Private equity groups purchasing dermatology practices

[sawtella]

What is everyone's take on this? It seems like it's getting pretty big in the South, but you also have Frontier Dermatology in Wisconsin, along with a few other larger groups in the East coast. I see the draw: more leverage in negotiating reimbursement rates, being able to buy supplies and equipment in bulk, etc. However, you lose the ability to become a true partner at a practice and instead are given the option of buying stocks into the parent company.

One of the practices I am considering is on the verge of being purchased by one of these groups, so I'm not sure what to make it. The other practice I'm considering is a large physician-owned MSG that pays on a wRVU model (which I'm not a fan of), but the general dermatologists still seem to be reimbursed very well.

Any advice from the senior residents/attendings would be greatly appreciated!

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[doctalaughs]

What is everyone's take on this? It seems like it's getting pretty big in the South, but you also have Frontier Dermatology in Wisconsin, along with a few other larger groups in the East coast. I see the draw: more leverage in negotiating reimbursement rates, being able to buy supplies and equipment in bulk, etc. However, you lose the ability to become a true partner at a practice and instead are given the option of buying stocks into the parent company.

One of the practices I am considering is on the verge of being purchased by one of these groups, so I'm not sure what to make it. The other practice I'm considering is a large physician-owned MSG that pays on a wRVU model (which I'm not a fan of), but the general dermatologists still seem to be reimbursed very well.

Any advice from the senior residents/attendings would be greatly appreciated!

It's great for the partners who are selling out if they are towards the end of their careers (likely will get a load of cash and only a modest reduction in their salaries for the last few years of their careers).

It's a terrible deal for the non-partners and young dermatologists who likely won't take much of a cut in these "buyouts." In addition, loss of control of your practice means you might be pushed to see more patients, reduce your salary etc in the future.

 

[asmallchild]

What is everyone's take on this? It seems like it's getting pretty big in the South, but you also have Frontier Dermatology in Wisconsin, along with a few other larger groups in the East coast. I see the draw: more leverage in negotiating reimbursement rates, being able to buy supplies and equipment in bulk, etc. However, you lose the ability to become a true partner at a practice and instead are given the option of buying stocks into the parent company.

One of the practices I am considering is on the verge of being purchased by one of these groups, so I'm not sure what to make it. The other practice I'm considering is a large physician-owned MSG that pays on a wRVU model (which I'm not a fan of), but the general dermatologists still seem to be reimbursed very well.

Any advice from the senior residents/attendings would be greatly appreciated!

I dislike it. Having worked for one (not Frontier), I can say there is more leverage in negotiating reimbursement rates but not the earth-shattering numbers they promise you during recruitment. I will say the ability to request and almost always receive any supplies and equipment (including lasers) is a benefit. I'm not as economically savvy as many others out there but the thought of being relegated to employee status working for these large groups is probably a detriment to the specialty (as it appears to have been for so many other specialties experiencing this sort of consolidation).

The biggest drawback is that the private equity group is very upfront as to why they are getting into medicine. There is constant pressure to fill the gaps in your schedule, perform more biopsies, excise things that I would ordinarily not excise, close defects in a manner where I normally wouldn't employ a graft/flap, and the list goes on and on. These groups are often known to float very high salary numbers to recently graduated dermatologists but you'll soon find the only way to maintain that kind of income when you inevitably get switched to a productivity model is to practice medicine the way they want you to practice, not necessarily in a manner that is best for the patient.

 

[smartparts]

I dislike it. Having worked for one (not Frontier), I can say there is more leverage in negotiating reimbursement rates but not the earth-shattering numbers they promise you during recruitment. I will say the ability to request and almost always receive any supplies and equipment (including lasers) is a benefit. I'm not as economically savvy as many others out there but the thought of being relegated to employee status working for these large groups is probably a detriment to the specialty (as it appears to have been for so many other specialties experiencing this sort of consolidation).

The biggest drawback is that the private equity group is very upfront as to why they are getting into medicine. There is constant pressure to fill the gaps in your schedule, perform more biopsies, excise things that I would ordinarily not excise, close defects in a manner where I normally wouldn't employ a graft/flap, and the list goes on and on. These groups are often known to float very high salary numbers to recently graduated dermatologists but you'll soon find the only way to maintain that kind of income when you inevitably get switched to a productivity model is to practice medicine the way they want you to practice, not necessarily in a manner that is best for the patient.

well said

 

[Balderdash]

Doctors lose control. The bottom line, not the patient, becomes the priority for the business, your path and Mohs goes to people the company decides on, they decide which EMR you use, they tell you how many patients you have to see, they tell you when they don't need you anymore...You can see where I'm going with this.

Ask any dentist who has joined the big box groups around the country if they like where they are. Sure, these places offer better starting deals but that's it. After the initial contract, your ceiling and your freedom to practice how you deem best are lost.

Frontier et al represent one of the biggest threats to the practice of dermatology. Private equity folks, much like casinos, don't get rich on bad deals.

 

[MOHS_01]

Do you mean Forefront? There are two large groups actively seeking acquisitions in my area right now -- ADCS out of FL and Forefront out of Wisconsin; both enjoy PE backing but represent very different business models. I can't say that I am a fan of either, really, for the long term -- but as has been noted above, for those able to cash out it is quite attractive. Their ability to negotiate better reimbursement rates will be increasingly limited over time in all likelihood... so I do not see the long term viability of their model for any significant return to the PE firms outside of getting ignorant (dumba**es, really) to work for less than they rightfully should earn. Yes, there will be some who gladly trade income and autonomy for a false security blanket -- but I say let them aggregate that population so as to get them away from the driven. Heh.

 

[MOHS_01]

Bump....

The practice management side of Forefront has been sold to a Canadian pension fund for a 10x multiple.... welcome to the world of corporate wage slavery, my short sighted friends.

 

[username456789]

Bump....

The practice management side of Forefront has been sold to a Canadian pension fund for a 10x multiple.... welcome to the world of corporate wage slavery, my short sighted friends.

Yup, saw that a couple weeks ago. Pretty not good.

 

[sam2222]

Does anyone have a complete list of these big groups?

 

[Solodyn]

The whole Private Equity and Corporate practice of dermatology is a pyramid scheme. It is a classic "next fool" theory under a different meme. I have met with many of the major groups about my practice and that is the conclusion I come up: It is a bad deal for me.

I will discuss a hypothetical example -
The Pension funds manager is happy with 10-12% return. Starting a new derm practice, if you know what you are doing at the right location, can give you 100%-200% return. So now, I have a local derm group (Advance Derm, Forefront, etc.. I don't care) who has let's say 10-12 clinic in the certain state, figure that I will sell my 80-100% return profit and loss statement to get a Private Equity Pension Fund to invest into my company. So now Pension fund manager just gave me 50-100 Million to replicate my model to get my return. Since I got the money... I need to spend it. I can't setup a new clinic and market for patient fast enough to satisfy the Pension fund manager's appetite... so the best way to do this would be to buy existing practice. By buying existing practice, you eliminate a local competition and have immediate cash flow at the same time. But it is not as efficient as a brand new practice with a caring owner. So rather than 80-100% return, the newly acquired practice may only give us 30% return. Nonetheless, 30% return is still higher than the standard Private equity/pension fund's return expectation. So I still come out a hero.

Meanwhile, I will entice more practice owners to sell to me with the stock buyback and promise of equity growth when there is another round of private equity fund injection. So the practice owner will sell their practice to me and I can count on them running the practice because they now are small share owner and have skin in the game.

My private equity owned derm group may experience decrease in profit... dropping 20%-25% annual return with all the practices I purchased. With all the heterogeneous natures of different practices, the efficiency and profitability will suffer. The return is no longer stellar. However, even at 20% return, it is still a very good private equity firm investment. Especially after many practice has been bought and the portfolio got so big, it makes my derm group enticing for a even bigger private equity firm to buy me out to get a 20% return on larger share of the pie.

My derm group is now having so much money to spend... and if I don't spend it, the illusion and pyramid will crash. So I need to buy more practices, offer more multiples, and get more practice sellers to take the stocks rather than cash with promise of future rounds of buyouts. The profit return will drop, my physicians autonomy lost, and patient care compromised.. but that will no longer be my biggest concerns. I need to buy more practices in order to flow this boat....

One day, when the profit of my derm group is no longer enticing and no more private equity firm is buying it out, I would have already made out like a bandit with new owners holding the bags....

Given above scenario, we are better off as practitioners to keep our own small practices. There is no price you can put on autonomy. If you have a your own practice and you really care for your practice and your patient, you can keep the entire return of 100%-150% with your own mid level and cosmetic. There is no reason to sell to another company and tie your practice asset into the stock of huge derm group.

 

[doctalaughs]

Interesting. My practice has been approached but we never seriously considered it. Do the private equity mega-groups have significantly better negotiated rates with insurance (I thought that was how they increased profit)?


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[Solodyn]

All the private equity owned practices tries to buy your practice on 3 selling points. These are illusionary unless you are running a financially-poor practice. Am efficient practice owner can expect 100-200% return of initial investment depending on the efficiency and cutting overhead. Therefore, even a dermatologist with poor business sense can do a 40-50% return of investment because the practice of medicine requires no "inventory". The Inventory is the physician's medical knowledge and procedures generally have low consumables.

The selling points are as follows... as to why these private equity derm practices will say they will do better than you can.

1. Contract negotiation - they are larger group so they will get better reimbursement rate than you do. So if you sell to them, it is a win-win.

This is NOT true most of the time. Many of dermatologists depend on Medicare (and various associated MCO) to upward to 50-75% of our patient volume. A successful practice simply is not an acne or pediatric derm practice. There is no negotiating of rate on anything remotely related to Medicare. You get 100% Medicare allowable rate and you are lucky if you don't get less when MCO is involved. Same goes for Medicaid and its related MCOs. In many markets BlueCross simply will NOT negotiate rates. To join the large group and if they truly are as good as they say, you will look at increase in reimbursement 2-3% in most practices, if at all. I simply don't see them increase my profit by 30-50% on contract negotiation alone. It is simply not happening post-Obamacare

2. Better Billing to get more return - They have centralized billing practices arm to get you paid for all your hard work.

There are physician out there who don't get paid for their work because they suck at billing or just outsource billing and never ask questions. For those practices, it is true that a better billing practice can get you more revenue. However, I am assuming that most of dermatologists who run their own practice will put in some diligence in their billing. In that case, I question an outside billers will really do that much better job. You have no control over the who the outside billing company will hire to handle your claims. For all you know, it could be some high school grad with some training and who couldn't care less about your practice. If you run a lousy practice to begin with, you may benefit from this reasoning. But if you run a good profitable practice to begin with, you are not getting that much more, if any, in return.

3. Centralize Administration of employees and discount supply acquisition through group purchase.

Centralize administration of employees means they take over your autonomy and your former employees no longer fear you or respect you as a boss. You may find your former staff fired and replaced by cheaper staff who disrespect you. You have to show up at 8am and can longer dictate your schedule. The practice you have sold may decrease HR overhead at the expense to your practice environment. Decrease overhead through group purchase is not going to that great, if at all. There are already existing Group purchase contract for independent medical practices. McKesson is not going to give away supply just because you are with Forefront. They maybe 2-3% saving but not going to turn your practice around.

I agree with the previous statements that selling the practice is good for retiring guys who want to monetize their practice quickly and get out. Those are the ones that are happy selling. If you are younger than 50, it is unlikely a good deal for you. They will try to sell you the idea of "second bit of apple", but you are better off and running an efficient practice at 100-150% return than to hope for what other people will do for you and be part of their pyramid scheme.

 

[reno911]

I agree with most of what solodyn said, but selling to a PE group is a great idea for some people. Especially older derms who want to cash out. If you're nearing retirement there is no way you are going to get another dermatologist to pay you what a PE-backed group would to take over your practice.

If you're younger, then it's probably a bad deal. Unless you're really terrible at or hate the day to day aspects of running a practice. A lot more such people exist than I used to think. I can understand that people may not find practice management fun, but as bad as it is, being your own boss is far better than being an employee.

 

[Ericslv]

The whole Private Equity and Corporate practice of dermatology is a pyramid scheme. It is a classic "next fool" theory under a different meme. I have met with many of the major groups about my practice and that is the conclusion I come up: It is a bad deal for me.

I will discuss a hypothetical example -
The Pension funds manager is happy with 10-12% return. Starting a new derm practice, if you know what you are doing at the right location, can give you 100%-200% return. So now, I have a local derm group (Advance Derm, Forefront, etc.. I don't care) who has let's say 10-12 clinic in the certain state, figure that I will sell my 80-100% return profit and loss statement to get a Private Equity Pension Fund to invest into my company. So now Pension fund manager just gave me 50-100 Million to replicate my model to get my return. Since I got the money... I need to spend it. I can't setup a new clinic and market for patient fast enough to satisfy the Pension fund manager's appetite... so the best way to do this would be to buy existing practice. By buying existing practice, you eliminate a local competition and have immediate cash flow at the same time. But it is not as efficient as a brand new practice with a caring owner. So rather than 80-100% return, the newly acquired practice may only give us 30% return. Nonetheless, 30% return is still higher than the standard Private equity/pension fund's return expectation. So I still come out a hero.

Meanwhile, I will entice more practice owners to sell to me with the stock buyback and promise of equity growth when there is another round of private equity fund injection. So the practice owner will sell their practice to me and I can count on them running the practice because they now are small share owner and have skin in the game.

My private equity owned derm group may experience decrease in profit... dropping 20%-25% annual return with all the practices I purchased. With all the heterogeneous natures of different practices, the efficiency and profitability will suffer. The return is no longer stellar. However, even at 20% return, it is still a very good private equity firm investment. Especially after many practice has been bought and the portfolio got so big, it makes my derm group enticing for a even bigger private equity firm to buy me out to get a 20% return on larger share of the pie.

My derm group is now having so much money to spend... and if I don't spend it, the illusion and pyramid will crash. So I need to buy more practices, offer more multiples, and get more practice sellers to take the stocks rather than cash with promise of future rounds of buyouts. The profit return will drop, my physicians autonomy lost, and patient care compromised.. but that will no longer be my biggest concerns. I need to buy more practices in order to flow this boat....

One day, when the profit of my derm group is no longer enticing and no more private equity firm is buying it out, I would have already made out like a bandit with new owners holding the bags....

Given above scenario, we are better off as practitioners to keep our own small practices. There is no price you can put on autonomy. If you have a your own practice and you really care for your practice and your patient, you can keep the entire return of 100%-150% with your own mid level and cosmetic. There is no reason to sell to another company and tie your practice asset into the stock of huge derm group.

This is a good explanation of the process.

If you have one practice and are thinking of selling keep a few things in mind.

1. Are you older? If so you may be able to get your next 3 to 5 years of profit within a couple of years and retire earlier.
2. If you are mid career you will most likely lose in this case because you can make more if you stick it out. Just because they have an office next door to you does not mean they are going to put you out of business. You will have to strengthen your customer service and referral base.
3. If you are just getting started, Start your own if you can afford it. Become the expert and keep your autonomy.

At all stages you have one things that will keep the corporate guys in check. Dermatologist are hard to come by and the only way to open new offices is to have more of them or for them to buy existing practices.
Lets say an existing practice has 4 derms with 2 partners. If the partners sell they will have to be able to keep the to employees. What happens if the two employees move across town outside of the non-compete and open their own? Now the partners are working twice as hard until they fill the void. The two employees that are now owners will work hard to build their own.

Small practices will have a harder time negotiating contracts and higher pay but still will stay independent.

It's a real threat that will require you all to be better businessmen and team up to negotiate rates.

 

[845500]

The whole Private Equity and Corporate practice of dermatology is a pyramid scheme. It is a classic "next fool" theory under a different meme. I have met with many of the major groups about my practice and that is the conclusion I come up: It is a bad deal for me.

I will discuss a hypothetical example -
The Pension funds manager is happy with 10-12% return. Starting a new derm practice, if you know what you are doing at the right location, can give you 100%-200% return. So now, I have a local derm group (Advance Derm, Forefront, etc.. I don't care) who has let's say 10-12 clinic in the certain state, figure that I will sell my 80-100% return profit and loss statement to get a Private Equity Pension Fund to invest into my company. So now Pension fund manager just gave me 50-100 Million to replicate my model to get my return. Since I got the money... I need to spend it. I can't setup a new clinic and market for patient fast enough to satisfy the Pension fund manager's appetite... so the best way to do this would be to buy existing practice. By buying existing practice, you eliminate a local competition and have immediate cash flow at the same time. But it is not as efficient as a brand new practice with a caring owner. So rather than 80-100% return, the newly acquired practice may only give us 30% return. Nonetheless, 30% return is still higher than the standard Private equity/pension fund's return expectation. So I still come out a hero.

Meanwhile, I will entice more practice owners to sell to me with the stock buyback and promise of equity growth when there is another round of private equity fund injection. So the practice owner will sell their practice to me and I can count on them running the practice because they now are small share owner and have skin in the game.

My private equity owned derm group may experience decrease in profit... dropping 20%-25% annual return with all the practices I purchased. With all the heterogeneous natures of different practices, the efficiency and profitability will suffer. The return is no longer stellar. However, even at 20% return, it is still a very good private equity firm investment. Especially after many practice has been bought and the portfolio got so big, it makes my derm group enticing for a even bigger private equity firm to buy me out to get a 20% return on larger share of the pie.

My derm group is now having so much money to spend... and if I don't spend it, the illusion and pyramid will crash. So I need to buy more practices, offer more multiples, and get more practice sellers to take the stocks rather than cash with promise of future rounds of buyouts. The profit return will drop, my physicians autonomy lost, and patient care compromised.. but that will no longer be my biggest concerns. I need to buy more practices in order to flow this boat....

One day, when the profit of my derm group is no longer enticing and no more private equity firm is buying it out, I would have already made out like a bandit with new owners holding the bags....

Given above scenario, we are better off as practitioners to keep our own small practices. There is no price you can put on autonomy. If you have a your own practice and you really care for your practice and your patient, you can keep the entire return of 100%-150% with your own mid level and cosmetic. There is no reason to sell to another company and tie your practice asset into the stock of huge derm group.

 

[845500]

You provided some helpful information. We are currently considering having a firm acquire our practice. Some of your points will be handy in our negotiations.

 

[MOHS_01]

Unless you are old / wealthy enough to have one foot out the door or are geographically mobile, it will not work out in your favor financially. It's a simple math problem...