Why Dermatology Sees Transformation in Practice Consolidation
Dermatologists who are considering the sale of their medical practices should know the latest information about their specialty area and practice consolidation trends.
The majority of dermatologist practices (35%) are operated as solo practices or single-specialty group practices (41%). However, 15% of recent practice acquisitions by private equity firms (PEFs) have been dermatology practices, even though this specialty comprises just 1% of physicians in the country.
Concern for the Commoditizing of Treatment of Skin Disease
A professor of dermatology expressed his concerns that as independent practices are replaced by investor-owned conglomerates, there may be more commoditizing of the treatment of skin disease.
Jack S. Resnick Jr., M.D., professor of dermatology at the University of California, San Francisco School of Medicine, recently published his thoughts on the sale of dermatologist practices in JAMA Dermatology. Resnick commented that he was hearing from many colleagues who were receiving “astonishingly” large cash offers to sell their practices and many other colleagues who had already sold their practices. He remarked that these dermatologists were very concerned about pressures they were facing from PEFs to change the way they practiced medicine to maximize financial returns for investors.
“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. Compliance with regulatory requirements, maintaining referral sources, and securing fair healthcare plan contracts can be difficult, Resnick said.
A cash offer may sound ideal and quite alluring, but individual purchase prices can vary dramatically. Solo practices are typically sold between three to five times EBITDA (earnings before interest, taxes, depreciation and amortization). This multiple jumps to between five to seven times EBITDA for small dermatology groups, and up to 13 times EBITDA for large, integrated, multisite groups.
The Downside of a Cash Offer for Your Dermatology Practice
Dermatologists can be enticed by extraordinary cash offers, but there are some pitfalls and concerns of which to be aware:
- Investors are focused on returns and generally earmark 20% of practice revenues in profits; they may remove resources from an already taxed healthcare system;
- Some PEFs place a premium on short-term revenue growth versus the long-term stability of the practice;
- The consolidation of practices and selling them at a profit may result in bankruptcies, which may create a situation of practitioners with no practice and patients without any available services;
- Dermatologists who sell their private practices to conglomerates may lose their control of their business, including staffing and capital equipment purchase decisions;
- Dermatologists who work for PEFs have expressed concerns that investors want to increase profits by hiring physician assistants (PAs) to take on some of the work load and reduce opportunities for dermatologists to recommend and select the best treatment for each patient; and
- The initial sale of the dermatology private practice may produce a large cash payout for the owner, but this may not flow to staff physicians who may see lower compensation in the future in the “normalization” of physician payment. Plus, if they leave the practice or are terminated, these doctors may have to address noncompete clauses.
Attracting External Investors
Remember that some of the factors that attract PEFs to dermatology are the high patient demand, the high rates of cutaneous cancers, our aging population, the shortage of dermatologists, and expanded insurance coverage.
Most private equity investors typically want to exit the investment in three to seven years and transfer the entity to another private or public investor at a higher multiple. Thus, dermatologists may experience a variety of different owners with different values over that period that aren’t always the same as the dermatologist’s own values. This can result in the diminished autonomy for practicing physicians.
Many Steps to Sell a Medical Practice
Dermatologists should be aware of this this rapidly evolving practice environment. The consolidation and commoditization of dermatology practices is altering the specialty and the choices of practice venues for future dermatologists.
As physician practices are acquired, the issue of what a practice is worth is a significant question. Each situation is unique, and you should understand the facts and circumstances of any specific medical practice and the post-transaction compensation structure to provide an accurate estimate of the FMV of that medical practice. Speak with medical practice sales consultant Andrew Rogerson in Sacramento to get more information about the business climate and valuation concerns in your community.
This is a one page summary on selling a medical practice, in order to help you get a general idea of what the necessary steps are you need to take. If this is causing you headaches then feel free to directly get in touch with Andrew via phone at (916) 570-2674 or use our email contact form.