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What is NHS?
The United Kingdom’s National Health Service (NHS) is a publicly funded healthcare system that provides comprehensive medical services to residents of the UK. Established in 1948, the NHS aims to offer healthcare services that are free at the point of use, regardless of an individual’s ability to pay. It covers a wide range of healthcare needs, including general practitioner (GP) services, hospital care, mental health services, dental care, and prescription medications. The NHS is funded primarily through taxation and is managed by the Department of Health and Social Care in England, with equivalent bodies in Scotland, Wales, and Northern Ireland overseeing healthcare in their respective regions.
The NHS System is Failing Both Patients and the Dental Profession
There have been challenges since the modification of the dental contract in 2006. The “Dental Reform” started in 2021, resulted in modifications to 2020 contracts however, this has done little to sort the issues. The changes were so minimal that the proposal resulted in frustration from the profession with the contract, to the extent that in 2023, over £400 million of NHS (UDA- units of dental activity) contracts were handed back.
In the UK there is unequal access for patients, with a shortage of dentists in several regions, particularly rural areas. In contrast, areas such as London are oversubscribed.
Dentists gravitate to areas where there are patients, but with the payments system on the NHS not keeping up with the costs of running a practice, dentists look for patients in areas where they can afford to pay private fees.
The NHS funding for dental care in real terms has been reduced by £1Billion since 2010.
Brexit and COVID
Brexit, closely followed by Covid-19, created a fundamental shift in dental workforce availability in the last few years. Timing played a big part in what happened next.
In February 2020, the UK left Europe, referred to as Brexit. In March 2020, the world entered a phase of lockdown due to Covid-19 and normal working practices changed significantly. In combination the effect was greater than “the sum of the parts.”
Brexit effectively reduced the available workforce in the UK by 30%, but this was not immediately recognized because no one was working due to lockdowns. The shortage Brexit had caused did not manifest itself as an issue until 2022. No one was recruiting, no one was seeing a dentist, few saw the problem coming.
When “the world” started to return to work, the UK woke up to the issue. There were millions of patients who had dental issues and needed to visit the dentist, including over 5,000,000 missed orthodontic appointments.
The problem was now how to work through the backlog. The NHS system was not created for an issue like Covid and so immediately failed, and dentists prioritized private patients, which resulted in frustration and anger…… but that was not the end of it.
The Perfect Storm
Covid seems to have changed perspectives on work-life balance and it is now the “norm” in the UK for dentists to only want to work three days. The reduction in available hours with the loss of European dentists and the three-day week made access for patients even harder.
The final pieces to the shift included the fact that an additional 3% (estimated) of dentist above the age of 57 retired early after Covid and 10% of General Dental Registered nurses, did not come back into dentistry.
Laboratories suffered under the “furlough” rules in the UK, as most are small business which operate on a dividend payment rather than a monthly salary. They did not receive any financial help and it is estimated that 30% of dental laboratories did not re-open after Covid.
With the UK now out of Europe, dental material prices rocketed, increasing by some 30%.
A summary of the unfolding story moving through 2022 (and current) is that the UK has significant demand but:
- a shortage of dentists
- increased material costs
- increased laboratory costs
- lack of available hours
- an increase in staff costs due to the shortage of nurses coming back after Covid
- and then, as if this wasn’t challenging enough, interest rates stared to rise, and rise quickly.
UK dentistry from 2022 was caught in the “perfect storm.”
The Storm’s Aftermath
In 2024 a significant challenge is recruitment and what associates expect to be paid. Even “poor” dentists are commanding higher rates because of the scarcity factor.
In 2023 and the start of 2024, we saw a significant private price increase fueled by latent demand. This, however, is now slowing with patients unable to afford the dentistry required. We see on the news in the UK regular stories about “DIY” dentistry and people trying to remove their own teeth.
Talking to industry experts, most new equipment sales activity is in central areas such as London where consumer wealth is usually highest. Dentists are not investing in the same way as before as there is “financial nervousness.”
Pre-2020, a well-run associate driven practice would deliver an EBITDA (earnings before interest, tax, depreciation, and amortization) of 23-24%. The DSO models were mostly bult on this number.
With staff costs up 2-3%, materials up 0.7-1% labs up 0.5%, dentists 3%, utilities 0.5%, ancillary service costs 1% etc. The EBITDA margin has dropped to around 15%, and that’s without factoring in borrowing. The EBITDA is better with an owner occupier and the business retains the owners’ full earnings.
The Current State of DSOs in UK Dentistry
DSOs which have existed more than 10 years and have been well run, usually up to 50 practices “family office” administered, are in good shape. Most have no borrowing or very manageable borrowings.
The bigger PE (private equity) backed organizations are not in such good shape. Debt on the borrowings, (as most leverage debt when they buy), has significantly impacted the bottom line. Simply put, for years interest rates were closer to zero, and today they are north of 9%. A relevant and challenging factor.
Due to the combined market changes, many DSOs have significantly reduced their acquisition of practices. As a consequence, valuations have fallen back to the level seen in 2021. DSOs are now focusing on evaluating the performance of their existing assets for organic growth. As we enter a period of “belt tightening,” it will be intriguing to observe the outcome of the organic growth delivery set in a backdrop of rising prices, decreased demand and the “credit crunch” that is developing in the UK.
I work closely with healthcare PE companies, and it is becoming apparent that dentistry is no longer the “buzz word” in the city.
Written by: Julian Perry BDS MFGDP.RCS DipImpDent.RCS (Eng). Dr Perry has worked in the dental DSO sector for 36 years as CEO, Clinical Director, Group Commercial Director, M&A Director. Amongst other things he is currently Chairman for three dental business, board advisor on two private healthcare businesses and advises Healthcare PE on acquisitions and strategy. Connect with him on LinkedIn.
