What’s happening with NHS orthodontic contracts?
UK dentistry has long been a somewhat turbulent landscape and the recent changes to NHS orthodontic contracts once again disrupted the way the profession is structured. Historically, NHS orthodontic contracts have always been time-limited, but those who held them have been confident that their contracts would be renewed. As such, the practices have held their value, often fetching up to six times their EBITDA (Earnings Before Interest Taxes, Depreciation and Amortization). This has presented a viable long-term business model for dental professionals in the field and made contracts fairly attractive for potential buyers.
In 2017, an announcement was made by NHS England that rocked the boat. A number of contracts were due to expire in early 2019 and it was broadcast that a nationwide procurement process to award new contracts would be performed at this time. This meant that all existing contracts had the potential to be re-tendered and the confidence in existing contracts being renewed reduced significantly. The result was that goodwill values plummeted and practices with NHS orthodontic contracts were left unsure of whether they would retain contracts beyond their existing agreements. Those in the Midlands faced increased uncertainly given that many aborted the tendering process altogether and were then stuck in limbo for the months that followed.
Since then, however, the impact on some of the affected practices has been positive. New contracts were awarded for those in London and the South East, guaranteed for seven years, with the option to extend for a further three years. As such, this has made NHS orthodontic contracts in these areas more secure than they were historically, representing greater value for businesses in the long-run.
Things have not been so good in the Midlands, where contracts of 5-6 years have been rolling out, with 3-year extensions available. Unfortunately, the shorter contract length is not enough to create decent goodwill values. As such, banks are less confident lending to buyers in these areas, reducing the ability to sell. In Essex and Hertfordshire, from June, they will have access to the longer NHS orthodontic contracts, and while it would seem that the remainder of the Midlands will follow suit eventually, many practices here remain on a hiatus.
For the most part, the new contracts are structured in a similar way to the previous model. They are still PDS (Personal Dental Services) contracts, so there is certainly the possibility of selling the goodwill with no problems.
The only down-side is a slight reduction in UOA (Units of Orthodontic Activity) values in some areas of the country, although the enhanced security of the new NHS orthodontic contracts still makes them very profitable. Many practices have recently agreed contracts based on a UOA rate of £65, with various review Body on Doctors’ and Dentists’ Remuneration (DDRB) uplifts attempting to increase this. For any practices operating north of £70 per UOA mark, be prepared to accept a lower rate in exchange for the confidence that the new 10-year NHS orthodontic contract could afford your business.
This extended security also has great potential to make practices more attractive to potential buyers, which is ideal for anyone thinking about selling or wanting this flexibility for the future. With the longer agreements, we saw EBITDA values start where they left off, but since then they have begun to rise to as much as six and half to seven times their EBITDA, depending on location. This is not far behind standard NHS contracts, which is reflective of the demand for orthodontic services in the UK.
We have also seen no issues with borrowing in light of this new NHS orthodontic structure to date. Lenders have often looked upon the dental sector favourably and this has largely been the case for orthodontic contracts despite the dip in goodwill values back in 2019. Although any PDS contract doesn’t deliver guaranteed income, the new structure does encourage stability of revenue for the business. Plus, the current NHS orthodontic contracts are a scarcer resource than they were in the past and with continued demand for them among patients and professionals, their value is being realised by lenders.
Of course, if you need any advice or support, the experienced team from Dental Elite would be more than happy to help. Our team intricately understands all the nuances of the modern dental profession, meaning we are well-positioned to guide you towards a more profitable and valuable practice.
It appears that the changes to NHS orthodontic contracts are bringing several benefits to the profession. They are certainly not something to be immediately dismissed and are all set to continue offering practice owners a lucrative and sustainable business opportunity.