The State of Private Equity in 2024: Impact on the Practice of Dermatology

WHAT TRENDS ARE YOU SEEING IN PRIVATE EQUITY IN DERMATOLOGY?

Kroin: Dermatology consolidation has been occurring for the last 10 to 12 years, and the evolution really started with medical dermatology practices ultimately trying to build economies of scale. Throughout the last several years, the medical dermatology consolidation has expanded to cosmetic dermatology, and more recently to medical aesthetics, medspas, and plastic surgery. As these large players continue to grow, they continue to try to identify ancillary services that allow for the continuum of care for the patient across the spectrum of dermatology. At the same time, we have seen several groups that are private equity backed merge with other platforms. Platinum Dermatology merged with West Dermatology. Water’s Edge Dermatology merged with Riverchase. QualDerm and Pinnacle came together. These platforms saw an opportunity to stop competing in similar markets and tackle the markets together.

We have seen second sales, such as when Sheridan Capital Partners-backed Dermatology of Central States was sold to SkyKnight Capital. Forefront Dermatology went from OMERS Private Equity to Partners Group. Epiphany Dermatology was sold to CI Capital Partners and then ultimately went to Leonard Green & Partners. These scenarios have brought a new, fresh level of capital into dermatology, as well as the thought process around continuing to scale with other services being tacked on to medical dermatology. As a result, even with higher interest rates and inflation, we’re still seeing dermatology more competitive in terms of going after nice, scaled assets than in other specialties.

HOW WOULD YOU DESCRIBE THE INDEPENDENTLY PRACTICING COMMUNITY’S PERCEPTIONS OF PRIVATE EQUITY? ARE EFFORTS BEING MADE TO CHANGE PERCEPTIONS?

Kroin: Just like in any industry or sector, there are good private equity groups that really focus on empowering physicians and providing resources while allowing the physician to practice medicine the way they have historically. There are also scenarios in which private equity groups with limited experience in healthcare think that they can tell the doctor what to do. For the most part, the good private equity groups are really delineating themselves from the rest. At the same time, we are at a stage in their evolution that I refer to as private equity 3.0, where keeping as much control as possible at the local level is a priority for the best groups. That includes schedules, vacation days, support staff, their templates, where they’re practicing, etc. Maintaining that level of control at the local level allows them to practice medicine the way they are accustomed to.

The second part, of course, is resources, and that is where each practice is different. The ultimate question is: Why are you doing this transaction?

Is it because of succession planning? Is it because you no longer have the capacity to deal with all the headwinds of labor, debt, skyrocketing interest rates, etc, and you need help from a capital perspective? Do you need help recruiting, or with revenue cycle? What has transpired over the last 3 to 5 years, is that, when an independent practitioner or group sees the details in a contract at the private equity level, they are pleased that they can still retain control at the local level from a clinical perspective. If they can benefit from a resource perspective in fighting the headwinds coming their way within dermatology and healthcare, it ultimately leads to a successful transaction. A dermatology group I spoke to recently told me that they were completely against private equity 6 or 7 years ago and were waiting for it to all go down the drain, but at the end of the day, we are not seeing that. Many doctors are now choosing to explore the private equity option, wanting to see it for themselves before making assumptions. The evolution is quite interesting as the doctors who have historically been more against private equity have become more open-minded and willing to look at it themselves versus hearing what their neighbors have to say.

Of course, I will be the first to admit that from a practice perspective, not all practices make sense for private equity. That is the key delineation that needs to be identified. Each practice owner needs to explore for themselves and come to their own conclusion. It’s OK if private equity doesn’t make sense for your practice, but it doesn’t mean that all independent groups view private equity as bad.

WHEN YOU TALK ABOUT WHETHER IT MAKES SENSE FOR EACH PRACTICE, ARE THERE DIFFERENT PRIVATE EQUITY MODELS OFFERING, PERHAPS, DIFFERING LEVELS OF AUTONOMY OR RESOURCES?

Kroin: Not all private equity groups are created equal. Every group has its own angle and approach. Some allow you to have more autonomy whereas others have a structure that’s more corporate, and the best fit depends on where each practice fits within the spectrum. You might want to be left alone and pick from a menu of options for resources, or you might really need help. You might be toward the end of your career and need someone to help with administrative duties and revenue cycle, and really take over. Depending on the group, you can explore all of that. The beauty now in terms of exploring private equity today versus even 5 years ago or 10 years ago is the fact that there’s an opportunity to evaluate the track record of each group to make an educated decision based on statistics and references, to really ensure that you’re betting on the right force to achieve your goals and succession plans.

DOES THE CONSOLIDATION BROUGHT ON BY PRIVATE EQUITY PRESENT AN OPPORTUNITY TO DRIVE CHANGE IN VARIOUS WAYS IN THE PROFESSION, SUCH AS INSURANCE REIMBURSEMENTS AND MEDICARE, OR EVEN RESEARCH?

Kroin: From a hospital perspective and a payer perspective, we continue to see consolidation within the hospital systems with multibillion-dollar organizations. Payers continue to post their most profitable quarters. Those two categories continue to have leverage against the independent practitioner. Private equity can allow you to have a backbone and perhaps achieve economies of scale to fight the insurance companies and ultimately address and renegotiate your rates based on inflation. It just needs to be structured the right way to provide a backbone for independent practitioners by supporting them across purchasing, renegotiating with payers, revenue cycle, and everything in between.

From a go-forward perspective, sharing best practices and affiliating with like-minded high-performing peers is a major benefit as well. We recently worked with a doctor who was very focused on expanding her clinical research program. She was constrained by having only a couple locations and a half-dozen doctors. She evaluated private equity based on who could really support her clinical research program and perhaps expand it. The group she chose was very supportive of that. So, again, there are the good groups that continue to figure out ways to have practitioners under their umbrella share best practices and add their unique value. There are also groups that encourage being pioneers in technologies and devices. There are groups that really say, “If you have a thought around an initiative that you want to pursue, perhaps in research, let’s see how we can support it to help grow the field of dermatology and continue to move the advancement of medicine forward.” There are several private equity groups that encourage collaboration and thought leadership. They encourage being pioneers and thought leaders because that only enhances their brand and reputation.

WHAT IS THE BIGGEST TAKEAWAY IN THIS DISCUSSION?

Kroin: It is a very interesting time within dermatology because there are a lot of moving pieces. You have the scenario with the expansion of service lines within the core medical dermatology into cosmetics, medical spas, and plastic surgery. At the same time, a lot is happening with mergers and second or third sale events with new capital coming in. The biggest takeaway is that, if you are exploring or thinking about exploring private equity, it’s so important to be educated on what the deal looks like and ensure that you will be just as excited after the deal as you are before. Do your homework and understand the level of control you’ll maintain, the type of resources that they can provide, and what type of track record each group has. When we catch up with our clients two years after their partnership is consummated and ask “Would you do it again?” And the answer is a resounding yes, we know we’ve done our job.