less expensive in prior years than it is now. Number two, it can frequently be floating. And so you really haven't seen the full flow through of the cash flow implications of the fact that you can see pricing upped 400 to 600 basis points. And so all of a sudden, right, we're here in mid-April and companies are making their Q1 debt payments and all of a sudden, you start to see, "Hey, we just blew through our cashflow forecast and now, we're now off budget in terms of what we were hoping to accomplish in 2023." We kind of feel like maybe it's that May or June board meeting to review the Q1 financials where the private equity firms are going to step in and say, "Whoa, cost of capital is different now and we need to be more thoughtful about how we're partnering with future practices."

And then, the other thing I would say, a lot of times, we don't think about our partnership model as a doctor selling or doctor transacting. We think about it in terms of are you open to making an investment in yourself because that's really what we're talking about. We do want to provide for some monetization of the practice, but our doctors are frequently reinvesting more than in other models. And so when we have that conversation, we like to start with, "What are your financial goals? What are you hoping to accomplish over the next 10 to 20 years?" And then, we work backwards from there. How can we help you harness long-term capital gains, taxed income versus ordinary income, taxed income and using that as a way to help you fulfill your long-term financial goals that you're seeking.

And so by doing it that way, sometimes we can actually get off of, "Hey, my buddy sold for X times EBITDA. I want the same or better." And we can talk about, "Look, this is a long game that we're playing. We're looking at 5, 10, 15 years." And so by focusing on the long-term, we're trying to have those types of conversations with different doctors, and frankly, if they're just interested in selling, doesn't tend to be the best opportunity for us. There's probably other groups that they could go and maybe get a couple more dollars. We're looking for folks that want to make that investment alongside of us.

You mentioned your kind of thematic approach of keeping an eye on where the tailwinds are coming from, both in reimbursement and other dynamics. As far as an area where DuneGlass has not made an investment, but you're spending a lot of time, what are some of the leading areas where you're searching?

Yeah, that's a good question. We frequently shied away from, I would say, kind of the pure play biotech and pharmaceutical spaces, but there is so much incredible research and commercialization that's occurring and so we're trying to find ways to piggyback off of those investments. You think about the drug pipelines that are out there that are no longer going to be delivered in a pill format, right? Maybe it's through infusion therapies that you might do one to four times a year or other dynamic delivery methods.

So we're trying to find where are some places that we can participate, but again, trying to take costs out of the system, trying to be very focused on patient outcomes, but also capitalizing on this incredible wave of biotechnology. I'd like to call it sort of mass customization of pharmaceuticals, so treating rare genetic disorders or rare diseases where it's not something where you're talking about tens or even 100 million prospective patients. You're looking at much smaller patient populations, but where the dollar impacts are still very, very important, right? The ability to reduce some of the chronic conditions or some of the chronic things that come from diseases that can really last your whole lifetime. So those are a couple spaces that we're actively researching. Nothing imminent, though.

Do you spend much time in some of the value-based care businesses? They can take a number of different shapes, but it also can interject a lot of complexity and risk-taking is exactly that, risk-taking. Do you spend much time in value-based care models?

I've wanted to for years. I've really struggled with it personally. I mean, the whole concept and premise behind value-based care makes a lot of sense, but the issue is there's still an information, I'm going to say, advantage that some of the really big players have out there. So Optum/UnitedHealthcare, they've got access to tens, I don't know, hundreds of millions of data points of care delivery over decades. And so when it comes to taking risk on patient populations, I'm just not sure that I want to be on the opposite side of the risk equation from an Optum or United because of that information dislocation. So we're trying to find ways that you're going to play in value-based care. What are the ways that you can either create your own proprietary data set in order to make more educated, risk-based decisions or to find really strong partners with whom you can go and approach those patient populations?

We haven't found that just yet, but it is very intriguing, even things like looking at CVS Aetna, right? I'm sort of cautiously optimistic about how that's going to play out because seeing the retail footprint that a CVS brings along with the, I'm going to call it, the data warehouse or data science that exists in something like in Aetna, it seems like there's some pretty cool ways that you can play. But then, as soon as I say that, right, I think about the resource constraints of being a smaller group and trying to compete against a CVS Aetna or United Optum or Walgreens is going to continue to make inroads as well. It just seems like you've got to have something that's truly proprietary in order to feel like you can take the risk into the equation.

Well, Dan, with that, we'll bring this episode to a close. It's been a ton of fun to chat with you and your insights are always sharp. Thanks again.

Geoff, thanks so much.

Thank you for joining us on this installment of the Capitol Corner. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.