> ## Documentation Index
> Fetch the complete documentation index at: https://dso.getlemma.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Evolve the fee structure (fixed → cost-plus)

> The standard arc as a dental group matures, why the percentage endpoint is mostly closed in dentistry, and the mechanics of the transition: amendment versus restated MSA, consents, a refreshed FMV study, per-state re-checks, and true-ups.

Many DSO-PC groups revisit the management fee as their operations mature. A group may move from a fixed fee to cost-plus as its services and cost base become easier to document. A percentage fee is available only where state law and the specific arrangement permit it. This guide explains how to evaluate and carry out a change.

## The arc

```mermaid theme={null}
graph LR
    A["Launch<br/>Fixed monthly fee"] --> B["Scale<br/>Cost-plus markup"]
    B --> C["Mature<br/>% of collections,<br/>only where lawful,<br/>which in dentistry is rare"]
```

### Stage 1, launch with a fixed monthly fee

**Why groups use it:** a fixed fee can be easier to administer and benchmark when the DSO provides a limited service scope, and it gives the PC predictable costs before revenue stabilizes.

**Its limit:** the fee does not adjust automatically as the service scope and cost base change. The parties should revisit the amount and supporting fair-market-value analysis rather than assuming the launch price remains appropriate.

### Stage 2, move to cost-plus once the DSO absorbs real services

**Why groups consider it:** once the DSO's services and costs are measurable, a documented cost base and supportable markup can provide a clearer pricing method. The parties still need current fair-market-value support and a formula permitted in the applicable state.

**Investor view:** a defined formula can make management-company revenue easier to model than a fee reset through periodic negotiation. Investors will still test the cost allocation, markup, state-law constraints, and whether the invoices match services actually provided.

**Compliance view:** a cost-plus formula can tie the fee to documented services and costs, but the formula is not a national safe harbor. Confirm state fee-splitting and management-fee rules, benchmark the markup, and document the services and invoices.<sup>1</sup>

### Stage 3: percentage of collections, with limited availability in dentistry

**Why groups want it:** maximum alignment with practice performance.

**Why stage 3 needs a state map:** Nevada, New Jersey, New York, and North Carolina expressly restrict specified revenue-dependent dental support formulas; Maryland's permitted-support pathway requires predetermined fixed compensation subject to its prior-period rule; and other states may apply broader fee-splitting, referral, control, or reasonableness provisions.<sup>1</sup> Treat a percentage formula as a state-specific design choice, not a maturity milestone. See [Fee-splitting](/concepts/model/fee-splitting) and [Set the management fee](/guides/agreements/set-the-management-fee).

## Prerequisites for a transition

* Current MSA reviewed
* The DSO's actual cost base calculated and allocated per PC
* A **refreshed FMV study**, completed **before** the new fee takes effect
* Per-state fee-splitting re-check for every PC moving to the new structure
* Counsel engaged in each affected state

## Steps

<Steps>
  <Step title="Re-check state law for every affected PC">
    Test the new structure in each state. Cost-plus often reduces direct revenue-dependency risk but is not an automatic safe harbor; percentage formulas trigger express rules in several jurisdictions. Keep any practice on a state-specific lawful formula rather than forcing a national change. See [DSO laws by state](/reference/legal/dso-laws-by-state).
  </Step>

  <Step title="Commission the FMV study before the change, not after">
    An FMV opinion obtained after a fee increase took effect is worth far less than one obtained before. The sequence is part of the evidence: it shows the fee was set by reference to FMV rather than justified afterward.
  </Step>

  <Step title="Choose: amendment or amended and restated MSA">
    |               | Amendment                                | Amended and restated                               |
    | ------------- | ---------------------------------------- | -------------------------------------------------- |
    | **Use when**  | Only the fee provisions change           | Multiple provisions change, or the document is old |
    | **Advantage** | Shorter; preserves the original          | One clean current document                         |
    | **Watch**     | A stack of amendments becomes unreadable | Loses the amendment history unless noted           |

    If your MSA predates 2025, test whether a **restatement** is cleaner than another amendment. The review should account for California's SB 351, Colorado's Rule 1.7 provisions scheduled to become operative January 1, 2027, Kentucky's KRS 313.075, and North Carolina's 2026 procedure change.<sup>2</sup> See [Draft the MSA](/guides/agreements/draft-a-management-services-agreement).
  </Step>

  <Step title="Define the new fee precisely">
    For cost-plus, specify:

    * **The cost base**, which DSO costs are included, and which are excluded
    * **The allocation methodology** across PCs
    * **The markup percentage**
    * **The calculation period** and true-up mechanism
    * **Documentation** the DSO must provide with each invoice
  </Step>

  <Step title="Adopt board and member consents on both sides">
    Both entities must independently approve. For the PC, this is the dentist-owner considering whether the new fee is one the practice should agree to, and the minutes should reflect that consideration, not a rubber stamp. The California Aspen settlement's requirement of annual written fee negotiations with PC owners shows where regulators expect this to land.<sup>1</sup>
  </Step>

  <Step title="Set a clean effective date and handle the mid-year transition">
    Prefer a period boundary, month, quarter, or fiscal year. If mid-period:

    * Prorate cleanly
    * State in the amendment which periods use which method
    * Handle the true-up explicitly
  </Step>

  <Step title="Update the invoice template and any automation">
    A cost-plus invoice needs to show the cost base and the markup. Update the accounting system's recurring entries, the invoice format, and any payment automation.
  </Step>

  <Step title="Update the financial model and reforecast">
    The DSO's earnings profile may change materially. If you are raising capital, model both structures so you understand how the change affects the numbers investors will review. See [How investors read DSO financials](/concepts/finance/how-investors-read-dso-financials).
  </Step>
</Steps>

## The true-up

Cost-plus requires reconciling estimated costs to actual. Specify:

* **Frequency**, quarterly or annually
* **Direction**, both, or only in the PC's favor
* **Mechanism**, a credit or additional invoice
* **Dispute process**

An unreconciled cost-plus fee is functionally a flat fee with extra steps, and it will be treated as one.

## The thing not to do

<Warning>
  **Never reprice past periods retroactively to increase DSO earnings before a raise or a sale.**

  A mismatch between the written fee and actual payments will draw diligence questions about both the calculation and the reliability of the financial records.

  If your fee has been below FMV, raise it prospectively, document why, and be prepared to explain the history. That is a defensible conversation. Restating prior periods is not.
</Warning>

## Verify it worked

* [ ] State law re-checked for every PC on the new structure
* [ ] FMV study completed **before** the effective date
* [ ] Amendment or restated MSA executed
* [ ] New fee defined precisely, including cost base, allocation, markup, and true-up
* [ ] Board and member consents adopted on both sides, with real consideration reflected
* [ ] Clean effective date; mid-period proration handled
* [ ] Invoice template and automation updated
* [ ] Financial model reforecast
* [ ] No retroactive repricing of prior periods

## Common failure modes

| Failure                                                        | Consequence                                                                                                          |
| -------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |
| FMV study after the fact                                       | Sequence undermines the evidence                                                                                     |
| Moving every practice to a percentage without per-state checks | Express-formula exposure in NV, NJ, NY, NC, and MD; fee-splitting, referral, control, or contract exposure elsewhere |
| Vague cost base definition                                     | Disputes and an unsupportable fee                                                                                    |
| No true-up mechanism                                           | Cost-plus in name only                                                                                               |
| Consents not adopted                                           | The change isn't properly authorized                                                                                 |
| Invoices unchanged after the structure changed                 | Documentation contradicts the agreement                                                                              |
| Retroactive repricing                                          | Credibility damage in diligence                                                                                      |

## Sources

1. NRS 631.215(2)(i); N.J.A.C. 13:30-8.13; 8 NYCRR 29.1(b)(4); 21 NCAC 16X .0101; Md. Code, Health Occ. § 4-103(E)(14). Pinpoints and official links appear in [Set the management fee](/guides/agreements/set-the-management-fee) and [DSO laws by state](/reference/legal/dso-laws-by-state). N.Y. AG, [Aspen Dental Assurance of Discontinuance](https://ag.ny.gov/sites/default/files/settlements-agreements/ADMI_AOD.pdf) (2015); Cal. AG, [Aspen Dental settlement](https://oag.ca.gov/news/press-releases/attorney-general-bonta-announces-settlement-aspen-dental-over-corporate-practice) (May 2026).
2. Cal. S.B. 351 (2025), effective January 1, 2026; Colo. Board Rule 1.7 under S.B. 25-194; Ky. KRS 313.075 (effective April 13, 2026); N.C. S.B. 257 (signed July 7, 2026). Details and links: [DSO laws by state](/reference/legal/dso-laws-by-state) and the [legislation tracker](/reference/legal/dental-legislation-tracker).