Acquisition Trends: Consolidation in Dermatology

Consolidation is a trend that is gaining momentum in dermatology. Practices are partnering with others to enjoy economies of scale and enhanced bargaining power; practices are being purchased by entrepreneurial-minded dermatologists; and perhaps most notably practices are being acquired by private equity firms that are actively courting high-profile providers.

The private equity footprint is becoming increasingly clear in the health care landscape; and investors are acquiring dermatology practices at a notable rate. Out of 200 private equity acquisitions of medical practices in the past 2 years, 30 have been dermatology practices.¹ Robust growth in dermatology in the coming years is among the reasons that this specialty appeals to investors. As of 2014, 42% of dermatology patients were over age 60, and the US Department of Health and Human Services estimates this percentage will continue to increase until 2030.² As a result, the US market for skin disease treatment, which totaled $7.5 billion in 2015, is expected to reach $8.6 billion in 2020.³

Interest from the private equity community is fueling much of the consolidation trend that was already underway in dermatology. In 2014, an investment banking firm published, Skin in the Game, a primer on private capital investment in dermatology practices.⁴ In this report, the authors describe several factors that contribute to the attractiveness of dermatology practices as investment platforms: “Dermatology remains a highly fragmented market, and the multisite, multi-unit structure of group practices is ideal for pursuing ‘buy and build strategies.’ Elective, cash pay, ancillary services in cosmetic dermatology allow for direct-to-consumer marketing, while medical dermatology provides a solid foundation for recurring cash flow. Practice branding lends well to physician transition, unlike other medical specialties where the practice goodwill resides predominantly with the physicians.”

Consolidation is Trending

The strong dermatology market is among the reasons for private equity firms investing in the specialty, but what is behind dermatologists’ selling their practices? Administrative burdens such as requirements of the Affordable Care Act and transition to ICD-10 are making it more cumbersome to operate a practice, and declining reimbursement and rising costs can make it more stressful. The percentage of doctors spending more than one day a week on paperwork rose between 2013 and 2014, from 58% to 70% and nearly one-quarter spend more than 40% of their time on administration, according to The Second Annual Practice Profitability Index, which also reports that interest in selling is rising.⁵ According to the report, while many independent physicians still wish to remain independent, the percentage of independent physicians declined from 60% in 2013 to 53% in 2014.

Whether you are a well-established partner in a medium-sized group practice, a relatively new dermatologist employed by a company that owns and operates several practices throughout a region, or a soon-to-be-retired practitioner in search of an attractive exit strategy from the practice that represents a lifetime of work, you might be wondering what the ramifications of consolidation mean for individual dermatologists and the practice of dermatology as a whole.

Some dermatologists are suspicious of the new business model and are questioning if the influx of large practices and private investors will mean loss of control for practitioners in the long run and fixation on the bottom line by investors.

Bruce Glassman, MD, has a different story to tell. His solo practice, Capital Dermatology in Alexandria, VA, which he operates along with 3 other physicians and a physicians assistant, was recently acquired by the country’s largest dermatology practice, Advanced Dermatology & Cosmetic Surgery (ADCS). Dr Glassman ran Capital Dermatology successfully since 1994, but said increased governmental impositions such as The Physician Quality Reporting System, Medicare Access and CHIP Reauthorization Act of 2015, and The Merit-based Incentive Payment System made operating the practice much more difficult for a single owner. “It’s a challenge,” Dr Glassman said. “You end up spending much more time dealing with those things and the other administrative aspects of human resources and billing.”

Dr Glassman had been receiving cold calls from various investors who were interested in his practice. His dissatisfaction with the time constraints placed on him by the growing tangle of red tape inspired him to meet with several of them. Some of the groups had little involvement in health care, some were interested in acquiring his practice and tapping his expertise to have him head a group of other dermatology practices that would also be acquired.  

His meeting with Maitland, Florida-based ADCS, which is led by its founder Matt Leavitt, DO, and owned by private equity firm Harvest Partners, ended up being the best fit, he said.

“Some companies saw me as a great way to get into the field, and others wanted to add me to their platform,” explained Dr Glassman. “With ADCS, I immediately felt like I had less pressure in my life because I was dealing with people who knew what they were doing.”

It’s been about 4 months since his practice was acquired by ADCS and he is still glad he made the deal. “Advanced Dermatology had a pretty simple approach. They had a tremendous infrastructure already in place, which many of the other companies did not have. ADCS offered the opportunity to practice medicine the way I always have, but I would be able to let them handle the human resources, let them handle the billing, let them handle the government regulations, let them handle all the compliance issues, and still continue running my practice and making my patients happy. It was an opportunity to simplify my life by getting rid of a lot of the stress that goes along with running a practice so that I could focus more on practicing medicine and living my life, instead of investing time in a lot of minutiae,” said Dr Glassman.

He has not been asked to change the name on his practice’s front door and his staff has remained the same. “ADCS does not come in and blow up your practice and say you’ve got to do it this way or else,” he said.

Dr Glassman suggested that the biggest misconception about an arrangement like his with ADCS is that physicians lose control. He pointed out that being part of a large company actually offers greater power than the average dermatologist has today. “There’s power in numbers. If you have more people working for the same company, that company will potentially have market share and can effectively represent you at the negotiation table with insurance companies that are trying to cut back your fees. I feel like I have done a great thing for the doctors who work with me. They now have the power of a large corporation behind them,” said Dr Glassman.

The Safety of Scale

ADCS’ founder and chief executive officer Dr Leavitt, echoed Dr Glassman’s suggestion that there’s safety and security in economies of scale. “Today’s practices are definitely at greater risk from consolidation of insurance providers and changes associated with that. None of us really know exactly where that trend is headed, but I’m certain there is an inherent benefit for practices being part of a larger entity—especially if there is enough penetration in a geographic area. It would be very hard for an insurance company to move away from you, if you have enough practices highly penetrated in one area.”

Dr Leavitt said he understands the concerns of dermatologists who find the concept of private equity ownership of dermatology practices worrisome. He said there was a time when he too had concerns, and as an average dermatologist he did not know much about the workings of private equity. Today he is the face behind 157 practices across the country. “I had a bit of an entrepreneurial bent and some money because I didn’t take a salary for a few years. I just kept investing it back into my practice, and little by little I opened a couple of practices and then a few more,” he said. “Soon I had 50 practices and I was managing other practices through my company AmeriDerm. I didn’t borrow any money; I financed everything myself. I had a very successful hair restoration business that I sold and then I had more money and I started getting requests from friends and friends of friends who wanted me to buy their practices. It started as something that generated from relationships and eventually it just caught fire.”

Dr Leavitt said at that point he began to investigate if there was a way to get help handling the endeavor—which had morphed in a conglomeration of practices worth tens of millions of dollars—without giving up any control. He learned about private equity and was intrigued. “On a scale of one to 10, my skepticism was a nine,” said Dr Leavitt. “I didn’t trust outside money coming into medicine so I tried to look for a group that wouldn’t tell us how to practice medicine or run everything by a spreadsheet.” He found such a group and that relationship lasted 5 years. Recently, ADCS was sold to another private equity firm, which Dr Leavitt said he picked with the same goal of maintaining autonomy over medical practice decisions. In May 2016,  ADCS was purchased by the New York-based private equity firm Harvest Partners in a deal reportedly worth more than $600 million.1,6

“I feel like we’re unique. We are not like other companies that brought in outside CEOs [chief executive officers] and managers. All the people that founded ADCS are still here.…We’ve added [positions] not subtracted,” said Dr Leavitt. Similarly, when ADCS acquires a dermatology practice, it is with the understanding that the selling physician and his or her staff can remain until they decide to move on. “I wasn’t looking to create an empire,” said Dr Leavitt. “The way I look at this is that I have an opportunity to buy practices from people who are frustrated, and we take the administrative frustrations away and enable them to concentrate on practicing medicine.”

Dr Leavitt added, “Dermatologists make 100% of all medical decisions; they do not ever have to answer to outside business people.”

He stressed that practice owners should never sell unless they think the change will improve their quality of life. “I wouldn’t tell somebody to do it for the money. It should really fit into their holistic plan of what they want their life to be like,” he said.
Exit Strategy

Dr Leavitt acknowledged that consolidation is a popular move among pre-retirees who are looking for a lucrative exit strategy, with guaranteed employment until they are ready to hang up their lab coat.

W. Patrick Davey, MD, a dermatologist who has been involved in a multitude of practice types and is a former chair of the American Academy of Dermatology’s Practice Management Committee, has observed the influx of private equity and said that it is too soon to know what this will mean for the specialty in the long run. “It can be a smart move albeit one with some loss of autonomy,” he noted.

“I spent 20 years in a large group practice, moved on to my own small solo practice for a few years, and now I’m building a surgical practice again and the principal partner in the group is one of my former medical students,” Dr Davey said. “The administrative burden of trying to run a group practice today with increasing demands for documentation, electronic record keeping, and insurance carrier consolidation are all part of what’s making physicians sell. Physicians are getting to the point where they feel like they need to have more professional management and one way they feel they can afford to do that is to join a larger group and have the group managed across multiple practices.”

Dr Davey pointed out that a downside is that oftentimes dermatologists who sell lose the autonomy to decide who to send pathology out to or to whom they may refer for Mohs surgery. However, he added, “It’s an especially effective move for pre-retirees. The investors usually have a contractual agreement where they retain the physicians for a number of years—so the physician has the money from the sale of the practice, as well as a salary coming in.” Ultimately, said Dr Davey, “If you don’t have anyone interested in taking your practice over for you, it’s not a bad retirement strategy.” n

References
1. Krause P. Private equity firms are suddenly buying dermatology practices—here’s why. Business Insider website. August. 22, 2016. https://www.businessinsider.com/why-private-equity-firms-buy-dermatology-practices-2016-8.
Accessed September 26, 2016.
2. Administration on aging. A profile of older Americans: 2011. Administration for Community Living website. https://www.aoa.gov/Aging_Statistics/Profile/2011/4.aspx. Accessed September 26, 2016.
3. Face of dermatology industry changing; companies in global skin disease market extending Products. BCC Research website. January 5, 2016. https://www.bccresearch.com/pressroom/phm/face-of-dermatology-industry-changing-companies-in-global-skin-disease-market-extending-products. Accessed September 26, 2016.
4. Skin in the Game, Growing Private Capital Investment in Dermatology Practices. Chicago IL: Brown Gibbons, Lang & Company; 2014. https://www.bglco.com/files/bgl_healthcare_and_life_sciences_special_report_dermatology_practices.pdf. Accessed September 29, 2016.
5. The Second Annual Practice Profitability Index. 2014 ed. CareCloud. https://on.carecloud.com/rs/carecloud/images/PPI-Report.pdf. Accessed September 29, 2016.
6. Harvest Partners and Audac announce recapitalization of advanced dermatology [news release]. Harvest Partners LP; May 18, 2016. https://www.harvestpartners.com/harvest-partners-and-audax-announce-recapitalization-of-advanced-dermatology. Accessed September 29, 2016.