Despite a US Senate inquiry and a recent lawsuit both aimed at private-equity ownership of dental clinics, PE money continues to invest in the sector.
Earlier this month, several PE firms — including Ontario Teachers, KKR and Madison Dearborn — each bid roughly $1 billion for Heartland Dental, an Effingham, Ill., group of 370 practices in 19 states.
These group dental practices are attractive to PE investment cash because, in part, there has been a boom in Medicaid spending on dentistry. A recent Bloomberg report said Medicaid spending in the dental sector soared 63 percent in the three years ended in 2010.
In fact, there have been at least 25 dental management-services companies bought or backed by PE cash in the last decade, according to the Bloomberg report.
The lure of the rising revenue stream is apparently brighter than the threat from Capitol Hill or from the Oct. 18 lawsuit.
The lawsuit, against Aspen Dental, a chain of 358 dental clinics in 22 states, owned by PE giant Leonard Green & Co., claims the PE firm’s ownership of the New York clinics runs afoul of state law.
In New York, like in other states, only dentists can own a dental practice.
The lawsuit doesn’t pose too big a threat to the PE firms, said one source.
“There are no bombshell damages in the suit,” said the source, who is close to one of the Heartland bidding parties.
“It’s a manageable risk,” the source said, adding that there likely is a legislative solution.
Leonard Green allegedly expected its dentists to serve three patients at a time, boosting profits, but providing poor care, said a lawyer who filed suit against Aspen.
Leonard Green declined comment. It has not yet responded to the allegations in court.
The lawyer said he is seeking class certification to cover all Aspen clinics. Aspen served 490,000 new patients in 2011.
Leonard Green and co-investor Ares Capital in 2010 put $367 million down to buy Aspen and have already collected $127 million through a dividend, the suit says.
In addition, Sen. Charles Grassley (R-Iowa) is investigating corporate dental practices for conducting unnecessary surgeries on kids.
“There are legitimate concerns that children are receiving unnecessary care, sometimes in a traumatic way, and taxpayers are paying for it,” Grassley said in June.