Senior associate Ty Lantz and analyst Stephanie Yeung of Mansfield Advisors examine the state of dentistry across the UK and major European countries, highlighting some of the trends affecting dentistry everywhere.
Buoyed by surging demand for private care, the UK dental market has continued to grow out of the Covid-19 pandemic. Tailwinds abound:
- Severe and ongoing supply constraints in NHS-funded care push patients to self-pay. Pent-up demand is likely to weather macroeconomic trends in the short-to-intermediate term
- NHS dental contract reform trials were abandoned
- The Covid-19 freeze in NHS co-pay increases is expected to lift in 2023, which will continue to shrink the price gap between state-sponsored and private care
On the deal front, private equity investors continue to trade dental platforms, and dental platforms continue to buy practices. Core Equity, owner of Portman Dental Care, doubled down by acquiring Dentex Health, and CapVest bought Rodericks Dental with plans to takeover Dental Partners Group.
Despite low levels of consolidation nationwide, the Rodericks-Dental Partners deal faced scrutiny over market power in some locales but was passed by regulators. Furthermore, the market for individual and group practices remains strong. For example, Scottish consolidator, Clyde Munro grew from 50 to 75 practices between 1H21 and 2H22 via single-practice and small-group acquisitions.
Rising borrowing costs for investors and increased credit risk for lenders should ensure growth plans are focused on smaller deals in the future.
Continental European dental markets
Within Western Europe, dental market dynamics and commercial opportunities, are dictated by payor mix, regulation, and labour supply.
The three main payor types include state-sponsored social medical insurance (SMI), private medical insurers (PMI), and patients. Coverage models fall into three categories: limited, partial, and comprehensive based on the treatments covered (see Figure One).
Because marginally free is the first port of call, within each country the level and supply of services provided by the state dictate the rest of the payor landscape. In places with limited coverage, only basic treatments for vulnerable populations are provided by the government with the rest funded personally. Under partial coverage models, patients bear 25‒80% of the cost for clinically necessary treatments through co-payment. While treatments such as orthodontics and implants can be clinically necessary and may confer statutory coverage, most of these procedures in adults are paid for privately. In addition to the services offered under partial coverage, comprehensive payors reimburse for preventative treatments and sometimes incentivise patients for regular attendance.
Regulation on dental practice ownership also varies by geography. Some countries preclude majority stake ownership by non-dentists, while others bar large dental groups from entering oversupplied areas. Regulatory oversight not only affects investment opportunities, but also the day-to-day operations of a practice. Answering to multiple governmental regulatory bodies in rigid environments burdens clinicians and limits the proportion of time that they can provide care.
Limitations on advertising also affect the strategies that dental business use to attract and retain patients.
Labour economics hinge on three factors: dental education, immigration, and workplace participation. The number of seats in dental schools is typically set by regulators but is influenced by third-party associations such as the UK’s General Dental Council and its counterparties abroad.
These societies also influence laws recognising foreign training and accreditations, and the number of dentists abroad that speak the native language is a hot topic regarding disruption. This is more relevant in places like the UK where dentists from commonwealth countries speak English as a first language. The possibility of a labour glut from lower-cost-of-living countries, however, has so far largely been squashed by arduous and expensive cross-border accreditation programmes.
Finally, the biggest factors affecting workforce participation are the shifting demographic of dentists from older men to younger women and the accompanying lifestyle preferences. In the UK, according to the British Dental Journal, 63% of current dental students are female and we hear of similar trends abroad.
Interestingly, when considering the impact of these elements on dental activity at a high level, no sweeping trends stand out. For instance, Italy and Germany have very different payor dynamics but comparable dental attendance, while The Netherlands and the UK have similar workforces and levels of insurance, but the Dutch go to the dentist 3x more than the British (see Figure Two).
A deeper look at each market, however, reveals the idiosyncratic effects of each dimension on care provision and the commercial landscape. We’ll look at the German, French, and Spanish dental markets to see these factors in action.
The German dental market is highly explicit in its regulation. In 2019, the Service and Supply Act (Terminservice und Versorgungsgesetz, TSVG) was introduced in Germany to restrict private investment in dental clinics and incentivise dental service expansion in underserved areas.
Regulators permit dental businesses to enter a locale based on the distribution of existing businesses and market shares. For example, Medical Care Centres (Medizinisches Versorgungszentrum, MVZ), which offer a range of medical services including dental, are permitted to enter and service up to 20% of the market in underserved areas, while in more competitive areas, per-MVZ market share cannot exceed 5%.
Personal insurance is government-mandated and available as social insurance or PMI. Nearly nine in ten Germans are eligible for, and covered by, SHI plans, referred to as sickness funds while high earners must join PMI plans.
Co-payments are required for advanced treatments such as crowns and bridges, but a subsidy reduces out-of-pocket expenses if a patient has a record of annual appointments.
Substantial public expenditure, revenue defensibility by regulation, and high utilisation make the German market an attractive infrastructure-like play for dental businesses, if one can break in.
In France, dental costs are shared across the government, PMI, and the patient nearly equally. Social health insurance only covers check-ups, fillings, and extractions so supplemental private insurance is popular. New laws such as ‘100% Santé’, however, have increased coverage of dental prostheses, capped prices of prostheses not typically covered, and reduced patient co-pays.
Plans to extend free annual check-ups for people up to 24-years of age and increased government reimbursement for preventive and regular care, by up to 144% for some procedures, are also expected to increase the proportion of regular dental attendees and benefit dentists.
Regulation regarding practice ownership, advertising, and pricing has kept the market fragmented thus far, but some corporates, such as G Square’s Dentego, are wading in.
In France, the law stipulates that practices must be majority owned by dentists. Corporate consolidators address this by distributing legal ownership across multiple dentists. Similar laws exist in the United States where investors have found a comfortable home in the Dental Services Organisation model. Time will tell if a complementary arrangement will take-off in France.
Spanish dentistry is characterised by free market economics, much like the US market. State coverage is limited to emergency dental care, such as extractions, and only for the poor. The market is fragmented but sits closer to the UK on consolidation than France or Germany. Outside of the typical corporate model, some pioneering dentists have had success building large multi-specialty practices.
Spain educates far more dentists per capita than the UK and has, on average, smaller practices. More dentists in more practices chasing fewer patients, however, has not resulted in severe price competition. Per-capita spend sits between the UK and France (see Figure Three), despite lower per-capita GDP, likely due to cultural norms about cosmetic dentistry.
The abundant supply of dentists, loose restrictions, and the high standard of care make Spain an attractive market for investment.
Dentistry provision is varied, and different markets are attractive for different reasons, what else is going on?
The labour mix in dentistry is changing. Baby-boomer dentists are retiring, and the traditional aspiration of practice ownership is being eroded by regulatory burden in some markets. Furthermore, younger associates are burdened with student debt while there have been limited real-income gains over the past decades. In the UK, fee income for a typical dental associate has fallen by 20% in real terms in the last ten years.
Dental workforce surveys find that dentists increasingly prioritise flexibility and part-time opportunities when looking for work, partly due to the feminisation of the profession; more dental graduates are females who prefer part-time work when starting a family. Larger dental businesses are better suited to providing a flexible schedule, but dentists worry about loss of clinical freedom when working in corporates.
We believe human resources can be a source of competitive advantage in labour-constrained markets, and flexibility is equally important in both clinical and lifestyle domains in attracting dentists.
There is growing focus on a more effective use of the ‘skill mix’ in the dental team. Some businesses are leveraging hygienists and therapists to free up dentists to focus on high-value procedures and maximize chair utilization. In some countries, the UK for instance, dental hygienists and dental therapists can carry out preventive treatments from gum cleaning to simple restorations including fillings.
For example, many dentists perform a scale and polish in about 30 minutes for £70, and a crown in around 60 minutes for £700 – a 5x difference in per chair-hour revenue.
Scopes of practice for dental team members will vary by geography, but efforts in many countries to steer dentistry toward prevention necessitate expansion of the dental workforce to improve access to care.
Looking beyond clinical staff, use of non-clinical support staff such as treatment coordinators can further optimise use of dental chair time to help patients choose treatments.
Last year (see HMUK Vol 25 Iss 9, November 2021) Mansfield Advisors wrote about increasing demand for cosmetic dentistry and the confluence of aesthetic and standard-of-care treatments. In the face of rising living costs, there are secular trends that support long term demand, at least for general dental care.
Many countries are still playing catch-up on the missed dental appointments from during the pandemic. Over the past two years, postponed dental work resulted in an increase in dental disease and a need for more significant restorations: what was initially early decay that could have been addressed by a filling has escalated to needing a root canal treatment and a crown.
Spurred by pain and a significant expense, smart patients will schedule their preventative appointments for the coming years. Furthermore, longer life expectancy and better whole-life oral health results in people retaining more natural teeth for longer, and these teeth tend to need care later in life. As people age and these teeth inevitably fail, implants are the preferred choice. Implants last longer, look better, and are more comfortable than removable dentures; they are also more expensive.
Across Europe markets are fragmented, and regulation is a key driver of investment theses. Nevertheless, dentistry has been an enduringly profitable sector throughout everywhere, and we believe the diversity of markets across the channel provides opportunities for varying risk appetites.
Investors seeking growth companies might look in less regulated countries such as Spain while those valuing revenue defensibility should look for comprehensive social health insurance programmes, like in Germany. Others still may try a balanced approach via a multi-market platform like Nordic Capital has done with European Dental Group.
The trends we identify in payor mix, regulation, and labour economics reinforce the importance of country-specific expertise to operate efficiently and keep investors smiling.