Vertical integration is a common term in the study of microeconomics. It is the beneficial ownership or control by one company of two or more stages of production or services normally operated by other companies. A classic example of vertical integration involves the “robber baron” Andrew Carnegie. When this practice is taken to extremes, competition is eliminated and a monopoly may be created.
Carnegie’s Control
In the steel production industry, Carnegie owned or controlled iron ore mines, railroads and ore transport ships, Bessemer steel mills, and a network of sales outlets to sell steel.1 Arguably, his methods of squeezing out competition at any level of the steel industry would be unacceptable under modern federal antitrust statutes. By controlling an entire chain of production, transport, and sales and by strongarming competition at any position in the chain, Carnegie became the wealthiest man in the world during his time.
By contrast, a classic example of a horizontal integration monopoly is offered by John D. Rockefeller and his company, Standard Oil. At one time, Rockefeller owned or controlled virtually all of the oil refining business in the United States. Eventually, the federal government required Standard Oil’s monopoly to be broken up into several independent oil refining companies.
Interestingly, each of these new companies then pursued a business philosophy of vertical integration after the government’s forced breakup. Each company expanded efforts into oil and gas exploration, securing leasing rights, transport of crude oil, refining, transport and distribution of marketable products, and wholesale and consumer sales.
Vertical Integration in Dentistry
Access Dental operates a chain of 14 dental clinics in California. A spinoff insurance company was created from the original dental chain, Premier Access Insurance Company. The insurance company has a listing of dental preferred providers and dental health maintenance organization providers, both in the United States and Mexico.
In 2014, Premier Access and its affiliates were acquired by a much larger insurance company headquartered in New York City, the Guardian Life Insurance Company of America. Guardian not only sells a wide range of dental insurance products, but also controls a Texas chain of children’s Medicaid clinics via its dental service organization (DSO), South Texas Dental (STX).2
Guardian Life purports that “Access Dental Services and STX Healthcare Management Services is on a journey of significant growth which involves providing business and professional management services to Dentists. The organization is focused on moving from a regional player in the Dental Services Organization (DSO) industry to a National competitor segmented into multiple regions under multiple brands. The company will experience significant growth primarily through acquisitions representing well over 150 dental offices throughout North America. Our regional brands of will represent our mission to provide cost effective quality of care.”
Texas dentists were concerned enough by what they viewed as the unlicensed and unlawful ownership and practice of dentistry by an insurance company that a subsequent resolution was filed and passed in the Texas Dental Association House of Delegates in 2017.3 The resolution specifically cited Guardian Life, South Texas Dental, and specific violations to Texas statutes.
Guardian is very open about its desire to expand into the Affordable Care Act dental insurance markets, dental Medicaid, and delivery of dental services.4
“Guardian’s acquisition of Premier Access demonstrates our commitment to maintaining our position as a leading dental company while expanding our reach to serve more customers who are seeking access to dental insurance through Medicaid and the exchanges,” said Dong Ahn, executive vice president at Guardian.
Vertical Integration by a Nonprofit
DentaQuest is a nonprofit 501c subordinate company of Dental Service of Massachusetts, also known as Delta Dental of Massachusetts. DentaQuest is the largest dental benefits administrator in the United States and the largest in the Medicaid sector.
In 2013, DentaQuest expanded its role as a dental Medicaid administrator and became a dental provider with the acquisition of Sarrell Dental, which operates 16 nonprofit dental clinics in Alabama and a mobile dental unit.5
The 2014 form 990, schedule R, Internal Revenue Service filing of Dental Service of Massachusetts in Part II (Identification of Related Tax-Exempt Organizations) lists DentaQuest, Sarrell Dental, Community Care of Kentucky, and Community Care of New Mexico.6 This strongly suggests DentaQuest has expanded as a dental provider further than the limitations of Alabama.
Vertical Integration by Corporate Dentistry
Gentle Dental of California (subordinate to InterDent Service Corp.) offers a discount services plan (not a true insurance vehicle) called Dedicated Dental. In InterDent Service’s other states, its discount plan is called the Gentle Dental Smile Plan. Comfort Dental (a chain of alleged franchise clinics) headquartered in Colorado sells a discount services plan called Gold Plan. Perfect Teeth, a DSO of more than 60 dental clinics, also sells a discount plan. In fact, sales of reduced fee dental plans for patients lacking dental insurance is common throughout the DSO industry.
On the surface, this can represent a cost savings for consumers. It’s a mechanism to avert potential delivery of care roadblocks generated by the insurance industry. However, there is no independent oversight of potential abuses with the discount dental services industry. State or federal auditors are not in play. There are no dental insurance company examiners. Abuses to the public abound with upcoding of care, unbundling of services, and delivery of unjustified treatments facilitated through reduced fee dental plans.7
Public abuse isn’t simply isolated to the DSO industry relating to discounted fee plans. Small business dentists have also been complicit. Further, the insurance industry and government sponsored programs (Medicaid and Medicare), which theoretically can be a positive element for oversight, may in fact operate in their own self-interest in opposition to patients and doctors.8
Vertical Integration with Lab Services
Historically, numbers of dental offices have provided laboratory services in-house. That may have included in-house repair or processing of dentures, partial dentures, gold castings, or porcelain application with staining and glazing for crowns.
Today, an example of vertical integration may include an on-site CAD/CAM device for the milling of dental crowns. A few DSOs have on-site dental laboratories physically attached to their clinics. Other DSOs either own dental laboratories or have special or exclusive contractual agreements with labs.
Ideally, vertical integration of lab services may benefit patients with more timely treatment, reduced costs, and more personalized dental care, especially for prosthetics. Unfortunately, that doesn’t always occur.
Many dentists who work as associates, figurehead clinic owners for a DSO, or alleged subfranchise owners are under strict agreements with corporate parties. Selection of dental laboratory services may be fully or partially outside of their direction. Unlicensed entities, which are not party to the doctor/patient contract, may obligate doctors to utilize specific laboratories.
Ugly Side of Vertical Integration
Small Smiles Dental was formerly an interstate chain of children’s dental Medicaid clinics. This troubling DSO, which abused the public interest, has since gone bankrupt and dissolved operations.9,10
Allegedly, disadvantaged children were frequently treated without adequate local anesthesia and restrained in devices euphemistically called “protective stabilization.” Problematic clinical issues included a paucity of adequate parental informed consents, gross overtreatment, unnecessary dental care delivery, and disregard for specific children’s comprehension, stamina, dignity, and age-related abilities.
Directors of Small Smiles Dental, then headquartered in Pueblo, Colorado, also owned DD Marketing. DD Marketing was responsible for placing soda pop machines in low-income school districts and establishing advertising campaigns on school campuses directed specifically at students.11-13
One hand generated dental caries via high-sugar beverages in economically challenged children and provided marketing to direct these patients to Medicaid clinics for clinical care. The other hand provided Medicaid dental treatments, often of suspect or dubious patient benefit.
Conclusion
Vertical integration is a tool or mechanism frequently seen in the study of microeconomics. It is not inherently good or bad in the dental industry. However, if misused, vertical integration can generate conflicts of interest, patient abuse, a mechanism to circumvent lawful statutes, and unfair control of a specific market.
Doctors would be wise to understand basic concepts in the study of economics, such as vertical integration. Many entities operating in the dental industry are not bound by a doctor’s obligation and responsibility to place the concerns of patients first. Rev. Martin Luther King Jr. said, “Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity.”
References
- Students of History. Comparing horizontal and vertical integration. https://s3.amazonaws.com/immigrationindustry/03+-+Comparing+Vertical+and+Horizontal+Integration.pdf Accessed June 11, 2018.
- Trademarkia. South Texas Dental trademark information. July 22, 2017. https://www.trademarkia.com/south-texas-dental-77970200.html Accessed June 11, 2018.
- Concerned Dentists of Texas. Dental practice ownership resolution for the Texas Dental Association’s 2017 meeting, House of Delegates. Resolution 92-2017-HR. May 17, 2017. https://concerneddentistsoftexas.org/news/2017/6/22/dental-practice-ownership-resolution-for-the-texas-dental-associations-2017-meeting-house-of-delegates Accessed June 11, 2018.
- Guardian. Guardian diversifies dental business with strategic acquisition [press release]. https://www.guardianlife.com/news/guardian-diversifies-dental-business-strategic-acquisition Accessed June 11, 2018.
- Sarrell Dental Center. DentaQuest Care Group and Sarrell Dental form affiliation [press release]. September 19, 2013. http://www.sarrelldental.org/dentaquest-care-group-and-sarrell-dental-form-affiliation Accessed June 11, 2018.
- ProPublica. Dental Service of Massachusetts Inc. Form 990, Schedule R for fiscal year ending December 2014. https://projects.propublica.org/nonprofits/organizations/46143185/201513169349303676/IRS990ScheduleR Accessed June 11, 2018.
- Davis MW. Misrepresentations to consumers: a dark side to dentistry. Dentistry Today. February 22, 2018. http://www.dentistrytoday.com/news/todays-dental-news/item/2966-misrepresentations-to-consumers-a-dark-side-to-dentistry Accessed June 11, 2018.
- Davis MW. Insurance industry spin and hype. Dentistry Today. May 1, 2018. http://www.dentistrytoday.com/articles/10430 Accessed June 11, 2018.
- United States Department of Justice. National dental management company pays $24 million to resolve fraud allegations [press release]. January 20, 2010. https://www.justice.gov/opa/pr/national-dental-management-company-pays-24-million-resolve-fraud-allegations Accessed June 11, 2018.
- Office of Inspector General, US Department of Health and Human Services. OIG excludes pediatric dental management chain from participation in federal health care programs [press release]. April 3, 2014. https://oig.hhs.gov/newsroom/news-releases/2014/cshm.asp Accessed June 11, 2018.
- Hays CL. Today’s lesson: soda rights; consultant helps schools sell themselves to vendors. The New York Times. May 21, 1999. https://www.nytimes.com/1999/05/21/business/today-s-lesson-soda-rights-consultant-helps-schools-sell-themselves-to-vendors.html Accessed June 11, 2018.
- Kaufman M. Fighting the cola wars in schools. The Washington Post. March 23, 1999. http://www.washingtonpost.com/wp-srv/national/colawars032399.htm?noredirect=on Accessed June 11, 2018.
- DD Marketing, Small Smiles Dental Centers: double dipping? Dentist the Menace. September 29, 2014. http://blog.dentistthemenace.com/2014/09/double-dipping.html Accessed June 11, 2018.
Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at mwdavisdds@comcast.net or smilesofsantafe.com.
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