Reforms impact private investment in German dental market

The Schedule Service and Supply Act (TSVG) places restrictions on private investment into some areas of Germany's dental market. Despite this, there remains scope for growth in the involvement of private investors in the market and we expect this to be driven by increasing consolidation in the years to come.

This is part of a series of articles exploring issues in the dental sector. Other topics include a focus on the impact of consolidation in the UK and Irish dental markets, a look at the evolution of digital dental care through apps, and how collaborative contracts can support digitisation.

The consolidation of the German dental market

Germany is perhaps the biggest market for dental services in Western Europe. Yet, the market is still extremely fragmented. In a study released in 2017 KPMG estimated that 99% of existing dental practices are still owned and operated by dentists themselves. It was only after regulatory changes in 2015 that the market saw the first signs of consolidation. Although this consolidation is still in a very early stage, the coming years may see it continuing at an increasing pace.

Historically, German law required dentists to personally provide their services. The number of additional dentists who could be employed was limited. This changed in 2015 when the German legislator made the legal institute of a 'medical care centre' (Medizinisches Versorgungszentrum (MVZ) available to dentists. Such 'dental MVZs' can employ an unlimited number of dentists.

A dental MVZ is an entity formed in the legal form of a partnership, a limited liability company  or a registered cooperative company. Limited liability companies constitute by far the largest number of dental MVZs.

Accredited physicians, not necessarily dentists, may, but are on the other hand not required to, hold shares in a dental MVZ. Other shareholders of dental MVZs, allowed by German law, include accredited hospitals and municipalities. However, private investors are not allowed to directly hold shares in a dental MVZ. Therefore, as hospitals may be privately owned, private investors considering investing in a dental MVZ can acquire a hospital and use this as a platform for their investments in dental MVZs.

During the period covering the beginning of 2016 to the third quarter of 2018, the number of dental MVZs increased from 25 to more than 600. However, it is likely that most of the dental MVZs are owned by dentists themselves. The Westphalian University Institute for Work and Technology in Gelsenkirchen, in a study dated February 2019, estimated that only approximately 10% of dental MVZs are ultimately owned by private equity investors.

The current German dental market offers tremendous opportunities for private investors who follow a buy-and-build strategy. Like in the entire healthcare sector, the stable, but aging, German population increases the demand for dental services. On top of this, 90% of Germans hold public health insurance, meaning services are directly paid by the insurer to the dental MVZ, eliminating the risk of default. This ensures stable cash-flow streams. Additionally, the consolidation of an extremely fragmented market may generate synergies in a variety of ways.

Centralising and professionalising administrative functions will reduce costs. Economies of scale will become more and more important, given the necessity of increased investments caused by digitisation. Services like the use of dental laboratories may be sourced in to create integrated value chains. The quality of services may be increased by facilitating an exchange among a larger group of professionals, potentially even on an international level. Together this provides a promising playing field for private investors.

Enactment of the TSVG

However, opportunities rarely come without challenges. The German Dentists Association (Bundeszahnärztekammer) lobbied for a restriction of private investment in the dental sector. As a result, on 14 March 2019 the Bundestag, Germany's parliament,  passed the Schedule Service and Supply Act ( TSVG), which became effective on 1 May 2019. The TSVG in general aims to improve service levels within the statutory public health insurance system. However, it also impacts private investments in dental MVZs, as it limits the establishments of dental MVZs by accredited hospitals.

Implications of the TSVG

To serve its purpose, the TSVG distinguishes different planning areas in accordance with the level of dental capacity. Whether or not a dental MVZ may be established or expanded by a hospital now depends on the specific planning area in which it is or is to be located.

As a general rule, a hospital may establish or expand a dental MVZ to the extent that the dental MVZ's share in dental services in the respective planning area does not exceed the threshold of 10%.

In planning areas in which the supply of dental services exceeds 10% of the supply defined as sufficient – usually large cities or metropolitan regions and, thus, the most attractive regions for investors – the threshold is reduced to a maximum of 5%. However, in planning areas, in which a lack of supply of dental services has been determined – i.e. more than 50% less than what is defined as sufficient,– dental MVZ's share in dental services can increase to 20%.

Additionally, in planning areas which have a supply level of up to 50% less of what is defined as sufficient, the hospitals are entitled to equip a newly established dental MVZ with at least five accredited or employed dentists.

Determination of supply needs

The degree of coverage of dental supply in the respective planning area will be determined in each specific case by an admission committee. For this purpose, the Association of Statutory Dental Health Insurance has to compile comprehensive and comparable overviews of the general level and the status of dental supply as at the end of each year. The overviews have to be compiled by the middle of the following year and published in an appropriate manner. It remains to be seen how the admission committee will deal with this new task and how it will interpret the degree of supply in line with the demand.

Grandfathering rules for existing dental MVZs

For investors it is important to note that dental MVZs which have been established prior to the enactment of the TSVG continue to enjoy protection and their right to operate cannot be revoked retroactively. However, their further expansion will be subject to the capacity limitations as well. Nevertheless, any hospital is barred from acquiring further capacity in the same planning category if the applicable limit is reached. In the event that a dentist leaves the already existing dental MVZ, the number of accredited dentist's seats can thus be upheld. However, in such circumstances the number of licensed dentists cannot be increased.

Aim of the restrictions

As a result of the new law and the restrictions that come with it, the German legislator expects that the rapid expansion of dental MVZs, the development of groups of dental MVZs and consequently the participation of private investors in the supply of dental care will be reduced, in particular in already well-served areas. It is also expected that hospitals and thus private investors will in the future start setting up dental MVZs in less well-served planning areas and improve the level of dentistry in those locations.

Impact for investors

The formation of or investment in dental MVZs by private investors remains possible despite the new restrictions. There is still no legal requirement for a hospital to be involved in dental care.

However, expansion into oversupplied regions for dental MVZ companies of a hospital that already account for 5% or more of the contracted dental services in an oversupplied supply area are no longer possible. As a result, private investors may have to re-focus their expansion plans.

In the case of acquisitions of hospitals operating a chain of dental MVZs, the proportion of the total capacity of these hospitals within the planning areas must be determined in order to assess the possibilities for expansion. Hospitals may, however, continue to establish and grow MVZs in other planning areas until the relevant capacity limit is hit.