The dermatologist had been in practice just a few years when he was approached by a private equity group. This was around 2015, when dermatology was just starting to buzz about investor buyouts. He was curious, so he agreed to meet with the company.
“They approached me with the idea that they could help me grow my practice, help my patients, and cut down overhead,” said the northern Alabama dermatologist, who asked that his name not be used. Over a lavish dinner, the investors lauded the clinician for his business acumen and for having built a great practice so quickly. They made an enticing buyout offer.
Ja_inter/DigitalVision Vectors
Before agreeing, he thought it over. He told the investors he wanted a few more years on his own before he’d consider a buyout. They encouraged him to think about it some more. He did, but the answer was still no.
Suddenly, the investors became aggressive and threatening. “They told me, ‘you have just made the biggest mistake of your early career. We’re going to make sure that our practice swallows you up, and if we can’t take you over and put you out of business, we’re going to buy up everyone around you so you can’t survive,’ ” said the dermatologist.
Surprisingly, the experience did not sour him on private equity – he even entertained a successor company’s offer. But he’s become more circumspect. “It has the potential to do good,” he said, adding that such financial support could help him pay employees, keep the lights on, and improve care. But the investors’ emphasis on profit is not appealing, he said.
“I’m going to have to have good proof that it’s truly going to improve patient care and outcomes. And I haven’t seen that yet,” he said.
Salvation or death sentence?
Depending on whom you ask, the continuing growth of private equity purchases of dermatology practices is either the death – or salvation – of the specialty.
Many dermatologists question whether the financial backers will invest in quality of care, or if they just will hire mid-level providers to churn out procedures to plump up revenues.
Neither the controversy nor the acquisitions show any sign of abating.
The American Academy of Dermatology has hosted debates on the topic at its annual meetings – and was to do so in 2020 until COVID-19 led to the meeting’s cancellation. AAD has not weighed in with any official policy and is not releasing data it may be collecting on the potential impact of private equity ownership. The organization provided a statement from President George J. Hruza, MD, who said, “the AAD supports a member’s right to choose the model that works best for them,” adding that the Academy “expects its members to provide safe and effective patient care, regardless of a dermatologist’s practice setting.” Dr. Hruza sold his Chesterfield, Mo., practice to United Skin Specialists, a private equity–backed company, in 2016, and still works at the same practice.
Some have said the acquisitions need to stop. “Until meaningful data are available on what happens to the quality of care and affordability for patients and payers, dermatologists should stop selling their practices to private equity firms, and legislators should prohibit such transactions,” wrote Joshua M. Sharfstein, MD, and Jamar Slocum, MD, of the Johns Hopkins Bloomberg School of Public Health, Baltimore, in an editorial in July (JAMA Dermatol. 2019;155[9]:1007-8).
Although he acknowledged that he has not tracked the issue closely and that little data exist on the impact on quality or cost, Dr. Sharfstein has not changed his tune. “I think there are enough warning signs to say we should put the brakes on,” he said in an interview.
“For what reason?” asked Betsy Wernli, MD, president of Forefront Dermatology, an investor-owned group based in Manitowoc, Wis. She said it seems that “on this topic, we abandon our scientific foundations and default to emotion and anecdote,” she said in an interview. “Having capital, and an investor that supports us has allowed us to perform better patient care,” she said. Dermatologist variance across all practices and practice models should be cause for more concern, she added.
Sailesh Konda, MD, has been an outspoken critic. Dr. Konda, medical director and clinical assistant professor in the department of dermatology at the University of Florida, Gainesville, and colleagues detailed the complicated financial machinations of private equity in the Journal of the American Academy of Dermatology. They showed that private investors seemed to hone in on buying outlier practices that performed high numbers of procedures. The paper – first made public in the fall of 2018 – created an uproar, especially among private equity companies. It was initially removed from the website in conjunction with a request from the editor that its conclusions be altered to be less harsh on private equity, according to the New York Times. The paper was eventually published in 2019 (J Am Acad Dermatol. Jul;81[1]:287-296.e8).
Dr. Konda has spoken at various dermatology forums and health care gatherings on private equity. He told the Times that he had given 16 talks to health care groups in 2018, and he was due to speak to a health care investors’ group in 2020. But he would not comment on the record for this story.
Brett Coldiron, MD, a former president of the AAD, also has been critical. He believes investor-owners push for more biopsies, freezing of actinic keratoses, Moh’s surgery, and other well-paying procedures. “I’m convinced that private equity may be the undoing of our specialty,” Dr. Coldiron said in an interview.
In a paper titled, “Private Equity Acquisition of Physician Practices,” published in the Annals of Internal Medicine in January 2019, Lawrence Casalino, MD, PhD, chief of the division of health policy and economics at New York’s Weill Cornell Medicine, and colleagues wrote that “private equity firms focus on specialties with high potential for additional income from elective procedures and ancillary services,” and that “dermatology has been a major focus” (Ann Intern Med. 2019;170[2]:114-5).
Dr. Brett M. Coldiron
And in a viewpoint published in JAMA in February 2019, first-year medical student Suhas Gondi and Zirui Song, MD, PhD, both of Harvard Medical School, Boston, concluded that investor-owned practices could drive up overall health spending in part because they extract better reimbursement from insurers (JAMA. 2019;321[11]:1047-8).
Access could also become an issue if the companies drive smaller independent practices out of business, they wrote.
On the other hand, they said, “these investments may also benefit patients and bring more efficiency to a system burdened with waste.” The authors called for more research and “thoughtful regulation” to enhance the potential positives while mitigating the negatives.
So far, the acquisitions have largely escaped the notice of regulators or lawmakers. Congress has made noises about targeting specialty practices owned by private equity as a means of taming surprise medical bills, but that legislation has been stymied.
Dr. Coldiron is convinced that private investors will eventually be tripped up by state laws that prohibit the corporate practice of medicine.
Leslie Baumann, MD, who sold her Miami practice in October 2019 to the investor-owned Skin and Cancer Associates, said critics are too cynical. “What if these private equity firms are going to actually make our specialty better?” she asked in an interview.
Dr. Leslie S. Baumann
What makes dermatology attractive?
Private equity has been acquiring specialty practices since at least 2009, with an acceleration over the last 5 years. Dermatology has been a frequent target, in part because so many dermatologists were in independent or small group private practices, making them ripe for takeover.
A 2015 report on the specialty by Cegedim, a company that provides information technology support to health care, found that the majority of practices had fewer than five physicians and that 57% of the practices were independent.
But more dermatologists are choosing employment. In a 2018 Medscape survey, 57% of dermatologists reported they were employed, while 49% were self-employed.
During 2013-2016, investors bought 35 dermatology practices – comprising 334 physicians, according to one study published in February (JAMA. 2020;323[7]:663-5). Investors bought 69 anesthesiology practices, 43 emergency medicine practices, and 39 family medicine practices during the same period.
Harvard’s Mr. Gondi and Dr. Song estimated that dermatology practices accounted for 15% of investor purchases in 2015 and 2016, even though dermatologists make up just 1% of U.S. clinicians.
In another paper published in JAMA Dermatology, Sally Tan, MD, and colleagues at Brigham and Women’s Hospital, Boston, and Harvard medical and business schools, estimated that, in 2019, at least 184 practices, comprising 381 clinics, were owned by 17 private equity groups and that the acquisitions had been accelerating: from 5 in 2012 to 59 in 2017 to 34 in the first 5 months of 2018 (JAMA Dermatol. 2019;155[9]:1013-21).
“It’s a very attractive area for investors because they know that the future is bright for dermatology,” said Reuven Porges, MD, CEO of Ft. Lauderdale-based Skin and Cancer Associates, which is owned by a private investor. Because dermatology involves providing many ancillary services and cash-only cosmetic services, “it has tremendous potential to continue to be successful in the future regardless of what health care changes are coming,” Dr. Porges said in an interview.
Investors also see promise in dermatology in the United States because “there’s a huge supply demand mismatch,” said Vance Vanier, MD, a cofounding managing partner at Chicago Pacific Founders, the private equity owner of Pinnacle Dermatology, which has 52 locations in Illinois, Indiana, Michigan, Minnesota, and Tennessee.
Theoretically, when investors handle billing, insurance negotiations, and health information technology, it gives clinicians more time to practice, Dr. Vanier said in an interview.
“Once that doctor is freed up to not do administrative tasks and focus on patient care, then, if they want to, they can see more patients and be more responsive to their needs,” he said.
Dr. Vanier said investor acquisitions are here to stay. “This is a trend that could go on for another 50 years before any saturation point is hit,” he said. “It’s a $2 trillion market. It’s hard to wrap your head around how enormous health care services is,” he said.
Dermatology acquisitions will be driven by the continuing imbalance of physician supply and patient demand; the financial pressure on newly graduating physicians who have big debt loads; the requirements for investment in health information technology to report quality metrics; and an aging population, Dr. Vanier said.
In a JAMA Dermatology viewpoint, Jack Resneck Jr., MD, professor of dermatology, University of California, San Francisco, listed many of the same factors – plus a skin cancer epidemic – as fueling dermatology acquisitions (JAMA Dermatol. 2018;154[1]:13-4).
Medical practices – not just dermatology practices – also offer a pure financial play. “Acquisitions of smaller practices provide a major arbitrage opportunity,” Dr. Casalino and colleagues said in the January 2019 Annals of Internal Medicine paper. In a merger of smaller practices into larger, the smaller practice’s valuation immediately becomes that of the bigger one, they wrote.