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    6 concerns about practice consolidation

    Big cash offers not always best for the practice or patient.

    The dermatology profession has begun to undergo a transformation under practice consolidation.

    Although most dermatologists continue to operate solo practices (35%) or single-specialty group practices (41%), yet 15% of recent practice acquisitions by private equity firms have been dermatology practices — even though dermatology represents only about 1% of physicians in the U.S.

    As independent practices are replaced by investor-owned conglomerates, there are concerns about commoditizing the treatment of skin disease, said Jack S. Resnick Jr., M.D., professor of dermatology at the University of California San Francisco School of Medicine, who recently published a viewpoint in JAMA Dermatology on issues associated with consolidating dermatology practices.

    “I decided to write the viewpoint after hearing from so many colleagues who were receiving astonishingly large cash offers to sell their practices and many other colleagues who had already sold their practices. They were very concerned about pressures they were facing from private equity owners to change the way they practiced medicine to maximize financial returns for investors,” Dr. Resnick said in an interview with Dermatology Times.

    “The decisions by many dermatologists to sell practices is understandable,” he said. The demands of running a medical practice can weigh heavy on a small practice. Meeting regulatory requirements, maintaining referral sources and securing fair healthcare plan contracts can be difficult.

    Cash offers can be attractive. Individual purchase prices can vary widely, but solo practices are normally sold between three to five times EBITDA (earnings before interest, taxes, depreciation and amortization). That multiple increases to between five to seven times EBITDA for small dermatology groups, and up to 13 times EBITDA for large, integrated, multisite groups. For example, in 2016, Harvest Partners purchased ADCS (40 clinics) for $600 million.

    Dermatologists may be attracted by extraordinary cash offers, but, “we need to consider the downsides,” he said.


    →  Investors are understandably interested in returns. They typically divert 20% of practice revenues in profits and may remove resources from an already taxed healthcare system.

    →  Some private equity investors value short-term revenue growth over the long-term stability of the practice.

    →  The process of consolidating practices and selling practices at a profit, may lead to bankruptcies, leaving dermatologists without practices and patients without services.

    →  Dermatologists who sell their private practices to conglomerates may experience a loss of autonomy including decision about staffing levels and capital equipment purchases.

    →  Dermatologists who work for private equity firms have reported concerns that investors seek to increase profits by hiring physician assistants to work in unsupervised satellite settings; redirecting dermatopathology specimens and Mohs surgery referrals to employees of the consolidated group; eliminating opportunities for dermatologists to recommend and select the best route for each patient.

    →  While the initial sale of the private practice may result in a large cash payout for the partner, it may not transcend to staff physicians who will likely receive lower compensation in coming years under a process called the “normalization” of physician payment. If they leave the practice or are terminated, they may have to contend with noncompete clauses.

    NEXT:  External Investors



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