Electricity networks infrastructure proposals support the UK’s low carbon ambitions
Out-Law Analysis | 21 Nov 2019 | 3:28 pm | 10 min. read
The market in Ireland has developed at a slower rate and remains highly fragmented compared to the UK. This means there are lots of opportunities for consolidation open to providers already on the island as well as those from Britain and overseas.
The challenge is for established operators pushing to build a Europe-wide presence to carefully manage consolidations and overcome challenges in the recruitment and retention of staff, particularly as the impact of Brexit is felt.
This is part of a series of articles exploring issues in the dental sector. Other topics include a focus on reforms impacting private investment in Germany, a look at the evolution of digital dental care through apps, and how collaborative contracts can support digitisation in the sector.
Dentistry services are split between those which are delivered via the NHS and those which are privately provided. The cornerstone of the dental industry in England, with equivalent bodies funding public dentistry throughout the UK, is NHS England. NHS dentistry is delivered via two types of contracts: general dental services (GDS) contracts, and, less commonly, personal dental services (PDS) contracts, which relate to orthodontic work. The key to understanding the evolution of the dental market over the past 10 years lies in these contracts.
NHS contracts are awarded to contractors and dictate the number of units of dental activity (UDAs) the nominated provider is required to provide annually; where those UDAs are to be delivered and the price at which each UDA is delivered. However, what really sets GDS contracts apart is the fact that provided the contractor meets the requirements of the contract relating to minimum performance and delivery levels, the contract will continue forever – it has no end date. That secure source of revenue has proved enormously attractive to operators and investors alike.
The long awaited NHS dental contract reform is due in 2020, though several aborted processes have already been and gone. However, the current proposals do not include any suggestion that UDA values will be reduced or that GDS contracts will become time limited.
As of 1 April 2011, it became a requirement for any person or company seeking to deliver dental services in England to be registered with and comply with the requirements of the Care Quality Commission (CQC). The CQC is a non-departmental body of the Department of Health and Social Care and is also responsible for regulating health and social care providers in England.
This perceived barrier to entry actually provided an opportunity for a multitude of private equity investors whom were familiar with the requirements of CQC regulation through their experiences in social care investments which pre-dated the consolidation of the dental market.
The UK dental sector represents a £7 billion market which in recent years has experienced wide-reaching and fundamental change.
Growing demand has been driven by a sharp rise in the amount of privately funded cosmetic dentistry procedures being undertaken. This is reflective of a change in culture within society which increasingly values appearance. As Real Deals reported earlier this year, some dental providers have been able to grow their revenues by developing their own specialised treatments using the latest digital technologies, thus retaining a greater share of referral income.
This shift towards private dentistry has been fuelled by regulatory reform, the possibility of future reductions in NHS funding and the restriction of treatments able to be provided under NHS contracts, all of which suggest that demand for private dental services will remain strong. As with so many healthcare sectors, the UK's ageing population is also one of the main growth drivers underpinning the dental sector.
All of this has meant that consumer spending on dental services in the UK has increased by nearly 300% per household since 2005 – with the sub-sector bucking the general economic trends during the financial crisis. This combination of factors, paired with an influx of new investors, has underpinned a wave of consolidation within the industry.
A decade ago the dental sector was highly fragmented, with the market dominated by individual practitioners or dentists operating in partnership. Today, of the approximately 12,500 dental practices across the UK, around 1,500 – approximately 13% – are owned by corporates. That figure only looks set to rise over the coming years.
While the largest corporates operating in the sector now run hundreds of practices each, there is an emerging challenge from mid-sized providers.
Investors, both those from within the industry including established corporates such as My Dentist and Bupa Oasis, together with a new wave of private equity investor, have sought to capitalise on the high revenues generated within the sector whilst seeking efficiencies through economies of scale. The centralisation of management and administration functions to support growing platforms has allowed the costs of delivering dental services at a group level to be significantly reduced, in comparison to the owner- operator model, whilst the income generated remains high.
Private equity investors have been attracted by the relative simplicity the dental market offers for delivering growth.
Neil Lloyd, chief executive of mid-sized corporate Dental Partners, told Real Deals: "The buy and build aspect of dentistry is highly attractive to private equity, made all the more appealing by the fact that dental clinics are homogenous, which makes them more straight forward to integrate."
The sector also remains popular with lenders who, in light of the politically uncertain landscape facing the UK, view the sector very favourably due to the level of regulation and it being needs-driven with a high degree of governmental control over the market.
As the market continues to consolidate, the emphasis on quality will only increase. High performing operators will be able to seek significant premiums on sale prices with an ever increasing number of eager private equity and corporate investors seeking a piece of the action.
The move to greater consolidation hasn't been without challenges. Due to the fast pace of change for serial acquirer groups, integration has proved a significant challenge and one that has a very direct impact on retention of the ever important commodity, dentists. It is also impossible to discuss dentistry staffing issues without touching on Brexit, which is inextricably linked to recruitment and retention.
Operators are already reporting concerns over a growing skills shortage in the sector and the Christies Dental Market Review 2019 noted that the number of new dentists in the UK fell by a fifth from 2017 to 2019 with the likelihood being that this trend will only worsen should the UK leave the European Union as planned.
That trend will only serve to place an even greater premium on practices situated in urban centres where the recruitment of replacement associates and hygienists poses less of a risk than in rural areas.
As M&A activity in the market has grown, so too have the multiples being demanded by sellers looking to cash in. Sector sources state that average prices for comparable practices have increased steadily over the past three to five years with smaller practices seeing growth in valuations rise from four times EBITDA to seven or eight times EBITDA now, commonly. On larger, premium transactions involving established groups with a large number of sites, multiples well in excess of 12 times have been prevalent. With these price increases, finding value is becoming an ever increasing challenge for investors.
Despite these challenges, appetite for investment remains healthy, particularly for those established operators seeking to establish a foothold in markets across Europe, setting their sights on creating the first truly pan-European dental platform.
General dental services are provided in Northern Ireland using a blended system of remuneration comprising a simple invoice based payment mechanism for dental services together with capitation and allowance payments. The statement of dental remuneration (SDR) is issued annually by the Department of Health and sets out the payment levels for more than 400 items of service and the conditions that claims must fulfill to be valid.
There is no contract in place with the Health and Social Care Board NI (the HSCB), the Northern Irish equivalent to the NHS, as all work is carried out via the invoicing system of work, governed by the SDR.
Once dentists are registered with General Dental Council - only individuals can register, not corporate entities - they can apply to be included on a list of health service dentists (the dental list) via the submission of a form HS48 to the HSCB. Again, the application form only allows for the registration of individuals as dentists, not incorporated entities.
Dentists who are registered on the dental list can then submit forms for payment from the health service for work carried out on patients. Payments are made on a monthly basis. As noted above, there is no formal written contract.
In our experience, notwithstanding that claims are made by individual dentists, payments are made into a combined practice account, and in turn allocated by the practice, or the limited company incorporated to conduct the business of the practice.
The Health (Miscellaneous Provisions) Act (Northern Ireland) 2008 will change the way in which dental services are currently provided by amending the current legislation to provide for a new format for general dental services in Northern Ireland. The changes introduced under this legislation are similar to the arrangements in England and Wales in that the HSCB will be able to provide services either through contracts with individual practices or to directly employ dentists to provide dental services. The central provisions of the 2008 regulations, however, are yet to be implemented, and despite some pilots having taken place, we do not know when they are expected to be fully brought into force.
We have seen high levels of consolidation of the Northern Irish dental market over the last decade, both in terms of local consolidation as well as UK corporates including Bupa and Portman acquiring a range of successful practices. In the past year, we have seen the investment levels slow somewhat, however this can be generally attributed to a switch in primary focus for the large corporates who see phase one of investment in Northern Ireland to have been completed, and are now turning their heads to more fragmented markets such as Ireland and Scotland.
The dental market in Ireland is several years behind the UK, remains fragmented and is ripe for consolidation. The two main corporate players, Bupa, which trades as 'Smiles Dental' in Ireland, and Dental Care Ireland continue to acquire practices and consolidate, particularly in and around Dublin, but multi-site dental businesses in places such as Cork do not exist, with sole practitioners operating from small premises being the norm. Principal dentists’ personalities and long-established patient relationships remain important in the sector, with some form of transition arrangement with the selling dentist central to most acquisitions.
Ireland does not strictly have a NHS-equivalent and private practice dominates the market. With a booming economy, ageing population and rise in demand for cosmetic dentistry, the country's population of nearly 4.8 million provides fertile ground for corporate buy-to-build strategies, but not necessarily much incentive for private equity investors currently, as there is in the UK. Demand for dental services, amongst the middle classes in particular, is buoyant again following the great recession, which saw practice numbers reduce by 40-50%.
In terms of the public system in Ireland; there is a means tested dental treatment services scheme (DTSS) provided by the Health Service Executive (HSE) - the closest equivalent body to the NHS in Ireland. This provides one free check-up per annum, two free fillings and unlimited extractions for those on state benefits and low incomes. There is also a treatment benefit scheme run by the Department of Employment Affairs and Social Protection (DEASP), available to workers, the self-employed and retirees who have made sufficient social security contributions, covering one check-up a year and a €42 contribution towards scale and polish or periodontal treatment. However, the majority of dental practices derive their revenues from treatments for private patients.
The Dental Council of Ireland regulates dentists in Ireland and performs similar functions to the General Dental Council in UK. The Irish Dental Association (IDA) promotes interests of the dental profession, publishes the Irish Dental Journal and is the equivalent of the British Dental Association.
The Irish dental regulatory scene is well overdue for reform. The Dentists Act 1985, for example, currently prohibits a body corporate from carrying on dental activities, albeit it is understood that the Dental Council of Ireland has never prosecuted any person for doing so and body corporates have owned dental practices for a number of years. Advertising restrictions are also prohibitive, a position which has been criticised by the competition authority in Ireland as discouraging competition.
A consultation process undertaken back in 2013 indicated that a significant proportion of respondents welcomed reform in these areas, also calling for a principal dentist for each practice to be formally appointed as being responsible for that practice and notice of such appointment lodged with the regulator. However, as of the time of writing, no Dentists Bill proposing new legislation has materialised.
One recent development was the introduction of the new 'Smile agus Sláinte' – national oral health policy, which launched in April 2019 and is to facilitate better, preventative oral healthcare for the population, including free oral health packages for under-16s and older medical card holders at a greater cost to the state. Dentists were sceptical of the policy, which the IDA’s members were not consulted on. There have also been allegations that the policy has not been properly costed and that there is insufficient political will to fund it.
David Meisel, Dorian Rees and Sarah-Louise Baird are specialists in transactions in the dentistry sector at Pinsent Masons, the law firm behind Out-Law.
28 Nov 2019
28 Nov 2019
Electricity networks infrastructure proposals support the UK’s low carbon ambitions