Great question!
Google's job is to show the most relevant search results in a given market. If competing practices have one website completely dedicated to "DENTIST TOWN" keywords, Google will give those practice's website content a higher relevancy score and they will have an SEO advantage over you.
When it comes to SEO, more is better. More content, more optimized images, a long standing domain history, more backlinks... you get the point. However when it comes to on-site SEO there are a few key optimizations that carry more weight than others. An example of this would be the page title of a website. If your competitor has a page title with a very focused keyword strategy such as "DENTIST TOWN" whereas your SEO team is attempting to rank your site for various main search terms, Google will weaken your ability to rank for any search terms (the things people most often seek).
The simplest way to put this is, when the "focus" is broad, the results are watered down and may not achieve top rankings. This is especially true if your competition has a narrow focus, has invested for a longer period of time, or has a longer standing domain history, or more reviews.
Some practices do ok with SEO utilizing one website for multiple niches and multiple locations, however this is only the case in areas of low or very low competition.
In all other markets, a focused strategy will get you a stronger ROI and a quicker ROI than using one website to attempt to reach a high relevancy score for multiple focuses, towns, or even services.
Examples of situations where multiple websites provide a competitive SEO advantage include:
- Multiple Location Practices (in different cities/towns/neighborhoods)
- Multiple Specialties (Implants, Orthodontics, General Dentistry, Pediatric Dentistry / Kids Dentistry, Oral Surgery, Endodontics, etc.)