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6 concerns about practice consolidation

Article

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.

SIX CONCERNS

→  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

 

 

“Due to the speed with which this transformation is occurring, the specialty urgently needs to have an open conversation about the risks and benefits for our profession and our patients. The consolidation and commoditization of dermatology practices and their services is rapidly changing the specialty and the choices of practice venues for future dermatologists."

-     Jack S. Resneck Jr., M.D., University of California San Francisco School of Medicine

EXTERNAL INVESTORS

Among factors that attract external investors to dermatology include high patient demand, high rates of cutaneous cancers, an aging population, the shortage of dermatologists and expanded insurance coverage.

The methods that some private equity firms employ to improve profitability, such as changing ancillary referral patterns, encouraging additional procedures and widening the use of unsupervised physician assistants could be problematic. “It may ultimately carry risks of Stark law noncompliance, False Claims Act exposure, and malpractice litigation,” Dr. Resnick writes. In 2005, a Georgia consolidated dermatology practice agreed to a $3.2 million settlement in response to allegations that it routinely required employed dermatologists to use its in-house pathology laboratory.

There is a scenario for which consolidation trend could reverse. “If consolidation leads to overvaluation of practices and an unsustainable debt burden, there is a risk of bankruptcies affecting these consolidated entities and a change in the trend,” Dr. Resnick says.

Not every private equity firm investing in dermatology is the same. “And certainly not every dermatologist who has sold has had a negative experience,” he said.

Still, the goal of private equity investors is typically to exit the investment in three to seven years and transfer the entity to another private or public investor at a higher multiple. As a result, “dermatologists may find themselves working overtime for a variety of different owners with different values that are not always in line with physician values, thus leading ultimately to diminished autonomy for practicing physicians.”

RADICALLY DIFFERENT SPECIALTY

Dermatologists and their patients should have choices about where they deliver or receive care, he said. There is still time to affect this rapidly evolving landscape.

“Due to the speed with which this transformation is occurring, the specialty urgently needs to have an open conversation about the risks and benefits for our profession and our patients. The consolidation and commoditization of dermatology practices and their services is rapidly changing the specialty and the choices of practice venues for future dermatologists,” Dr. Resneck said. “There is still time to have some influence, or we may soon wake up to a radically different specialty that we had not paused to contemplate.”

 

REFERENCES

Jack S. Resneck Jr, M.D. "Dermatology Practice Consolidation Fueled by Private Equity Investment, Potential Consequences for the Specialty and Patients," JAMA Dermatology. Published online Nov. 21, 2017. DOI:10.1001/jamadermatol.2017.5558

 

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