Private equity firms target little-known state dental bill
The legislation stems from the investigation of Wall Street-funded health management companies suspected of overbilling, rendering needless treatments and breaking laws.
By Sydney P. Freedberg and Jason Kelly
The likes of Jeb Bush, William Frist, Tommy Thompson and Haley Barbour aren't typically heard from in the office of Thom Tillis, the speaker of the North Carolina House of Representatives.
Yet the four Republican Party stalwarts, none of them Carolina residents, have contacted Tillis' office over a little-known bill to toughen state regulation of dental companies. They've been joined by Grover Norquist, the Tea Party favorite and anti-tax crusader who heads Americans for Tax Reform.
"It's not terribly common to have these types of names" intervening on a state bill, said Jordan Shaw, a spokesman for Tillis.
Their interest marks the Tar Heel State as the front line in a national struggle over dental management companies. Fueled by Wall Street money, at least six such firms are under scrutiny by two U.S. senators and authorities in five states over allegations that they soak taxpayers through excessive Medicaid billings, abuse patients via needless treatments and run afoul of laws that say only licensed dentists can practice dentistry.
The North Carolina bill would place new strictures on such companies, which have become a favored investment of the private equity industry. Private equity firms have bought or put money into at least 25 dental-management companies in the past decade.
Republicans control the North Carolina state Senate, which approved the bill on a 46-2 vote, as well as the state House, where it has stalled.
A dozen companies, at least half of them backed by private equity groups, raised more than $1.1 million to try to stop the bill, which is supported by the North Carolina Dental Society and the state Board of Dental Examiners. The private equity backers include Leonard Green & Partners of Los Angeles, Court Square Capital Partners of New York and Levine Leichtman Capital Partners of Beverly Hills, California.
"They're looking at North Carolina as their test case," said Lisa Ward, the director of government affairs for the North Carolina Dental Society, which has reported hiring five lobbyists and spending about $400,000 to support the bill. "They'll do anything they can to win here."
Bush, who served as Florida's governor from 1999 to 2007, sent an email to Tillis "asking him to review the bill," said Jaryn Emhof, a spokeswoman for Bush. The former governor hasn't taken a position on the legislation, Emhof said. He contacted Tillis at the request of Florida Representative Michael Bileca, she said.
Bileca, a Republican from West Miami, Florida, is listed as the president of Towncare Dental Partnerships Inc., which has 28 offices in Florida, according to the company's website. He is also a founding board member and treasurer of the Dental Group Practice Association, a dental-management trade group, according to his legislative website. Bileca didn't respond to an e-mail seeking comment.
Some of the national Republicans who contacted Tillis's office about the bill have their own ties to private equity.
Thompson, a former Wisconsin governor who's now a Republican candidate for a U.S. senate seat there, is listed as an operating partner with MTS Health Investors, a New York-based private equity firm specializing in health care, according to the company's website.
After serving as secretary of the U.S. Department of Health and Human Services from 2001 to 2005, Thompson received at least $1.1 million from Washington law firm Akin Gump Strauss Hauer & Feld, according to a 2007 financial disclosure form he filed. The law firm lobbies for private equity interests and the industry's leading trade group.
Thompson also reported receiving a $50,000 consulting fee from TA Associates, a Boston private equity firm. It had an investment in the 1990s in Monarch Dental Corp., a management company. Marcia O'Carroll, a spokeswoman for TA Associates, didn't respond to a request for comment.
Thompson declined to comment through a spokesman. He has said previously that his work for Akin Gump's health care practice never involved lobbying. Shaw, Tillis's spokesman, said that while Thompson tried to get in touch with Tillis, the two men haven't connected.
Nor did the speaker connect with Barbour, a former Mississippi governor and chairman of the Republican National Committee from 1993-97, according to Shaw. Barbour is a founding partner of BGR Group, which bills itself as "the premier bipartisan government relations, strategic communications and investment banking firm" headquartered in Washington and London.
One subsidiary of the firm, called BGR Capital & Trade LLC, provides services that include "reliable access to private equity and sovereign wealth funds seeking new investment opportunities," according to its website.
Frist, a heart surgeon and former Republican senator from Tennessee who served as Senate Majority Leader, is a partner in Cressey & Co., a private equity firm that specializes in health care investments. Cressey had in its portfolio Midwest Dental Inc. until April 2011, when it sold its majority stake in the management company to Friedman Fleischer & Lowe, a San Francisco buyout concern.
In an e-mail dated May 16, Frist told Tillis he was especially interested in the bill's "potential to alter some innovative practice patterns."
"I have a number of dentists here in Nashville as well as practices that have expressed some concerns around the bill," Frist wrote.
Frist said in an interview that although he was expressing concern to Tillis, he wasn't taking a position on the bill, nor was he lobbying. He said he wrote to the North Carolina House Speaker after hearing from potential investors and dentists who were concerned that the bill might "drive out efficient, effective professional management of health care services in North Carolina."
He said he has no financial stake in any business in North Carolina, nor in any dental management group. He said he has no plans to invest there.
"I'm involved simply as a policy maker and someone in the private investment world," he said.
Tillis wrote back to Frist two days later that while he was trying to work with both sides, "I must say that my leaning is towards the free-market argument against increased regulation/control."
The North Carolina bill would mandate a regulatory review of agreements between dental management companies and dentists to make sure corporations aren't driving clinical decision- making. Laws in North Carolina and at least 40 other states bar corporate dentistry because of concerns that the profit motive raises the risk of unnecessary or shoddy care.
Dentists contract with the management firms for marketing, scheduling, staff recruitment and other services. Some dental management corporations "have crossed the line from providing business support services to exerting control over the dental practice," the Dental Society said on its website about the bill.
Last year, the dental board found that Gary Cameron, an Asheboro dentist, violated state law by selling his practice to Heartland Dental Care Inc., an Effingham, Illinois-based company with more than 300 affiliated dental practices in 18 states. Only licensed dentists may own, manage, supervise, control or conduct dental practices, under North Carolina statutes.
The board said Cameron and Heartland used a complex series of contracts, leases and employment agreements to effect the sale -- and that Cameron agreed not to compete with the practice. Heartland is about 30 percent owned by CHS Capital, a Chicago private equity firm.
Cameron and Heartland agreed to cancel the agreements. They denied any wrongdoing.
The fight in North Carolina comes as at least five states are conducting audits or reviews of how dental-management companies do business. Texas officials cut off Medicaid payments to one firm, All Smiles Dental Center Inc., because of allegedly "excessive" and "inappropriate" orthodontic care, according to an All Smiles executive's affidavit that was filed when the company sought bankruptcy protection earlier this month. All Smiles is owned by Chicago-based Valor Equity Partners.
Texas inspectors have taken exception to 63 of 86 All Smiles orthodontic cases reviewed from 2007 to 2011, according to Michael Lozich, its chief compliance officer. "We're going to defend ourselves and contest against these claims," he said.
All Smiles' collapse followed another bankruptcy filing in February by Nashville-based Church Street Health Management LLC, a dental-management company that cited the costs of defending itself against lawsuits and investigations. The company, which is affiliated with Small Smiles clinics, is owned by Arcapita Inc. and other private equity firms. Washington-based Carlyle Group (CG) owned part of Church Street before it exited the deal within the past year, spokesman Chris Ullman said.
Church Street may have been abusing patients, "grossly overcharging the United States government in Medicaid reimbursement claims" and focusing "more on achieving self- imposed quotas via assembly line service than proper patient care," according to a letter two U.S. senators wrote the company in November.
Senators Charles Grassley, an Iowa Republican, and Max Baucus, a Montana Democrat, are examining whether some dental management companies -- also called dental service organizations, or DSOs -- are breaking laws by directing care, according to people familiar with their inquiry.
Church Street "respects the Senate's important oversight role" and has provided information about improvements in the quality of care over the past five years, according to Don Meyer, the company's spokesman. Church Street doesn't make care decisions or own dental practices, he said.
In North Carolina, records show that American Dental Partners of Wakefield, Massachusetts, hired its own lobbyists. In Michigan and California, American Dental was sued last year by dentists who claim the company interfered with their delivery of care to patients.
R. Bruce Thompson II, one of three registered lobbyists for American Dental, declined to comment. The company, which manages more than 280 dental centers in 21 states, says it intends to defend itself vigorously in the lawsuits. JLL Partners, a New York-based private equity firm, completed a buyout of American Dental for about $390 million in February.
Meanwhile, the Federal Trade Commission has sided with the management companies in a 13-page letter that says the North Carolina bill would probably reduce competition for consumers.
The letter, dated May 25, says, "given that DSOs focus solely on non-clinical aspects of dental practice, it does not appear that the Bill would enhance the Board's ability to ensure patient safety," the FTC staff wrote. The letter asks state lawmakers to consider whether the bill risks "merely protecting those dentists who do not choose to use DSOs against competition from those who do."
Norquist made a similar argument in a May 21 letter asking North Carolina lawmakers to reject the dental bill, calling it an "attempt to use the power of government to eliminate competition." He called it a "hidden tax" and said North Carolina consumers pay $250 million more each year for dental treatments because the state faces a shortage of dentists.
Norquist's Americans for Tax Reform is a tax-exempt nonprofit group that isn't required to disclose its donors, and doesn't. John Kartch, the group's communications director, didn't respond to an e-mail asking whether private-equity firms are among the contributors.
In Raleigh, meanwhile, representatives of the dental society and the management companies met this week with lawmakers, trying to find a compromise and rework sections of the bill that the companies consider overreaching.
"We're trying to see if we can peacefully co-exist," said M. Alec Parker, the dental society's executive director.
More from Bloomberg
There is a Change.org petition to stop Private Equity owned dental clinics from abusing children and defrauding Medicaid. Anyone who is appalled by this issue needs to sign it, go to change.org and search "Stop Private Equity".
I have gone to a practice for years that partners with American Dental Partners. The practice is extremely well run and all decisions are made between me and my dentist, who is excellent. I could not be more pleased with the service. Just because there are examples of one company not performing properly, it is not fair to attack all companies that are bringing innovative models to the dental care industry. The competition will make the whole field more dynamic and patient centered.
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