Evolving regulation of dental service organizations: Regulatory update

Bart Walker, JD, LauraLee R. Lawley, JD, and Anthony M. Del Rio, JD, provide an update on the evolving regulation of dental service organizations (DSOs) in the United States at both the state and federal levels.

Dental service organizations (DSOs) continue to undergo regulatory changes throughout the United States at both the state and federal levels. Recently, Georgia, Texas, Washington, and Virginia considered legislation that would impose greater restrictions on the ability of DSOs to do business in those states, and the United States Department of Health and Human Services Office of the Inspector General concluded a series of studies of Medicaid-covered pediatric dental services in several states. Some of these recent developments are highlighted below.

Editor's note: An abbreviated version of this article appeared in the November 2016 issue of Dental Economics.

State legislative and judicial activity

Georgia

On September 19, 2014, the Georgia Board of Dentistry considered amending Rule 150-10-.01, which focuses on fraudulent, misleading, and deceptive advertising by dental practices. The proposed rule would have prohibited statements, including those made in advertisements, regarding a dentist’s ownership interest in a dental practice when the dentist does not have an equity stake, an ability to sell the interest in the practice, or certain other common rights of ownership.¹ The rule would have affected DSOs that employ typical contractual restrictions on the dentist's ability to take certain actions with respect to the ownership of the practice, such as selling ownership interest in the practice without the DSO's approval. After much discussion and no public comments on the matter, the Board decided not to move forward with the amendment. However, the fact that such a rule was proposed and debated by state regulators illustrates that there is always the potential for unexpected state action.

Texas

2014 proposed rulemaking defined

On November 21, 2014, the Texas State Board of Dental Examiners withdrew two proposed rules from consideration that would have significantly restricted the ability of DSOs to do business within the state. The proposed revisions to Rule 108.70 and a proposed new rule, 108.74, would have restricted the ability of dentists to contract with DSOs in Texas for certain services. For example, licensed dentists would have been prohibited from contracting with any unlicensed person or entity for certain nonclinical functions typically handled by DSOs, such as management of equipment and certain back-office tasks.²

Rule 108.74, which concerns ownership, maintenance, and operation of dental practices, was modified by the Board and reissued for public comment in January and again in March. The Federal Trade Commission urged the Board to reject the proposed rules due to concerns that the rules would harm competition.ⁱ The Board tabled the proposed rules during its May 2015 meeting, and there has not been any Board activity around these proposed rules since that time.³

Senate Bill 519 signed into law: DSO registration with Secretary of State

On June 14, 2015, Texas Governor Greg Abbott signed Senate Bill No. 519 into law. The bill places fewer restrictions on DSOs than the aforementioned proposed rules would have imposed, but it requires DSOs to register annually with the Secretary of State and pay a fee. The law stipulates that DSOs must disclose to the Secretary of State: (1) the DSO's name and business address; (2) the name and business address of each licensed professional entity (or dentist) with whom the DSO contracts, as well as ownership information for the professional entity; (3) the name of each licensed dentist and nonlicensed person who holds direct ownership of 10% or more in the DSO; and (4) a list of all business support services that the DSO provides each respective professional entity. The Secretary of State is required to share all registration information with the Board of Dental Examiners, which the Board may then use to aid in investigations.

While this new law does not grant the Board regulatory authority over DSOs, the registration requirement and subsequent reports to the Board could lead to further scrutiny of DSOs in Texas. Failure to register with the Secretary of State may result in a DSO being fined up to $1,000 for each day that it fails to register. DSOs and their investors should monitor compliance of the registration requirements to avoid such penalties. This law took effect on September 1, 2015, but it did not technically require registration of existing DSOs until February 1, 2016. In March 2016 the Texas Secretary of State adopted new rules with respect to the law. Among other things, these stipulate that existing DSOs are not required to initially register with the Secretary of State until January 2017 if they entered a dental support agreement prior to February 1, 2016. The new rules require an annual registration fee of $150.

Advertising rule struck down

On January 21, 2016, the United States District Court for the Western District of Texas enjoined the Board from enforcing certain parts of Rule 108.54. Specifically, the rule restricted dentists from advertising any specialties except those accredited by the American Dental Association. The court held that the rule was unconstitutional under the First Amendment because the Board failed to meet its burden of showing that the rule was necessary to protect the public from inherently or potentially false or misleading speech or that the rule was narrowly drawn. The Board has filed for an appeal of the District Court’s ruling.

Washington

On January 22, 2015, the Washington State Legislature introduced House Bill No. 1514. If passed, the bill would stipulate that DSOs may not have an equity interest or investment in dental practices, and it would prohibit unlicensed persons from sharing in the revenues, profits, or proceeds of a dental practice. Specifically, an unlicensed person could not be compensated for services with a share of the revenues or profits of a dental practice. The law would also limit agreements to one year, forbid noncompetes, and require that copies of all agreements be provided to the Board upon request. In addition, a DSO would only be allowed to provide consulting and clerical services as long as the arrangement does not violate the fee-splitting prohibitions. Dentists would be given the ability to cancel services at any time, and dentists would need to be permitted to cancel the agreement at any time. On March 10, 2016, the Bill was reintroduced to the new legislature session and remains in committee.

Virginia

Last summer, the Virginia Dental Association filed a petition for rule-making by the Virginia Board of Dentistry. The petition requested a change to Virginia’s regulations governing the practice of dentistry and dental hygiene—particularly 18 VAC 60-20-170, the regulations governing unprofessional conduct. The petition requests that the Board adopt the American Dental Association (ADA) Code of Ethics in full as the ethical standards applicable to dentists licensed in Virginia. Public comments, made to the Board, expressed concern that the proposed rule was overreaching and would give the Board more power to discipline dentists and DSOs based on a claims that they are violating the fee-splitting provision contained in the ADA Code of Ethics. The Board considered the public comments at its regularly scheduled meeting on September 18, 2015, and voted to deny the petition, reasoning that it had relied heavily on the ADA Code in the 2010 development of the amended regulations and felt that most of the standards in the Code were already addressed in current or proposed regulations. The Board also noted that the ADA Code was too “aspirational” rather than being objective.

Connecticut

On July 17, 2015, the United States Court of Appeals for the Second Circuit upheld a rule promulgated by the Connecticut Dental Board, restricting the use of light-emitting diode (LED) treatments for teeth whitening to licensed dentists. The rule was challenged by Sensational Smiles LLC, a company that provides teeth-whitening services to consumers. The court held that the rule did not violate either the due process or equal protection clause of the United States Constitution because it was rationally related to the state's legitimate interest in protecting its citizens' oral health. The court said the fact that the rule might have been prompted by a desire to give dentists a monopoly in providing such services was irrelevant to the constitutional issue. This is in contrast to the recent ruling of the United States Supreme Court in North Carolina Board of Dental Examiners v. Federal Trade Commission, in which the court held that the North Carolina Dental Board was not actively supervised by the state and, as a result, (1) it did not have state-action immunity, and (2) its attempt to regulate teeth-whitening services was an anticompetitive and unfair method of competition under federal antitrust law. On February 29, 2016, the Supreme Court of the United States declined to hear appeal of this case, so it will remain precedent within the Second Circuit’s jurisdiction.

Kansas

On March 31, 2014, Kansas House Bill No. 2611 amended K.S.A. 2013 Supp. 65-1435 by revising the provision that had effectively restricted dentists from owning multiple full-time offices. Originally, the statute disallowed a dentist from having ownership in a dental office unless the dentist was personally present in the office operating as a dentist during a majority of the office's operating hours. This requirement was amended by House Bill No. 2611 to permit a dentist to have an ownership interest in a practice so long as the dentist was in the office “at least 20% of the time patients are being treated in the office,” rather than “during a majority of the time.” Although the current statute continues to restrict a dentist from having ownership in an office unless that dentist is actively practicing there, the amendment opens up the possibility of a dentist having ownership in multiple full-time offices without running afoul of the law.

Office of Inspector General reports

Recently, the US Department of Health and Human Services Office of the Inspector General (OIG) conducted a multiyear investigation into questionable billing practices that took place in New York, Louisiana, Indiana, and California in 2012 in connection with Medicaid pediatric dental practices. Results of these studies have been released periodically since March 2014. Generally, the OIG found that certain dental providers—including general dentists, orthodontists, and oral surgeons—performed a greater number of services per day, received higher payments per child, and provided select services to more children than their counterparts.

In New York, the OIG identified 29 dental providers who, in their opinion, had questionable billing practices. Medicaid had paid the providers a total of $13.2 million for pediatric dental services. One-third of the general dentists identified were associated with a single dental chain that had previously settled lawsuits regarding medically unnecessary procedures.^ii,4

In Louisiana, the OIG identified 27 dental providers as having questionable billing practices, with Medicaid expending $12.4 million. One-third of the providers worked with either of two dental chains alleged to have performed unnecessary procedures to increase profits.⁵

In Indiana, the OIG identified 95 dental providers as having questionable billing practices, accounting for $30.5 million in Medicaid-paid pediatric dental services. Two-thirds of the identified general dentists were affiliated with four dental chains—three of which have been involved in federal and state investigations.⁶

In California, the OIG identified 335 dental providers as having questionable billing practices, with Medicaid having paid $117.5 million for pediatric dental services. One-half of these providers worked for dental chains, with the majority having worked for five chains in particular, two of which were the subject of state and federal investigations.⁷

As part of the reports, the OIG also recommended that the applicable state agencies enhance monitoring of dental providers to identify patterns of questionable billing, ensure that the state provides proper safeguards, review service provider payment processes, and take appropriate action against dental providers with questionable billing.

In June 2015, the OIG presented its findings from a three-year study of Medicaid-covered orthodontic services in Texas. The OIG found that the state’s Health and Human Services Commission had not ensured that requests for prior authorization of Medicaid orthodontic services were approved in accordance with state Medicaid guidelines.⁸ Consequently, Texas made erroneous payments of approximately $133 million to providers. The state agency contracted with ACS State Healthcare LLCⁱⁱⁱ and its subcontractor, the Texas Medicaid and Healthcare Partnership (TMHP),ⁱⁱⁱ to provide dental program administration services. TMHP was responsible for implementing the previous administration process, which entailed reviewing the facts associated with medical treatments and making determinations about medical necessity and appropriate care.

Given TMHP’s alleged failure to abide by the administrative process, the OIG recommended that the state agency refund the $133 million to the federal government, determine and refund the federal share of any additional amounts related to orthodontic preauthorizations, and monitor the orthodontic program to ensure compliance with state Medicaid guidelines. The state agency has indicated that it will adhere to the OIG’s recommendations and has transferred its Medicaid claims administrative contract to a private third party.

The OIG investigations described above illustrate how the actions of a select number of bad actors can focus regulators on the DSO industry as a whole. These investigations demonstrate the need for DSOs to be vigilant in compliance with all applicable state and federal regulations governing dentists and support services. However, one key takeaway from these investigations is that the questionable practices seem to involve only a very small number of providers; these do not reflect the practices of the industry as a whole.

Federal legislative involvement

On June 30, 2015, US Senator Chuck Grassley of Iowa wrote Attorney General Loretta Lynch requesting information regarding the number of criminal and civil Medicaid dental fraud referrals, the number of ongoing dental chain fraud investigations, and how the Department of Justice plans to address the issues surrounding health-care fraud.⁹ He cited several studies by the Office of the Inspector General and news media reports to emphasize the significance of the dental fraud problem. He also wrote directly to the OIG requesting similar information and any additional audit findings. As a member of the Finance Committee, Senator Grassley oversees expenditures for Medicaid and other benefits. His interest in this topic could lead to increased scrutiny of the DSO model.

Conclusion

The DSO model has become an increasingly popular investment opportunity for management companies and private equity firms. As the DSO model grows in popularity, so do regulation and scrutiny around the industry, which is evidenced by the investigations, litigation, and legislative and regulatory efforts mentioned above. Particular care should be taken to ensure that the relationships between dentists and nondentists do not cross the line into the impermissible area of the corporate practice of dentistry. By nature, this is a state-specific issue and, given the same set of facts, different investors can reach different conclusions about what structure to choose based on a variety of factors, including the parties’ relative risk tolerance and overall clarity (or lack thereof) in a particular state.

Notes

i. According to a letter by Federal Trade Commission staff members, addressed to Simone Salloum, assistant general counsel of the Texas State Board of Dental Examiners (October 6, 2014). https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-texas-state-board-dental-examiners/141006tsbdecomment1.pdf.
ii. The specific chain was not identified in the report, but the entity had ceased to operate in the state of New York.
iii. Now Xerox State Healthcare. The contract with Xerox and TMHP was terminated in August 2014.

References

1. Fraudulent, misleading or deceptive advertising, 160 Ga Reg 7 (LexisNexis, August 2014).
2. Extension of duties of auxiliary personnel—dental hygiene. Texas Register. 2014;39(51):9785-9786.
3. Subchapter F: Contractual agreements. In: Chapter 108: Professional conduct. Texas Register. 2014;39(51):9879.
4. Brian P. Ritchie; Office of Inspector General, Department of Health and Human Services. Questionable billing for Medicaid pediatric dental services in New York. OEI-02-12-00330. https://oig.hhs.gov/oei/reports/oei-02-12-00330.pdf. Published March 2014.
5. Suzanne Murrin; Office of Inspector General, Department of Health and Human Services. Questionable billing for Medicaid pediatric dental services in Louisiana. OEI-02-14-00120. https://oig.hhs.gov/oei/reports/oei-02-14-00120.pdf. Published August 2014.
6. Suzanne Murrin; Office of Inspector General, Department of Health and Human Services. Questionable billing for Medicaid pediatric dental services in Indiana. OEI-02-14-00250. https://oig.hhs.gov/oei/reports/oei-02-14-00250.pdf. Published November 2014.
7. Suzanne Murrin; Office of Inspector General, Department of Health and Human Services. Questionable billing for Medicaid pediatric dental services in California. OEI-02-14-00480. https://oig.hhs.gov/oei/reports/oei-02-14-00480.pdf. Published May 2015.
8. Daniel R. Levinson; Office of Inspector General, Department of Health and Human Services. Texas paid millions for unallowable Medicaid orthodontic services. A-06-11-00048. https://oig.hhs.gov/oas/reports/region6/61100048.pdf. Published June 2015.
9. Grassley seeks key agency updates on Medicaid pediatric dental fraud [news release]. Washington, DC: Chuck Grassley, United States Senator for Iowa; July 2, 2015. http://www.grassley.senate.gov/news/news-releases/grassley-seeks-key-agency-updates-medicaid-pediatric-dental-fraud.

Bart Walker, JD, is a partner in the nationally recognized health-care practice at McGuireWoods LLP. A leading lawyer in the dental and DSO space, he advises health-care providers as well as equity sponsors and lenders to the health-care industry. He also works with providers, including DSOs, on regulatory and transactional matters.

LauraLee R. Lawley, JD, is an associate at McGuireWoods LLP. She represents health-care providers in mergers, acquisitions, divestitures, joint ventures, corporate governance, and regulatory matters. Her clients include hospitals, ambulatory surgery centers, dialysis centers, and physician groups. She also represents lenders in health-care industry transactions.

Anthony M. Del Rio, JD, is an associate at McGuireWoods LLP. He advises health-care clients on general corporate matters and compliance and regulatory issues. His transactional work focuses on private equity investment, provider affiliations and joint ventures, mergers and acquisitions, and complex management service organization arrangements.