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Dental Abuse Seen Driven by Private Equity Investments

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Photographer: Ben Margot/AP Photo

Dental care at an elementary school.

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Photographer: Ben Margot/AP Photo

Dental care at an elementary school. Close

Dental care at an elementary school.

Source: Stone Photography via Bloomberg

Darren Gagnon, center, looks at his wife Stacey, while standing on the steps of the Prescott Arizona Courthouse in Prescott, Arizona in 2011, while accompanied by their children, from left to right, Isaac, Bailey, Silas, Ellie and Joel. Close

Darren Gagnon, center, looks at his wife Stacey, while standing on the steps of the Prescott Arizona Courthouse in... Read More

Medicaid's Dental Boom. Graphic by Chloe Whiteaker/Bloomberg Close

Medicaid's Dental Boom. Graphic by Chloe Whiteaker/Bloomberg

Photographer: Scott Eells/Bloomberg

The ReachOut Healthcare America website. Close

The ReachOut Healthcare America website.

Source: WFAA-TV via Bloomberg

Orthodontist Christine Ellis, third right, testified in Congress that the “flagrancy of the fraud” she found in audits she performed for Texas Medicaid “is truly unbelievable,” with only 10% of the paid claims she reviewed actually qualifying for Medicaid coverage. Close

Orthodontist Christine Ellis, third right, testified in Congress that the “flagrancy of the fraud” she found in... Read More

Photographer: Andrew Harrer/Bloomberg

Senator Max Baucus, a Democrat from Montana, left, speaks with Senator Charles Grassley, a Republican from Iowa, before a Senate Finance Committee markup session on healthcare reform in Washington, D.C. Close

Senator Max Baucus, a Democrat from Montana, left, speaks with Senator Charles Grassley, a Republican from Iowa,... Read More

Isaac Gagnon stepped off the school bus sobbing last October and opened his mouth to show his mother where it hurt.

She saw steel crowns on two of the 4-year-old’s back teeth. A dentist’s statement in his backpack showed he had received two pulpotomies, or baby root canals, along with the crowns and 10 X-rays -- all while he was at school. Isaac, who suffers from seizures from a brain injury in infancy, didn’t need the work, according to his mother, Stacey Gagnon.

“I was absolutely horrified,” said Gagnon, of Camp Verde, Arizona. “I never gave them permission to drill into my son’s mouth. They did it for profit.”

Isaac’s case and others like it are under scrutiny by federal lawmakers and state regulators trying to determine whether a popular business model fueled by Wall Street money is soaking taxpayers and having a malign influence on dentistry.

Isaac’s dentist was dispatched to his school by ReachOut Healthcare America, a dental management services company that’s in the portfolio of Morgan Stanley Private Equity, operates in 22 states and has dealt with 1.5 million patients. Management companies are at the center of a U.S. Senate inquiry, and audits, investigations and civil actions in six states over allegations of unnecessary procedures, low-quality treatment and the unlicensed practice of dentistry.

Allegations like Gagnon’s “are not representative” of the more than 500 cases handled by ReachOut affiliates in Isaac’s school district, said Mickey Mandelbaum, a company spokesman.

Private-Equity Purchases

ReachOut is one of at least 25 dental management-services companies bought or backed by private-equity firms in the last decade. Dentists contract with the companies for marketing, scheduling, staff recruitment, supplies and other services. The companies account for about 12,000, or 8 percent, of U.S. dentists, according to Thomas A. Climo, a Las Vegas dental consultant.

Some of them have been riding a boom in Medicaid outlays on dentistry, which rose 63 percent to $7.4 billion between 2007 and 2010, outstripping the 4.9 percent growth in other dental spending. ReachOut and several of its private equity-backed rivals seek patients like Isaac Gagnon, who are covered by Medicaid, the federal-state insurance program for the poor and disabled.

On May 2, All Smiles Dental Center Inc., a management company owned by Chicago-based Valor Equity Partners, filed for bankruptcy protection. Its hand was forced in part by a Texas Medicaid action cutting off payment to some of its clinics because of allegedly “excessive” and “inappropriate” orthodontic care, according to an All Smiles executive’s affidavit included in the filing. All Smiles was part of a state audit in which 90 percent of Medicaid claims for orthodontic braces were found to be invalid because they weren’t medically needed, according to Christine Ellis, one of the auditors.

Another Bankruptcy

The All Smiles collapse followed another bankruptcy filing in February by Nashville-based Church Street Health Management LLC, which cited the costs of defending itself against lawsuits and investigations. Church Street is owned by Arcapita Inc., Carlyle Group LP (CG) and other private equity firms and affiliated with the Small Smiles network of dental clinics.

U.S. Senate investigators are examining whether ReachOut, Church Street and its affiliated clinics have overbilled Medicaid, according to Senate documents and people familiar with the matter. Another company under Senate scrutiny is NCDR LLC, which manages 130 Kool Smiles clinics, these people say. NCDR is owned by Friedman Fleischer & Lowe, a San Francisco buyout concern.

‘Assembly Line Service’

Church Street may be 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,” U.S. Senators Charles Grassley and Max Baucus told the company in a November letter copied to Carlyle co-founder William E. Conway Jr. Grassley, an Iowa Republican, is Ranking Member of the Senate Judiciary Committee. Baucus, a Montana Democrat, chairs the Finance Committee.

One broad issue in the inquiry is whether the management companies merely provide services to dentists, or are breaking the law by directing care, according to people familiar with the matter and letters the Senators sent to state regulators. State laws broadly say only licensed dentists or firms they own can practice dentistry.

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, said Don Meyer, the company’s spokesman. He said the bankruptcy isn’t affecting patients. Reachout’s Mandelbaum declined to comment on the Senate inquiry. NCDR, whose Kool Smiles affiliates had 2 million patient visits last year, is “committed to an open dialogue with regulators and legislators,” said Geoffrey Freeman, a spokesman.

Underserved Children

ReachOut, NCDR and Church Street do not make care decisions or own dental practices, according to their spokesmen. Each company said it is dedicated to helping underserved children get dental care.

After years of complaints that the poor were being deprived of such care under Medicaid, public pressure and class-action lawsuits opened the floodgates. Texas’s Medicaid dental outlays tripled to $1.24 billion between 2007 and 2010, as fees were boosted so more dentists would accept patients. Indiana, Connecticut, Maryland and Tennessee also boosted reimbursements.

At the same time, young dentists with education debt sometimes topping $300,000 “can’t get the loans they need to start their own practices,” said Bryan J. Shanahan, past president of the Arizona Dental Association. “So they look for work in a corporate setting where they get immediate cash flow.”

Working ‘School Hours’

Dental management firms can deliver patients and a six- figure income by sending teams to schools where they can treat Medicaid-eligible students in volume -- as many as 30 children in one visit. A ReachOut recruiting ad last year promised “15+ patients/day” and “$120K/year (+ bonus opportunity)” by working “school hours 1-5 days per week.” The ad appeared on the website of the University of Detroit’s dental school.

The private equity industry has stepped up its investment in dental management in the last five years partly because health care was one of the few areas that grew through the recession, said M. Alec Parker, executive director of the North Carolina Dental Society.

Wall Street buyout firms have also been attracted to dental practices because they are less regulated than physician groups, according to Sandy Steever, an editor with Irving Levin Associates in Norwalk, Connecticut, which tracks health-care transactions.

Cottage Industry

Dentistry is a fragmented, “cottage” industry ripe for management services, said Robert Fontana, chief executive officer of Aspen Dental Management, owned by Leonard Green & Partners, a Los Angeles private equity concern. Fontana and other industry executives said they see no evidence that private equity investment lowers the quality of dental care.

Texas is investigating dozens of cases where dentists, including affiliates of management companies, may have done unneeded work or billed Medicaid for undelivered services, according to spokesmen for the attorney general and other state agencies.

Investigators are looking at allegations that dentists placed crowns on children needing only less-expensive fillings, or put needless braces on 12-year-olds with baby teeth -- at taxpayer expense, said Joy Sparks, general counsel for the Texas State Board of Dental Examiners.

The investigation includes cases involving Kool Smiles and All Smiles, according to Stephanie Goodman, a spokeswoman for the state Health and Human Services Commission, which oversees Medicaid.

‘Unbelievable’ Fraud

Ellis, a Dallas orthodontist, testified in Congress last month that the “flagrancy of the fraud” she found in audits she performed for Texas Medicaid “is truly unbelievable,” with only 10 percent of the paid claims she reviewed actually qualifying for Medicaid coverage.

Texas “has gained a lot of fraudulent orthodontic providers, including many private equity owned dental clinics engaged in the illegal practice of dentistry,” Ellis told the U.S. House Committee on Oversight and Government Reform.

Ellis audited All Smiles claims for the state from 2007 through 2011, and found “overutilization” of Medicaid benefits before and after Valor bought control of the firm in 2010, she said in an interview.

‘Credible Evidence’

Texas’s Medicaid program has put Dallas-based All Smiles on “payment hold for credible evidence of fraud” and referred the case to the attorney general, said Goodman, the state health commission’s spokeswoman.

Texas inspectors have taken “exception” to 63 of 86 All Smiles orthodontic cases reviewed from 2007-2011, according to Michael Lozich, its chief compliance officer. “We’re going to defend ourselves and contest against these claims,” he said.

All Smiles and its founder, Richard Malouf, previously agreed to pay the U.S. and Texas $1.2 million to settle Medicaid fraud allegations between 2004 and 2007, without admitting wrongdoing.

In Michigan and California last year, groups of dentists sued their management company, American Dental Partners, alleging it interfered with treatment decisions only dentists are allowed to make. JLL Partners, a New York private equity firm, completed a buyout of American Dental for about $390 million in February.

Patients Unattended

American Dental refused to replace defective anesthesia equipment, used bill-collection policies that led to “refusal of dental services to patients” and failed to maintain proper staffing levels, the Michigan plaintiff, Redwood Dental Group, alleged. The policies caused patients to be left unattended and their care to be rushed, Mark Bouchillon, Redwood’s president, said in a letter attached to the complaint.

American Dental, which manages more than 280 dental centers in 21 states, declined to comment. The Wakefield, Massachusetts, firm has appealed a judge’s ruling against its motion to force arbitration in the Michigan case. The California case is under arbitration. In a federal filing in November, the company said it intended to defend itself and its subsidiaries “vigorously.”

“How is JLL going to generate a return on its huge investment without further squeezing our dental practices financially?” asked Bouchillon, whose group has about 25 dentists.

After actions taken against affiliates of one management company last year, North Carolina is considering legislation that would subject agreements between dentists and the companies to state approval.

Quota Pressure

The North Carolina Dental Society, which backs the bill, says some management companies bill patients for unneeded care and otherwise operate illegally. Dentists may be pressured to meet quotas and perform more-expensive treatments “instead of focusing on what’s best for patients,” according to a website sponsored by the group.

Opponents say passage of the measure will drive up costs. The two sides have begun lobbying and TV ad wars. Private-equity players Leonard Green, Court Square Capital Partners, and Levine Leichtman Capital Partners own or back companies that contribute to Alliance for Access to Dental Care, a political committee that has raised $1.1 million to fight the bill, according to state records. They say the management companies usually charge less and accept more types of insurance than private practitioners.

In California and Arizona, state investigators are examining complaints that ReachOut-dispatched teams billed Medicaid for unnecessary work on children, according to people familiar with the inquiries.

Program Ended

In Nevada, the Clark County School District ended its ReachOut program earlier this year. School nurses had complained about children returning to classrooms in pain after baby root canals and other work, according to Amanda Fulkerson, a spokeswoman for the district, which includes Las Vegas. Derryl Brian, one of the mobile dentists who worked with ReachOut, said they had treated 80,000 children since 2006 with a high satisfaction rate.

ReachOut’s owners have called the company a “unique” model. In 1997, founders Michael Howell and Daniel Goldsmith started a company to coordinate care to nursing-home residents in Michigan. They expanded to children in schools and by late 2003, were delivering dentistry to homeless shelters, foster programs, group homes and mental health facilities.

In November 2007, ReachOut received private equity funding from Sentinel Capital Partners, of New York. Under Sentinel, it acquired two rivals and increased its patient size fivefold. Last year, as a holding of Morgan Stanley Private Equities, its dentists saw 488,000 children in 8,700 schools.

Mainly Preventive Work

“Many of these children would otherwise go without even the most basic care,” said Mandelbaum, the company spokesman. ReachOut affiliates mainly clean and perform preventive work, with baby root canals and crowns accounting for less than half of 1 percent of patients, he said.

ReachOut’s model is built on the premise that low-income parents often don’t have time or transportation to take children to the dentist. So mobile teams pack equipment in large cases, load up a minivan, head to schools and set up in gyms, libraries or classrooms.

In most states, only a dentist, not a business corporation, can be licensed to control and conduct a dental practice. U.S. Senate investigators are examining whether some dental management companies are actually de facto owners of practices that bill Medicaid, according to letters Grassley and Baucus have sent to state regulators.

‘Embedded’ in Practice

Management companies have “moved from being vendors of services,” such as patient billing, “into increasingly complex arrangements under which some -- not all -- have embedded themselves deeply into every aspect of the dental practice,” said Ken Burgess, an attorney for the North Carolina dental board.

The Big Smiles dentists’ network and others ReachOut serves use “their own professional judgment and discretion,” and share the company’s belief that patients shouldn’t be physically restrained, according to Mandelbaum.

One of ReachOut’s most-ubiquitous affiliated dentists is Elliot Schlang, who has registered dental practices and licenses in at least 16 states. Schlang said he practices in all of them and travels the country training staff and treating children.

“I work day and night,” he said in an interview.

Another ReachOut-affiliated dentist is Ralph Green. Arizona records list him as the principal of a dental practice that has the same Phoenix address as the one shown on ReachOut’s website. The website lists Green as ReachOut’s clinical director.

Unnecessary Drilling Complaint

In August 2010, Green’s lawyer appeared before the Arizona dental board to answer a complaint that ReachOut did unnecessary drilling on a Phoenix student’s teeth -- even after the student’s mother, Valerie Davila, told the company she was seeing a family dentist and didn’t need any work.

The 6-year-old, Sabrina Martinez, suffered “unnecessary pain,'' Davila said. ''Imagine if it was your child.”

There were two children with the same name at the school, and the work was done on the wrong Sabrina Martinez, Green’s lawyer, Jeff Tonner, told the dental board. Although the board agreed that work was done on the wrong child, it dismissed the case, noting Davila had complained about “the business entity,” not a dentist.

Four Teeth Missing

In San Diego, Tina Richardson’s third grader, Alexander Henry, came home in March with four baby teeth missing after a school session with a ReachOut-affiliated dentist that was so painful he “waved his arms frantically,” “pushed everyone off him” and “bled so badly that they had to send him to the nurse’s office,” according to her complaint with the state dental board. Among other things, Richardson said the consent process wasn’t valid.

Richardson said Alexander had seen a dentist nine days earlier who didn’t recommend any teeth pulling. Although she signed a consent form in September covering many procedures including extractions, she said she didn’t sign another one that came in November seeking permission to take out three teeth. No one from ReachOut called to discuss the proposed procedures, she said.

The state board is investigating her complaint, according to a letter to Richardson. Gurgen Sahakyan, listed as Alexander’s mobile dentist on a form brought home from school, said “the original consent was signed” and the work was done well. Mandelbaum said ReachOut couldn’t discuss specific patients.

Dentistry Guidelines

American Academy of Pediatric Dentistry guidelines say “oral discussion between provider and patient, not the completion of a form, is the important issue of informed consent.”

In Arizona, a state investigator subpoenaed the names of children seen by the ReachOut-dispatched dental team on Oct. 4 last year, the day Isaac Gagnon was treated, said Dan Brown, who was then Camp Verde School Superintendent.

When ReachOut called Stacey Gagnon to tell her the mobile dentist was coming to Isaac’s school, she said she explained that he had seizures and other serious medical conditions. ReachOut was told he could have a cleaning and oral hygiene education, nothing else, according to Gagnon.

Five weeks later, a ReachOut team in the art room at Camp Verde Elementary took X-rays of Isaac, according to preschool instructor Becky Fordham. When Isaac was moved to a corner of the room, he began to gag, Fordham said.

Kicked and Screamed

He kicked and screamed while several adults held him on the dental table, according to another teacher’s aide, Stephanie Shultz. “The dentist man got me,” Gagnon remembers her son saying.

The Gagnons said the school identified Isaac’s dentist as Alvin J. Coon Jr., who works with a ReachOut-affiliated practice registered in the name of Green -- the dentist who answered Davila’s complaint in the Phoenix case. Coon and Green’s lawyer declined to comment.

The root canals were unnecessary and the number of X-rays was “excessive,” according to Bobby Lee Raber, a dentist in Prescott who reviewed the records for the Gagnons. Professional guidelines call for only four X-rays for a child Isaac’s age, Raber said.

Isaac should have been sedated to numb the pain and not held down, Raber said in a written review. He said he ends treatment and reschedules when children cry, and doesn’t sedate or restrain them without parental consent.

Medicaid Refunded

A couple of weeks after Isaac’s dental visit, Gagnon said ReachOut told her the company refunded Medicaid the fees for her son Joel, who was seen at school on the same day as Isaac. The Gagnons say they didn’t complain about Joel’s examination.

Darren Gagnon, Isaac’s father, said he received a visit from Robert Linder, a ReachOut regional vice president, about a month after the treatment. Linder apologized that Issac was treated without consent, and said what happened was “not common practice,” according to Darren Gagnon and a colleague who was also at the meeting.

To contact the reporter on this story: Sydney P. Freedberg in Miami at sfreedberg@bloomberg.net

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net.

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