The business-side of running an oral and maxillofacial surgery practice can present unique challenges, such as purchasing the latest equipment, staffing offices and dealing with technology and cyber security. That’s where private equity and a group run by doctors tries to help.

Listen as Daniel Hosler, who brings experience in equity, and Dr. David Kostohryz, Jr., an oral surgeon, discuss Allied OMS, an oral and maxillofacial surgery platform they founded that helps with the “business of the business” of oral surgery offices.

Their platform helps offices purchase equipment, staff their offices, keep up with rules and regulations, communicate with other doctors who are part of Allied OMS through a Slack channel, receive some mentoring, and help with IT. And the group helps open satellite offices to expand the services of respected practices.

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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 Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner Geoff Cockrell as he and specialists share real-world insight to help enhance your knowledge.

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 dealmakers and thought leaders at the intersection of healthcare and private equity to explore some of the pressing topics of that intersection. Today we've got a fun discussion, I'm joined by my longtime friend Dan Hosler. He's the co-founder at DuneGlass, a private equity investment firm, but he's also the CEO and co-founder of Allied OMS, a dental provider platform. I'm also joined by David Kostohryz DDS, MD, also co-founder of Allied OMS. And we're going to talk about the impact of private equity investing in healthcare. But Dan, maybe give a quick introduction of yourself and then David, and then we'll jump into some questions.

Wonderful. Thanks so much, Geoff. Dan Hosler here, co-founder of DuneGlass Capital. So I've spent the last, call it, 15 years having worked in middle market private equity on the healthcare investing side. And we started DuneGlass Capital about five years ago with a particular focus on working directly with physician practice management partnerships and working with doctors in particular and teaching them about the inner workings of private equity and how to really harness that power, the centralization of back office services, getting more coordinated in activities, really working with the doctors to teach them about how to put that as a powerful tool for them to use in their practices.

David, maybe give a quick introduction of yourself as well.

Absolutely. David Kostohryz, private practice oral surgeon in Fort Worth, Texas, and a co-founder of Allied OMS. About five years ago, Dan Hosler and I reconnected to build Allied OMS from the ground up, which was our answer in the oral surgery space to a platform that aligned the doctors and investors a lot stronger across all constituencies.

So there's been a lot of discussion about the impact of private equity investing in healthcare and a lot of frankly shade thrown at that investing from the perspective of if the primary goals as a society and as a government with respect to healthcare are to expand access to healthcare, control overall system costs and improve outcomes. The critique has been that private equity has not helped those things. Which is pretty inconsistent what has been my experience. But Dan, maybe starting with you, how would you describe the role of private equity investing in healthcare and what's DuneGlass' mission in that?

It's certainly come up more frequently. We've talked about maybe some negative outcomes in some hospital consolidations. And also over the last really 15, 20 years, we've seen tremendous consolidation on the payer side, so non-governmental payers. And I think the real question that we've asked ourselves though is how can we help the people who actually provide healthcare services? The doctors, the Allied Health professionals, the ones that touch point directly with the patients. How can we help make sure that being a doctor, being a surgeon continues to be a really rewarding experience? And it's gotten difficult. We talk about how every year, the business of the business, which none of our doctors went to dental school and medical school to learn, the business of the business gets more complicated. There's more rules, there's more regulations, there's certainly more costs when you think about inflation. So how can we better arm those providers to be able to make sense of that while being maniacally focused on patient outcomes and really providing amazing care for all those folks?

And so that forms the backdrop of why we started DuneGlass Capital and Allied OMS in particular. We said, if we could work more closely with providers, provide better alignment of interests, that's what David talked about just a second ago, create better economic outcomes for those doctors, those doctor owners of these ambulatory practices. And then increased transparency. So really understanding not just the business model of healthcare, but also the business model of private equity. We thought that by doing those three things and trying to excel at them, it would lead to much better outcomes, whether you're an investor or whether you're a patient or anything in between. So that really formed the basis of our why. And I think it's important to point out, if you think about private equity's involvement in healthcare investing, traditionally private equity has not invested that much when you think about the overall spend inside of healthcare.

If you think about pharmaceuticals or pharma services, if you think about hospitals or if you think about payers, in many of these cases, there hasn't been a lot of private equity involvement. And so while it's talked about and maybe it gets that headline attention when people are looking to get folks to click on links, the actual involvement of private equity in some of these healthcare services, these ambulatory practices is a relatively newer construct and one that we think should be allowed to play out and let the markets decide. If there are bad actors, if capital is inefficiently deployed, the market will speak because increasingly people have options about where they go. And I think that's the focus that we have tried to pay particular attention to at DuneGlass Capital and then also at Allied OMS.

David, from your perspective as a provider, what does the impact of scale have on the patient experience?

With the right partnership, such as what DuneGlass provides Allied OMS, with the right partnership that allows DuneGlass to unburden the local practice from all the day-to-day business dealings, the nuances of running a small business, a very profitable and high volume small business, it allows us as practitioners to align ourselves better with our patients. So it gets us back to just seeing patients and giving the best quality care that we possibly can. It takes a lot off of our plate and allows us to provide high quality care day in and day out.

Dan, in addition to scale private equity also can provide capital. How would you describe the impact of capital at the intersection of healthcare and private equity?

Yeah, one of the things we do with our doctors is we teach them about the different sources of capital. So whether we're talking about debt, we actually hosted a debt primer about 12 months ago where we taught our doctors about the different forms of debt that are available to businesses in addition to how to select the right kind of equity partner and what is the difference between debt and equity. And I think it's really eye-opening. A lot of the doctors were taught, frankly, either through interactions in their practices or maybe even it was mentioned during their training, that debt was a bad thing universally. And I think one of the things that we try to teach the doctors is when is it appropriately used? How can you use it to invest in the latest imaging technology? Our oral surgeons use a tremendous amount of 2D and 3D imaging to make sure that they're placing those implants exactly where they belong. Or they're resetting the jaw, correcting it from where it was to where it needs to be.

And so by accessing capital, we can actually continue to innovate in these practices and get more of this technology in the hands of providers so that it can lead to increased opportunities for the patients. So I think that's a really fun intersection of where private equity can definitely help. And then there's lots of ways in which I think about some of the burdens that we can take off of people's plates. IT, the number of times doctors ask us like, "Sheesh, I'm worried about ransomware. I'm worried about what's going on. Where do I even begin?" So being able to provide resources on an ad hoc basis so that the doctor or the practice admin can literally pick up the phone and say, "I need help. I need help in HR, I need help in IT. Gosh, I'm curious. Has anybody ever looked at a dashboard with these metrics on it?" This allows us to fulfill those questions that lead to greater access to care and, frankly, better patient outcomes if we can deliver those types of services directly to our doctor's hands.

David, we've talked some about improving the doctor experience, about improving the patient experience, Dan alluded to improved outcomes. From where you sit, looking at practices in general versus Allied OMS, do you keep track of overall outcomes against benchmarks and how does Allied OMS fare in that?

Absolutely. Our chief medical officer, Jonathon Jundt, who has a practice in Evergreen, Colorado, serves as our chief medical officer, and he is maniacal about calculating the outcomes of each and every case that an Allied oral surgeon sees. So we're actually working on some proprietary software that will allow us to easily track the data in real time right after a case is finished, but then to compile all the data and make sure that we are still at or above the gold standard of care in oral surgery. And it comes down to other various nuances and technology offerings such as 3D scanners, cone beam CTs, the latest and greatest technology that we can have in our office. And by having a great capital provider and sponsor such as DuneGlass, they make sure that we have all of these offerings in our office so that we are providing the best quality care that our patients desperately deserve.

Part of the critique of consolidation and private equity's involvement in consolidation is that you get an amassing of market power, and the two thoughts on that. One is market power in and of itself is not problematic. Large companies have market power all the time and they have to be careful what they do with it. But my second thought on that is amassing that kind of market power is actually a pretty rare phenomenon even in the consolidating healthcare environment. In the dental space, Dan, and I'm going to start this one with you, how would you describe the ability to even amass that kind of market power? Because it feels like that's an elusive idea that there's a lot of jumping at shadows, that the idea of amass market power, and I just don't see it existing .

Yeah. In oral surgery in particular, many of our duly degreed doctors, they spent years and years in training, but there's only really 7,000 or 8,000 oral and maxillofacial surgeons in the US. There's well north of 100,000 dentists. And dental consolidation probably was one of the very first, started over 40 years ago. I'm calling a claim, Heartland Dental was probably one of the very early players. And that was started by Dr. Rick Workman, so actually a dentist that helped kick things off and said, "Gosh, I'm frustrated practicing in rural Illinois. There's got to be some scale efficiencies of being able to partner together." So when we talk about consolidation and market power, it just seems nearly impossible in the world of dentistry, and in particular at Allied OMS where we're entirely focused on oral and maxillofacial surgery, it seems really difficult to say, "Gosh, this is going to create adverse outcomes in terms of market consolidation."

I view it actually the opposite. I think by working in coordination with dentists who are many times the key referral sources to our doctors, the dentist may be able to do an occasional extraction or maybe an occasional implant. And when it comes down to folks that have been providing these services day in, day out, either with local anesthesia or IV-based mild sedation, there's nobody that has done these cases more successfully than the well-trained oral and maxillofacial surgeon. From our perspective, we want to work in partnership with our dental referral sources to make sure that for those difficult cases, or gosh, I hope it doesn't happen, but if a case is started and isn't able to be completed by a dentist, that really the terminal referral source, the last call for help goes to an OMS-trained doctor. And so I think that's a really amazing opportunity for our oral and maxillofacial surgeons to serve that role.

But it just seems unlikely when you think about a pool of technically 108,000 providers very much delivered at that local market that a consolidation of those folks is going to lead to problems from a market placement perspective. I think the opposite is true, I think by coordinating care, we have a Slack channel, we have a HIPAA-compliant Slack instance where doctors can share cases of interest. And I can't tell you how many times I hear an oral surgeon from our network say, "After training, I just felt alone on an island. I didn't have anybody that I could compare case notes on or if I ever wanted to ask a question."

And I think one of the most powerful tools that we can provide is how can we provide a collaborative environment where our oral and maxillofacial surgeons can share notes? Or we have a mortality and morbidity channel where we can talk about cases that maybe were more challenging than others. The ability to do that, I think, leads to safer outcomes and greater access to care because our doctors are more equipped to provide that care at the, I call it chair side, right at that point of care chair side, they're going to be better equipped to be able to help a broader variety of patients.

David, as you're out talking with prospective partners, how would you describe the secret sauce or special sauce of Allied OMS?

Dan hit on a couple points in that last little segment. And he talks about how we as practitioners after we finished residency, sometimes we join a smaller private practice or even a group practice, but you only know what you know within that practice. And so it is nice to now be able to align myself with 60 plus other oral surgeons throughout the United States, literally in the matter of minutes with our Slack channel communication or just picking up the phone and calling a new partner of mine in the Allied network. It allows me to better my practice and learn other ways to grow my practice organically through practitioners that have done this for multiple decades.

It's been a great resource and outlet for me to be able to learn from those that have come before me. But really when we go out and we look to partner with other practices, it's those that want to be part of something a little bit bigger. And not necessarily better, but we hopefully are offering them a better resource and ultimately a better outcome for their patients by helping them de-stress and unburden their business with all of the day-to-day nuances and pains and struggles that it takes to actually run that business.

HR issues, continuing education requirements, and trying to keep up with those credentialing requirements. Sourcing products and materials that we use in our office, which become difficult. Now we have a network of oral surgeons throughout the United States where we can ask, "How are you getting such and such sedation medications? Because there's a shortage here in my state." It's the ability to be able to just be part of something a little bit bigger and ultimately a little bit better.

Dan, not all of the platforms out there, in particular dental platforms, have done swimmingly well. Several have experienced real challenges. Where do you think those that have gotten into trouble, what's the source of those troubles and how do you avoid them at Allied?

Yeah. One of the first things that we saw in the market was we had, shoot, 14 or 15 years of a near zero interest rate environment. And so frequently it was not just debt, but it was the fact that the debt was allowed to be purely floating rate. So I remember my first job in private equity back in 2006 was to do an interest rate swap. And that became something that was no longer taught inside of private equity firms. I joke with my friends in management and partner positions in their private equity firms today, and I said, "Hey, have you ever done an interest rate swap before?" And a lot of them said, "No, but we realize we have to do that." So the debt side is definitely something that crept up on a lot of these businesses. I think similarly, because the interest rate was low, you were allowed to go on a buying spree, so you didn't necessarily have to take the time to adequately integrate the practices that you bought.

Operating partners used to be a big deal back in '05 and '06 when I first started in private equity, and then it fell by the wayside, everybody went on a buying spree through the great recession and past that. And it's funny because I'm now hearing LPs and GPs talking about the importance of operating partners and deep integration, words that I hadn't heard in 15, 20 years. So I think some of the issues that have crept up on some of these other DSOs have been focused on over-leverage and not being thoughtful about the debt service. It's on lack of integration, so growing too quickly through buying practices and not taking the time to make sure that they're deeply integrated into that back office. Those are probably the top two things that we see out there.

And there's also early warning systems. We talk about it as a company, we have this patient flow that exists in every practice. Typically, a consult will lead to one of a couple different experiences. Maybe it's an extraction first and then four to six months later the implant is placed. And when you start to see some time lag differences, maybe consult volumes are slightly growing, but the time difference between extraction to implant is elongating. It's making sure that we're sharing this information with our doctor partners to make sure that they are making the appropriate decisions to say, "Hey, maybe it's getting more difficult for the patient to afford it. What are the options that we can do?" One of the things that our chief medical officer has been pushing lately is the availability of immediate molar or immediate implant placement. So the option to literally place the implant at the same time, it saves a patient visit, it puts the patient back into the restorative hands of a dental partner sooner, and all of those things lead to a better benefit for the patient.

So it's one less visit to the oral surgeon. It's potentially one less local anesthetic or IV sedation event. So there's actually cost savings that can flow through as well. Teaching our doctor partners about the availability of more cutting edge technologies that lead to less patient time away from work or away from family or whatever it is that's most important to them. Those are some of the things that we've tried to focus on and also some of the things that we've seen some of the traditional dentistry DSOs suffer from, especially the debt and the integration side.

I think those are definitely correct. I would add that looking at platforms that have had challenges, I find them having difficult and sometimes antagonistic relationships with their providers, which I would put in the bucket of culture and alignment. David, maybe starting with you, how do you build culture at a multi-site, far flung organization? How do you build a unified culture that is constructive?

Yeah, great question. I mean, it really starts from the top and it starts from the founders who founded Allied for this specific reason is to build a better business and a better platform for oral surgery providers. That was our goal and I think that we're hitting on that goal methodically and purposefully. The other way that we like to establish culture is to allow our new incoming oral surgeons, physicians to be mentored by somebody who has been part of Allied. It is a point of contact for them on how they run their business. It allows them to understand why Allied was built and know that Allied was built from the ground up to provide a better place for practitioners to practice the way they really want to. And not to have DuneGlass Capital or Allied OMS management looking down upon them saying they need to crank out more hours and/or more patients. It really allows them to continue to see patients how they want to see patients and build a practice in a very caring manner.

Dan, maybe spinning that question to you. Culture and alignment has soft edges that David's referring to, it also has some math components. How do you think about building alignment through the economic arrangements with providers and where do people sometimes get that wrong and how do you think about it?

It's sometimes difficult because at DuneGlass Capital, some of our portfolio companies, they've missed out on opportunities for partnership because somebody else in the market is giving more cash to the doctors and therefore they've got less skin in the game going forward. And it can be difficult to watch those situations happen. I like to say that in many ways it becomes self-selecting. We want to make sure that our doctors are deeply involved in the business. So every one of our companies has doctor-led committees that allows them to really exercise their strengths on the business side and directly influence each of the management teams.

We like to make sure that our doctors have significant stock ownership. And that starts with the second an associate surgeon or a junior doctor joins any one of our businesses, and actually Allied's even pushing the envelope of that. We've created a name, image, likeness program for residents because we said, "If there's a good connection and you're ready to commit to a practice, let's provide an advance on your signing bonus in the form of getting you signed up and just getting you a couple extra dollars for your last year of residency training."

Some of these residents, you make next to nothing your last year of training, you almost have like a tenfold increase in salary after you graduate and you finish your training and then you go on to work in private practice. And so we said there's got to be some ways to help reduce some of that friction or make that last year a little bit less difficult. So just coming up with innovative ways to align the interest for the people that provide the care and the companies that are tasked with making sure that we're working together closely with the doctors.

David, looking at the back half of 2024 and into 2025, what is your prognosis for growth? And as you look at and think about growth for Allied, do you think of that more through acquisitions? Do you think of that more through organic growth? What does growth look like for you in the back half of this year?

It's multifaceted. We want to be able to continue to grow out our current geographies and our existing practices with support of other practices around them. But we also want to open additional de novo clinics. And really they're mainly extensions of a current brand in a geography we are already invested in. And that is taking a local practice and identifying opportunities, say, 30, 40, 50 miles away from them to open an extension of a well-established practice, mainly a satellite clinic, if you will. And these will be opportunities to where we can have a little bit further of a reach of our existing referral base who already knows that we provide quality care in the area, but then be able to amplify that by opening these satellite clinics. So I think if you look at our growth story over the next, say six to 12 months, it's a combination of your local M&A strategy as well as the satellite de novo build out.

We could talk for quite a while, but I think we'll call it a wrap there. Thank you guys for joining. This has been a ton of fun. You all have really built a tremendous company and it's been fun to watch it grow.

Thanks so much, Geoff.

Thanks, Geoff.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@maguirewoods.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.