Private Equity Swallowing Ortho Practices

Skeptics

But there are skeptics.

Marni Jameson Carey, executive director of the Association of Independent Doctors, a nonprofit trade association that represents more than 1,000 doctors in 33 states, says the private equity folks “… don’t have medical licenses to lose; they didn’t take any Hippocratic oaths. They are in it for the profit. And Americans are going to pay for it, either with their health or their finances or both.”

The trend to acquire dermatology practices by private equity in the 1990s, reports MarketWatch, “sent valuations sky-high.” But some of the largest groups declared bankruptcy. Doctors today are seeing parallels. One private-equity-backed group, DermOne Dermatology, closed a number of offices earlier this year, selling others to another dermatology group.”

Sailesh Konda, M.D., an assistant clinical professor of dermatology at the University of Florida, said dermatologists “… are complaining of a constant pressure to see more patients with less resources, and that’s a constant overarching theme.”

Konda, an avowed opponent of equity firm acquisitions of medical practices, estimated that just under 1,000 dermatology offices are affiliated with private-equity-backed groups in the U.S., employing about 1,100 dermatologists and about 750 nonphysicians like nurse practitioners and physician assistants. Dermatologists make up just 1% of U.S. doctors, but have been the target of 15% of all recent medical practice acquisitions by private equity, according to Konda.

Dermatology practices, like orthopedic practices, have many attractive qualities for private equity investors. They can both provide a lot of ancillary services. They can also sell company-branded products to patients, offer new services, and refer to in-house specialists, all of which serve as revenue streams.

In one 2016 example, Omers PE paid over 13 times EBITDA for Forefront Dermatology, which had previously been owned by venture capital and private equity firm Varsity Healthcare Partners, and ABRY Partners paid about 15 times Dermatology Associates’ expected $20 million in earnings to buy it (the company is now called U.S. Dermatology Partners). The firms did not respond to MarketWatch’s requests for comment or declined to comment.

Seems like nobody wants to talk.

In a recent JAMA Dermatology research letter, Jack Resneck, M.D., a dermatologist and professor at the University of California, San Francisco, wrote about “risks to the specialty, the profession, and patients that could be irreversible as independent practices are rapidly replaced by investor-owned conglomerates, commoditizing the treatment of skin disease.”

MarketWatch cites unnamed sources who work or have worked for venture and private-equity-backed practices who told them that “financial firms’ emphasis on profitability results in corners being cut and patient care suffering.” There was no substantiation of those claims.

The report alleged that many doctors reported pressure to meet production numbers for procedures, sell products and refer patients to in-house adjunct services.

Corporate Practice of Medicine

Technically, when private equity firms invest in medical practices, they are actually buying the practice management or support companies affiliated with the practices because a company running a doctor’s office, or what’s called the “corporate practice of medicine,” is illegal in about 40 states, though how that’s defined and enforced varies considerably, said Ropes & Gray partners Deborah Gersh and Neill Jakobe.

“There is no bright line, and there is no bright line from state to state,” Gersh said.

Given these cautions, what should private physician practices keep their eyes on as they consider an investment or acquisition by a private equity firm?