Justin Thomas sprays himself with sunscreen
during the first round of the 2016 The Masters golf tournament.
Private
equity firms are snapping up dermatology practices across America.
In the
past two years, there have been over 200 deals involving physician practices,
with about 30 of those transactions in dermatology.
Investors
are attracted by profitable new cosmetic procedures offered by many
dermatologists, and are placing premium values on high-performing,
well-positioned practices.
Some of
the recent deals have been huge.
New
York-based private equity firm Harvest Partners
recently purchased Maitland, Fla.-based Advanced Dermatology &
Cosmetic Surgery, the largest U.S. dermatology practice, in a deal reportedly
worth more than $600 million.
Varsity
Healthcare Partners sold dermatology practice Forefront Management Holdings to
the private investment arm of pension fund giant Ontario Municipal Employees
Retirement System in a deal worth more than $450 million.
The Wall
Street Journal reported that the transaction valued Forefront, with more than
$30 million in earnings before interest, taxes, depreciation and amortization
(EBITDA) last year, at about 13-times EBITDA.
We can
expect more deals.
That’s
especially true because dermatology is a fast-growing specialization. The
market is expected to increase to $13.1 billion by next year, according to a
2013 Harris Williams & Co. study.
There is
a dermatologist shortage that will likely persist for years even as a growing
number of medical students pick the specialization.
To
private equity firms, there are several factors that make dermatology practices
more attractive than other medical practices.
Demographics. By 2019, there will be 54 million
Americans over the age of 65, up from 46 million-plus today, according to a
report by the U.S. Department of Health and Human Services’ Administration on
Aging. Skin cancer, particularly melanoma, is on the rise too, striking about
3.5 million people annually, according to the American Cancer Society.
Healthcare access. More and more
Americans have access to healthcare thanks to the Affordable Care Act. About 20
million people have gained insurance coverage between the passage of the law in
2010 and early 2016, boosting demand for dermatology.
Financials. Common medical and surgical
dermatology procedures are typically well reimbursed. Additionally,
high-margin cosmetic procedures tend to be paid out of pocket by
consumers and are not as reliant on discounts made to insurance providers as
many other types of medical care. Notably, most dermatology work is conducted
outside of hospitals and as such is not subject to the push for cost-savings
underway at hospital systems.
The upsell. Many dermatology practices have a
cosmetic component, offering everything from Botox, Restylane, micro-dermabrasion
and laser correction, CoolSculpting (a non-surgical fat removal process),
high-end skin creams and other services. Investors like the idea of training
doctors to do a better job of upselling such offerings so that patients who
might come to have a mole removed are likelier to sign up for more lucrative
services.
Historically,
physicians may have viewed the full or partial sale of their practice as the
loss of independence or control.
Today,
many doctors embrace the idea of being able to spend 100 percent of their time
providing patient care.
The
consolidation of back office functions — like billing, scheduling, and
insurance contract negotiation — is a huge motivation to sell.
Some
physicians with thriving practices are teaming up with investors to become
consolidators, acquiring other dermatology practices and getting an equity
stake in the larger entity.
Some have
joined or formed multi-physician dermatology practices with several locations
and additional specializations.
In the
end, consolidation should be good for patients. Ultimately, it ensures that
doctors spend more time with them.
Patrick
Krause
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