It has been well-established that rampant abuse and fraud followed the federal Paycheck Protection Program (PPP) small-business loan program. NBC News termed corporate looting of the COVID relief plan as “the biggest fraud in a generation.”
The New York Times reported in August 2021, that more than 15% of PPP loans—totaling $76 billion—had at least one indication of potential fraud, based on an in depth study from the McCombs School of Business at the University of Texas, Austin.
The dental industry was not exempt from such nefarious activities. A former Oregon dentist pleaded guilty to stealing nearly $11.5 Mil in government COVID relief funds. Similarly, a Texas dentist defrauded taxpayers and the U.S. Small Business Administration (SBA) out of $1.89 Mil by proffering false information on two PPP loan applications. He subsequently accepted a guilty plea.
Dental support organizations (DSOs) held in the portfolios of private equity firms also participated in allegedly bilking taxpayers for millions of dollars. The Private Equity Stakeholder Project decried how the nation’s second largest DSO apparently abused the PPP loan program. Almost all such loans were forgiven with virtually no oversight scrutiny.
A report in Bloomberg Law said that private equity firms were highly reluctant to accept COVID relief money, and those that did accept funds generally returned it (often under government pressure). However, such was not always the case for dental practices affiliated with companies held in private equity investment portfolios.
“After the government broadly excluded private equity firms from the program, dozens found ways to steer around the restrictions, often adjusting governance or ownership arrangements with portfolio companies,” reported Bloomberg Law.
“Laws in most states prevent investors from owning dental practices outright, so buyout funds own a separate entity that provides related services. Ares and Leonard Green & Partners own Aspen Dental Management Inc., a provider of business and administrative support to dentists.”
Bloomberg Law reported, “As the pandemic shut down dentistry, almost every practice affiliated with Aspen qualified for SBA financing, Chief Executive Officer Bob Fontana told staff in a message April 19, 2020.”
“Two weeks ago, we worked with practice owners to submit PPP loan applications,” he said at the time. “We’re thrilled to report that every loan request we submitted has been accepted.”
U.S. SMALL BUSINESS ADMINISTRATION RULES
The U.S. SBA established numbers of requirements on PPP loans to help ensure money would be allocated to small businesses, such as small business dental practices. The objective was to favor small businesses versus larger corporate entities which had easier, and a wider variety of access to emergency funding during the COVID crisis.
- Under the North American Industry Classification System Code (NAICSC) number 621210, the SBA recognizes qualifying small business dental practices which generate under $8 Mil annually.
- A small business must generally retain under 500 employees to qualify.
- The maximum amount borrowed could be 250% of average monthly payroll expenses—up to a maximum of $10 million.
- The money was intended to cover up to eight weeks of payroll, as well as debt payments, mortgage interest payments, rent, and utilities.
U.S. SBA AFFILIATION RULES
PPP loans were placed under the guidance of SBA “Affiliation Rules” in an April 3, 2020 directive. One rule specifically examined affiliation based on management structure. A company is considered an “affiliate” if the CEO or president of a parent company also controls the management of a subordinate company.
In the case of the dental industry, a dental support organization (DSO) frequently controls subordinate dental practices through contractual agreements (often termed business service agreements, management service agreements, and administrative service agreements). These contracts often give the parent company DSO much operational and financial control of the subordinate entity of the dental practice.
The SBA document specifically reads, “Affiliation also arises where a single individual, concern or entity controls the management of the applicant concern through a management agreement.”
Contract wording in agreements between a DSO and dental practice “ownership” generally will state the entities are independent and the DSO’s relationship to the dental practice is that of “independent contractor.”
In reality, the alleged “independent contractor” DSO may control the dental practice through a variety of means inclusive of capital production (dental equipment), supplies, laboratory selection, specialist selection, personnel staffing, terms in facility lease, and especially control with the bank account of the dental practice. The dental practice and DSO may also be engaged in mutual fee-splitting, or a sharing of profits which generates an “affiliate” relationship.
In fact, alleged independent dental practices at times may basically exist as subordinate shell companies under a DSO. This was determined in a case between a now defunct DSO, Orthodontic Centers of American (OCA), and orthodontic dental specialists in a December 2008 ruling in U.S. Fifth Circuit Court of Appeals 07-30430.
“This case arises out of a dispute over various business service agreements (BSAs), which OCA had entered into with orthodontists in the state of Texas. According to the terms of the BSAs, OCA purchased or leased office space and purchased equipment for each office. OCA was also responsible for billing patients, filing insurance claims, hiring nondental personnel, setting dress codes, and managing a bank account through which the dental practice’s funds flowed. The orthodontists were not authorized to withdraw funds from the operating account, so OCA periodically transferred money from these accounts to pay the orthodontists their compensation.”
“In exchange, the orthodontists agreed to work a minimum number of hours each week at the practice and not to perform orthodontic work outside that office. The orthodontist would receive an hourly rate for seeing patients, and OCA would receive an hourly management fee in addition to being reimbursed for its overhead. Profits were then split according to the respective ownership interests of OCA and the orthodontists.”
“The BSAs were to be in force for long periods of time, some up to forty years, and their terms severely restricted the orthodontists’ ability to terminate or assign them.”
“The BSAs provided little to no ability for the orthodontists to oversee any of OCAs decisions related to their practice. Ultimately, the orthodontists were essentially only left with control over diagnosing and treating their patients. Accordingly, the subject matter of the agreement runs afoul of section 251.003(a)(4)’s prohibition of unlicensed persons from owning, operating, or maintaining a premises at which those persons also employ or engage another person to practice dentistry.”
MODELS OF AFFILIATE AND NOMINAL PRACTICE OWNERSHIP
Some DSOs structure agreements with “owner” dentists, such that no one dentist may be positioned as a majority owner of a practice. They may own up to, but never more than a 49% equity stake. As such, a minority owner dentist enjoys limited control of a practice.
Other DSOs enlist dentist corporate officers or associated dentists, who serve as nominee owners of multiple assigned dental practices. These dentists obtain multiple dental licenses in a variety of states, so they can be positioned as figurehead owners for various dental practices. Some never actually step foot in dental facilities they allegedly own and manage.
A more common model to circumvent the reality of beneficial clinic ownership by a DSO is to retain nominal dentist “owners” limited to a dozen or fewer dental practices. These doctors may be remunerated by the DSO for a modest sum or allowed some degree of profit sharing as determined by the parent company (DSO, and/or private equity beneficial ownership). In such situations, the dental practice is always a subordinate affiliate to a parent company, regardless of misrepresentations to material facts in a management contract.
All the while, there do exist companies which purportedly function as true DSOs and keep themselves distanced from clinical decision making, as well as beneficial ownership and fee sharing. Outsourced services may include payroll, accounting, marketing, human resources, tax planning, etc. Such DSOs are apparently bonified independent contractors serving dental practices and lack financial affiliation.
PPP LOAN ABUSE BY A SPECIFIC DSO
A particularly larger DSO orchestrated abuses to the PPP loan program to a new low. A federal program designed to help American workers keep their jobs and small businesses meet monthly expenses was distorted to assist designated company senior people. The DSO’s title, clinic names, and names of individuals all are redacted from this report, so as not to hinder a potential future qui tam whistleblower lawsuit.
On April 20, 2020, the DSO’s chief financial officer (CFO) sent out an email blast to all of the company’s “owner” dentists. (The term “owner” is placed in quotations because clinic beneficial control is under the direction of officers of the DSO. In fact, numbers of clinical dentists of this DSO own minority positions in the privately held stock of the DSO. However, the majority and controlling shareholder is a private equity company.)
The email read, “You received your PPP loan, now what? Spend a few minutes with XXXXX (name of DSO) CFO, YYYY ZZZZZZZZ (Name of Chief Financial Officer), for some tips on how to maximize your PPP money.”
The corporate DSO had filled out loan applications and later loan forgiveness paperwork, for each of their bogus affiliated listed sole proprietor dental practice “owners.” Taxpayer money went to individual “owner” dentists. It is unclear if any funds were “kicked upstairs” to the DSO or private equity company. Regardless, funds did not go to their dental team workers.
This particular DSO is under a significant degree of leveraged debt. Numbers of their affiliated doctors have privately complained regarding alleged strongarm sales tactics of the DSO, for their doctors to purchase their privately held stock (not subject to SEC rules and oversight, like a publicly traded security). One might question if government PPP loan money also went toward stock purchases of DSO privately-traded shares. Unfortunately, limited protections exist for minority shareholders in privately held companies such as most DSOs.
The corporate office next made individual phone calls to each of the DSO’s auxiliary employees including dental assistants, hygienists, and front office personnel. There was to be no paper trail or texting trace.
Each worker received an individual telephone voice-call, one-on-one from a corporate human relations representative and not a group conference communication. Staff was given info on how to apply for state unemployment insurance, as each were furloughed. Personnel was falsely advised dental clinics failed to qualify for PPP loan funding, in direct contradiction to the DSO CFO’s email to doctors.
Subsequently, a majority of the dental team members learned they were given misrepresentations by management on PPP loan funds, which were earmarked by the SBA to assist them. Dental employees later felt deceived and betrayed by their employer, especially after dealing with personal financial stress of temporary unemployment.
These healthcare workers gave their all for patients and a company, which they believed in. They assisted emergency dental patients during the height of COVID state lockdowns and associated fear of contracting the virus themselves. Unfortunately, they worked for people who could not be trusted, especially during a time of great consternation with the COVID epidemic.
Numbers later left employment with this particular DSO. Feeling used and abused, many removed themselves permanently from any employment within the dental industry. Undoubtedly to some unknown extent, this particular DSO contributed to dentistry’s Great Resignation.
The Great Resignation hit the dental industry exceptionally hard as reported by the American Dental Association’s (ADA’s) Health Policy Institute (HPI). Troubling actions of a single DSO are not likely responsible for the serious loss of dental hygienists, as reported by the ADA’s HPI. However, one must never underestimate how such unlawful, unethical, and unprofessional conduct represents one negative contributor among many.
The dental profession, unlike the private equity industry, cannot afford to lose any productive team members. Dentistry ideally factors in lifetime professional careers, and places less significance on maximizing short-term quarterly return on investment (ROI).
Any entity within the dental industry that places maximal ROI ahead of patient care, fair dealings with personnel, or cheating of taxpayers, has no honorable place in dentistry.
In the dental profession, people’s welfare must come first.
ABOUT THE AUTHOR
Dr. Michael W. Davis practices general dentistry in Santa Fe, NM. He also provides attorney clients with legal expert witness work and consultation.
Davis also currently chairs the Santa Fe District Dental Society Peer Review Committee.
He can be reached at MWDavisDDS@Comcast.net.
FEATURED IMAGE CREDIT: Vitalii Vodolazskyi/Shutterstock.com.
