Feeling the squeeze

Illustration: Eirian Chapman

Are health-fund-owned dental clinics invaders or saviours? Andy Kollmorgen investigates

Corporate dentistry has well and truly arrived in Australia, and these days it comes in all shapes and sizes—including extra large.

Its earliest incarnation involved businesses like the Townsville-based 1300SMILES group, founded by Dr Darryl Holmes, and corporatisation in this case went as far as a listing on the ASX.

So far, going public has turned out to be a good move for both shareholders and the company. Earlier this year, 1300SMILES reported a net profit of $3.8 million on $18 million in revenue and was delivering a dividend of 11.25 cents a share in an economic environment not particularly conducive to expansion. Plus the company says it has no debt. It’s also worth noting that Dr Holmes himself owns a considerable number of shares.

Dr Chris Hart, who broke new ground in the centralisation of payroll, human resources, patient contact and marketing with the Brisbane-based Lifetime Smiles Group, is another corporatisation success story, and one that has proved attractive to investors with no connection to dentistry.

National Dental Care, which is owned by private equity firm Crescent Capital, acquired Lifetime Smiles in 2014, and it currently owns about 60 practices across the country.

These sorts of operations have been gobbling up independent practices, presumably for the benefit of both patients and dentists, though concerns have been raised about continuity of care since dentists in a corporate environment may not be masters of their own destinies—especially if they don’t meet KPIs imposed by their corporate masters.

But how bright is the future for the first wave of corporate dentistry in Australia, or for independent dentists for that matter? In announcing the recent solid performance of 1300SMILES, Dr Holmes also acknowledged some economic headwinds that had slowed the growth of the business, citing “economic uncertainties which have made consumers more reluctant to spend, even on essential dental maintenance”.

Among these are “political gridlock at both Queensland and federal government levels” and rising housing prices in Sydney and Melbourne.

“It’s difficult to compete with a payer that owns the business. To compete, independent dentists are going to have to provide high-value services on a competitive basis that aren’t covered by the health funds.”—Dr Chris Hart, Lifetime Smiles Group

But businesses such as 1300SMILES may be facing another headwind—namely, a juggernaut of big-league health-insurance funds muscling in on the dental-clinic market. Bupa, for instance, now owns over 140 dental clinics across Australia and, along with Medibank Private, controls about 60 per cent of the health-insurance market.

In 2015, these two funds alone took in a little over $6 billion each from Australian policyholders.

Some years earlier, Dental Corporation went on a dental practice buying spree around the country, becoming one of the largest corporate players at the time. In 2013, it was snatched up by Bupa.

Dr Hart says that independent dentists are up against a real challenge. “It’s difficult to compete with a payer that owns the business. To compete, independent dentists are going to have to provide high-value services on a competitive basis that aren’t covered by the health funds.”

The business model for the health funds’ dental divisions comes down to patients paying less if they go to a clinic in their health fund’s network. And with the economies of scale that health funds can bring to bear, they can afford to charge less. Health funds can also find out what other practitioners are charging through the HICAPS claims system and adjust their prices accordingly.

Independent practices are hardly in a position to engage in a price war against the billion-dollar behemoths, and many dentists have reportedly signed contracts with health-insurance companies on the theory that they’ll get more patients.

Medibank, for instance, says it has over 6,700 “Member’s Choice” dentists available to Medibank customers around the country, though a spokeswoman told Bite the health fund itself doesn’t have a line of clinics or any dentists under contract.

“We don’t own any clinics or employ any dentists,” the spokesperson said. “It’s simply an agreement between Medibank and dentists who would like to take part. If they become a Medibank affiliated dentist, they agree to charge a certain fixed amount for services to Medibank policyholders so our customers can save money. In exchange for honouring the agreement we promote them on our website.”

The Australian Dental Association has gone on record saying the mega health funds and their super clinics are engaging in a form of anti-competitive behaviour by pushing policyholders to their networks and driving independent clinics out of business. The $22 billion health insurance industry denies this.

“[Bupa’s fee structure] provides customers with certainty about what they will be charged and what their out-of-pocket costs will be. We will never hide from the fact that delivering value for money and affordability for our customers is our priority and why we want to provide pricing certainty and transparency.”

But ADA president Dr Hugo Sachs says that independent clinics are indeed feeling the squeeze.

“There is anecdotal evidence that some practices have experienced downturns of business to a point that their viability has been severely affected.

“I know of one practice that relocated because a private health-insurance clinic set up virtually next door. Health fund clinics per se do not drive independent dental practices out of business, but they significantly affect their viability. It is when private health insurers with considerable market power inappropriately use that power to steer consumers towards health-fund clinics that it becomes problematic for independent dental practices.”

So far, the ADA hasn’t accused the likes of 1300SMILES or National Dental Care of such conduct.

Maybe that’s because they haven’t resorted to hardball tactics. According to the ADA, Bupa sent notices in early 2016 to its contracted dentists at non-Bupa clinics saying the health fund would cancel their contracts unless they took steps to ensure that all dentists in the practice were contracted to Bupa.

It was a threat that would have carried weight, since Bupa commands considerable market share in a number of states, issuing 52 per cent of health insurance policies in South Australia, 38 per cent in both the Northern Territory and Tasmania, and 34 per cent in Queensland according to the ADA.

“Bupa is seeking to coercively compel non-contracted dentists to be contracted with Bupa, offering no real consideration in return,” said Dr Sachs. “In other words, they aim to exercise more influence over independent dentists and practices.

“The ADA believes this constitutes a form of third line forcing, which is a contravention of the Competition and Consumer Act 2010 as it would very likely damage the competitive process through the misuse of market power.”

The end game, says the ADA, will likely involve Bupa moving away from contracts with dentists outside its owned clinics and pushing its policyholders toward Bupa-owned clinics only.

“Health-fund clinics per se do not drive independent dental practices out of business, but they significantly affect their viability. It is when private health insurers with considerable market power inappropriately use that power to steer consumers towards health fund clinics that it becomes problematic for independent dental practices.”—Dr Hugo Sachs, president, ADA

And because Bupa contracts give the health fund the right to suspend promotion of its contracted providers for any reason without notification, “there is a real risk that Bupa will eventually withdraw support for its contracted providers as it continues to steer consumers to Bupa’s own clinics, which the ADA considers to be a misuse of market power,” said Dr Sachs.

A Bupa spokesperson took issue with the idea that health funds are unfairly grabbing market share.

“It is important to highlight that whilst Bupa does operate dental practices, the scale of this business is relatively small compared to the overall dental workforce with our clinics representing less than eight per cent of the industry,” the spokesperson said.

“Separate to those practices owned by Bupa, we also operate a network which provides certainty of cost to our customers. This arrangement sees nearly 50 per cent of all dentists electing to participate in these arrangements and most importantly all dentists, whether the clinic is owned by Bupa or not, operate on the same fee and rebate structures so that there is complete equity for all participating.”

Similar to the Medibank model, the fee structure “provides customers with certainty about what they will be charged and what their out-of-pocket costs will be. We will never hide from the fact that delivering value for money and affordability for our customers is our priority and why we want to provide pricing certainty and transparency.

“We don’t agree that Bupa or other funds are stifling competition,” the spokesperson added. “It is also worth noting that the operations of the Bupa health insurance business are totally separate to each dental clinic and this clear separation has been provided to all relevant regulators including the ACCC.”

The move into the dental space may be about value for money for health fund customers, but it can’t be a coincidence that providing dental cover has long been a costly exercise for health funds. Getting a grip on these costs by owning the clinics would have to be good for the bottom line.

It seems clear health funds are committed to staking a major claim in Australia’s limited patient pool, so where does this leave the original trailblazers of smaller scale corporate dentistry?

If the likes of 1300SMILES or National Dental Care are worried, they don’t want to talk about it. Our requests for comment from a number of non-health fund franchises were ignored.

The health funds may have the power and the money, but perhaps there’s room for both brands of corporate dentistry—at least for now.

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