Tax money for unneeded braces goes to hedge funds

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by BYRON HARRIS

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WFAA

Posted on June 8, 2011 at 10:40 PM

Updated Thursday, Jun 9 at 11:21 AM

NEWS 8 INVESTIGATES

Last year, lax state regulations allowed dentists to legally collect nearly $200 million to straighten the teeth of poor children in Texas at taxpayer expense.

That's more than the rest of the United States combined.

Orthodontic treatment for children is generally an elective, cosmetic procedure that many parents spend thousands of dollars on for their children. But Texas pays for orthodontics under Medicaid like no other state in the country.

In 2010, Texas spent $184 million on Medicaid orthodontics.

Medicaid is designed to provide health care for the poor. Braces, however, have little to do with improving childrens' health, many dentists say, and the money could be better spent on more critical dental care.

While the state struggles to manage its Medicaid budget, dentists are literally collecting millions from the brace business. State records show 34 dental operations collected more than $1 million in medicaid orthodontics last year.

Dental clinics are being bought up by hedge funds, making Wall Street the ultimate destination for millions of taxpayer dollars.

Even on posh Strait Lane in Dallas, one mansion stands out. It is the house that braces built: A massive French chateau with a gleaming black Bentley in the garage. Out back is a pool house, large enough for most families to live in.

It's all owned by dentist Richard Malouf and his wife Leanne, until recently the owners of All Smiles Dental Centers. All Smiles is a chain of 51 dental clinics that took in $10.2 million last year, according to state records.

That's three times as much as the entire state of Georgia paid out in 2010.

The Maloufs also own the mansion next door. The combined value of the two properties is more than $14 million, according to Dallas County tax records.

Dr. Malouf could not be reached for comment on his dental dealings; his attorney did not return phone calls.

News 8 has learned that Malouf has sold All Smiles to Valor Equity Partners, a Chicago-based hedge fund. All Smiles corporate headquarters says Chris Roussos now runs the company.

Roussos is not a dentist. He did not return phone calls. But in a YouTube video, he outlined his dental management philosophy when he ran another dental management company.

"We define success on how well our practices are doing in the local markets," Roussos said in the video. "Are they growing? Are they profitable? And are they exceeding the profitability as well as the growth of the local market?"

Just three years ago, All Smiles collected $5.4 million from Medicaid orthodontics (MO), according to state records. Since that time, All Smiles' MO billings nearly doubled to $10.2 million.

The business of charging taxpayers for putting braces on kids' teeth has mushroomed in Texas in the last three years. Nowhere is that growth more evident than on a stretch of South Buckner Boulevard in Dallas which might be called the "Medicaid Mile."

Actually, there are five dentists' offices providing MO in just a half-mile. Many of them advertise free braces under Medicaid.

With an animated neon sign, Jefferson Dental touts its "grand opening" with flashing letters that promise "free Medicaid braces."

Jefferson Dental is owned by hedge fund Black Canyon Capital of California. Jefferson Dental is the first investment that pops up on Black Canyon's Web site under "positions."

Texas Smile Dental is just down the street, with a three-foot tooth next to the sidewalk and a "Medicaid braces" sign on the front window.

Another South Buckner clinic is Navarro Orthodontix. With a dozen offices across the state, Navarro operations collected $22 million in MO last year — by some estimates enough to put braces in the mouths of 10,000 children.

"No one's ever died from crooked teeth," said Dr. Deveck Frech, who teaches at Baylor Dental College in Dallas. "The dental health threat that we have for our children comes from cavities and from gum disease."

Frech describes MO as "the new golden goose" for making big money in dentistry.

"Orthodontics is a luxury," said Dr. Carolyn Wilson, who also teaches at Baylor. "It's not a necessity. It won't impact a child's overall health or well-being."

Both Dr. Wilson and Dr. Frech point out that in a scarce economy, a dollar spent on braces is a dollar not being spent on cavities.

"We look at orthodontics as supplemental to dentistry," said Dr. Christine Ellis, who teaches oral surgery at UT Southwestern Medical Center.

So why does Texas spend close to $200 million on what some describe as a dental luxury?

"This is the whole problem right here," Dr. Ellis said as she leafed through an MO reimbursement schedule. There's a payment list, in essence, for installation, maintenance, and extra equipment in the child's mouth.

Medicaid pays dentists for orthodontics by each procedure they do instead of a lump sum for the "finished mouth" of straight teeth. "And so the more procedures you do, the higher the bill becomes," Dr. Ellis said.

A "Herbst appliance" can bring in $250.

A "maxillary quad helix with finger springs" can garner $325.

All of this is intended to give dentists flexibility in straightening a child's teeth. But the claims can also be used to boost a total bill.

The State of Texas does not qualitatively evaluate a dentist's orthodontic claims. It checks primarily to see if the necessary forms are submitted, and it rejects only one in seven MO claims.

Some dentists say that in cases of severe deformity and cleft palates, Medicaid orthodontic payments can be warranted, but that such cases only occur in fewer than five percent of the population.

Texas rules could be interpreted more strictly. The state, critics say, chooses not to enforce them. Hence, Texas' attraction for hedge fund dental investment.

No other state is nearly as generous to dentists as Texas. California paid out $19.5 million last year, one-ninth of what Texas paid.

Michigan and Kansas paid out $0.

E-mail bharris@wfaa.com

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