Private Equity Investment Fueling Consolidation of Dermatology Practices

With the consolidation of dermatology practices being fueled by private equity (PE) investment, several risks to the specialty, the profession, and patients exist, which might prove to be irreversible and could lead to commoditization of the treatment of skin disease, according to a recent commentary by Jack S. Resneck, MD, of the University of California, San Francisco, published in JAMA Dermatology.¹ The ultimate concern is that dermatologists working in such purchased practices might ultimately experience a loss of autonomy.

As recently as 2014, the majority of dermatologists were in solo practice (35%) or single-specialty groups (41%).² Although several dermatology practices did pursue strategic consolidations, the specialty of dermatology appears to have deferred some of the controversies inherent in the acquisition of medical practices by nonphysicians. Over the last 3 to 5 years, however, the practice of dermatology has begun to experience consolidations that are being stimulated by PE investments.

Investors initially purchased larger, multisite dermatology practices as anchor investments. Presently, after having acquired larger anchor practices, many PE firms have begun to add on smaller regional dermatology practices to achieve scale and consolidate the regional marketplace. In such acquisitions, purchase prices are often expressed as multiples of “earnings before interest, taxes, depreciation, and amortization (EBITDA).” There is wide variability in offers, but they are typically in the range of 3 to 5 times the EBIDTA for solo practices, 5 to 7 times the EBIDTA for small dermatology groups, and ≥13 times the EBIDTA for large, integrated, multisite groups.

Although dermatologists are often encouraged to remain after a PE sale, in certain cases the investors may accept physician departures because buyout recipients can sometimes be replaced by younger dermatologists or physician assistants who are paid at a lower level. Factors that may attract external PE investors to the field of dermatology include high patient demand, an ongoing skin cancer epidemic, an aging population, a shortage of dermatologists, and apparent opportunities to expand cosmetic services.³

Established partners may benefit from up-front cash that is generated when a sale takes place, but younger or employed dermatologists in such practices typically receive lower rates of pay in future years. If those employed physicians either leave the practice or are terminated, they are faced with noncompete clauses that may make future employment difficult.

Dr Resneck concluded that intergenerational disagreements concerning the prudence of accepting PE investments are creating intrapractice strain among some dermatologists. He expressed his hope that the dermatology practice will consider this rapidly evolving landscape proactively while there is still time to exert some influence.

References

1. Resneck JS Jr. Dermatology practice consolidation fueled by private equity investment: potential consequences for the specialty and patients [published online November 21, 2017]. JAMA Dermatol. doi: 10.1001/jamadermatol.2017.5558
2. Ehrlich A, Kostecki J, Olkaba H. Trends in dermatology practices and the implications for the workforce. J Am Acad Dermatol. 2017;77(4):746-752.
3. Brown Gibbons Lang & Co. Skin in the Game: Growing Private Capital Investment in Dermatology Practices. https://www.bglco.com/files/bgl_healthcare_and_life_sciences_special_report_dermatology_practices.pdf. Published August 2014. Accessed October 22, 2017.