The Roll-Up of Dermatology Clinics

03.05.21

When patients begged Dr. Amy Wechsler, a Manhattan-based dermatologist, to make secret trips to the Hamptons for cosmetic house calls, they saw nothing frivolous about their request. Just weeks into lockdown, patients lived in terror waiting for their natural face — sometimes a face not seen for decades by the outside world, much less by their significant other — to reveal itself once more. “As the trifecta of nail, hair, and skin businesses closed, many people suddenly saw themselves looking significantly more aged with graying hair, pronounced wrinkles, deflated midfaces, and jowling,” said one New York certified plastic surgeon. Whispers of “Botox speakeasies” surfaced on Instagram, and online call-out culture poised itself for the offensive.

Long-term filler users weren’t the only ones feeling exposed. The ubiquity of “Zoom-face” has left us all staring at angles so unflattering even Bloomberg created a guide for how to look more attractive on video calls. Dr. Ranella Hirsch, a Boston-based dermatologist, calls it the “watched pot” phenomenon. “Never in modern history have so many people had the collective time to stare at their faces up close,” explained Hirsch. “It’s impossible to underestimate how much looking at ourselves at less than flattering angles and lighting has impacted our sense of appearance.”

Dermatology, once a quaint profession best known by patients as “the mole doctor,” is suddenly a field with higher stakes. The transformation has been rapid: over the last decade, skincare replaced makeup as the crown jewel of the beauty industry at the same time that a skin cancer epidemic engulfed older Americans. Once a fractured market that had been left nearly untouched by the wave of ongoing medical consolidations, the majority of dermatologists still operated in solo practices (35%) or single-specialty groups (41%) as late as 2014.

But those numbers are swiftly eroding thanks to private equity buyouts. Today, an estimated 14% of dermatologists work for a private-equity backed practice, a number that is only expected to grow as strained independent operators reconsider their options. What’s driving the connection between skincare and private equity?

A Continuous Growth Market

Modern dermatology enjoys insatiable demand from a diverse range of age groups. As panicked patient phone calls revealed, the industry is generally recession-proof, although the initial wave of strict lockdowns threw a legal wrench into that dynamic. Dermatology is blessed with a happy mix of elective, cash-based procedures that allow for branding and direct-to-consumer marketing, while medical-based procedures provide a predictable cash flow.

Older patients, ruing the days they spent baking in baby oil, are driving a new wave of skin cancer diagnoses that eclipses all other cancer types combined. Melanoma, the rarest and deadliest skin cancer, has been on the rise for over thirty years, and basal and squamous cell carcinomas have seen a 250% increase since 1994. A single case of Mohs surgery — a complex procedure for removing certain skin cancers layer by layer — can net as much as +$1,100 in reimbursements from Medicare.

But younger patients are the real cash cows. Ever cognizant of the fat dissolving from their faces at the rate of one teaspoon per year, “prejuvenation” — the growing trend of young women having cosmetic procedures — is driving cash-based procedures. “There are younger, skin-savvy patients who come into my office saying, ‘I’m not going to get older; my skin’s not going to age,’” said Dr. Julia Carroll, a Toronto dermatologist. “They want to be ahead of it.”

Technology and Commercial Skincare Drive Demand

The invention of more natural dermal fillers — aka hyaluronic acid-based injections rather than bovine-based formulas — allows for a new level of convenience and repeat procedures. The dermal fillers market — whose end-user is divided between hospitals, surgical centers, dermatology clinics, and others — is expected to expand at a CAGR of 8.6% from 2018–2026.

Skincare ambitions have graduated beyond anti-aging and towards achieving “rich face” — a Kylie Jenner-inspired aesthetic whose exaggerated features suggest influencer status and wealth. “Patients in their 50s and 60s would never admit they got something done, but many younger women like to brag that it’s part of their beauty routine,” reported one dermatologist. “They post on social media that they just came from the dermatologist with a photo of them giving duck lips.” Still, the look requires a level of professional restraint. “If you’ve hit Daffy Duck doppelganger status, you’ve gone too far.”

Ironically, commercial skincare use is also driving new patients. Despite the average woman spending $2,900 per year on skincare and makeup, many customers resort to dermatologists after self-sabotaging their skin with a punishing 10+ step regime. “Patients will come in and tell me they have one kind of cleanser for the day, another for the night, toner, spot treatments, some sort of oil, some kind of antioxidant cream, a facial brush, which usually makes acne worse — just a ton of stuff,” said Dr. Rachael Cayce, a dermatologist at the Los Angeles-based DTLA Derm. “I see 30 patients a day, and I’m having this conversation with 15 of them. Usually what I’m doing is just decreasing their products.”

The Increased Shelter of A Large Group

Physicians have much to gain from entering a group practice. Small practices are vulnerable to price hikes for equipment, supplies, and insurance, a power imbalance that was only exacerbated by lockdowns. Prohibitive overhead demands a continuous inflow of patient fees to remain operating. After the first wave of COVID-19, McKinsey reported that over half of respondent physicians faced financial uncertainty. “I’m constantly thinking about how many more days I can stay closed without losing my practice,” confessed one physician during lockdown. “I have seven to nine types of insurance: rental, malpractice, workers’ compensation, employee disability.”

While total shutdown is no longer standard policy, many practices are still not operating at full capacity. “Even if you want to work a full day, you’re seeing patients at 30 percent capacity — 50 percent capacity at best if you have a large space,” the physician added. “If you’re doing it right, you will be suffering financially.”

Dermatologists most often turn to private equity to achieve financial stability and relieve themselves from the duties of back office minutiae. One doctor, Bruce Glassman, who sold his independent practice to Advanced Dermatology & Cosmetic Surgery (ADCS), the country’s largest dermatology practice, admitted that he was sick of doing paperwork. “[ACDS] had a tremendous infrastructure already in place, which many of the other companies did not have,” said Glassman. “ACDS offered the opportunity to practice medicine the way I always have, but I would be able to let them handle the human resources, let them handle the billing, let them handle the government regulations, let them handle all the compliance issues, and still continue running my practice and making my patients happy.”

How Does Private Equity Influence Dermatology?

Some criticize the impact private equity has on patient care and medical ethics. Dr. Coldiron, a dermatologist in Cincinnati, believes the drive for greater efficiency erodes clinical expertise. “Ads will say, ‘See our dermatology providers,’” he said. “But what’s really going on is these practices, with all this private equity money behind them, hire a bunch of P.A.’s and nurses and stick them out in clinics on their own. And they’re acting like doctors.”

The influx of less qualified clinicians performing primary care or annual exams is not unique to dermatology — it’s a wider trend prevalent in nearly every healthcare subsector outside of a few geographic areas that restrict their roles. Like many medical fields, dermatology faces a continued shortage of providers. The addition of PAs and NPs reduces wait times and expands care to a larger population of patients while cutting costs.

Consolidation can also improve care by increasing the level of expertise across the group. Junior doctors can consult with senior veterans, and capital-intensive resources can be shared. Some new technologies, including six-figure lasers, electronic medical record systems, and telehealth services, can amount to multiple mortgages per month that many individual practitioners simply wouldn’t be able to afford on their own.

Others cite unnecessary procedures used by PE-backed groups to milk insurance companies and defraud the government. “You can’t serve two masters,” said Michael Rains, a doctor who worked at U.S. Dermatology Partners, a big private-equity chain. “You can’t serve patients and investors.” Actually, you can, but only if incentives are aligned correctly. One 2020 white paper found that just 35% of dermatologists who worked in PE-owned practices were shareholders. If physicians still own 49% of a practice, they may be less likely to take off to the golf course at 10am on a Wednesday. On the other hand, if they’ve already sold off 90% of their equity and are just looking to cash in an early retirement check, they may have less interest in running an ethical practice.

This Too Shall Pass

Once restrictions are fully lifted, dermatologists can expect a steady lineup of Zoom-survivors eager to erase the accumulation of sun-damage and poor lifestyle choices induced by social isolation. Thanks to excessive drinking, reduced exercising, and maskne eruptions along the jawline, one dermatologist already reports patients returning for filler every five months instead of nine. “The skin is fighting an uphill battle right now,” she says. “The lack of regular 9-to-5 office hours and a need to get out of our confined spaces … meant more people were outside than ever before.”

But all hope is not lost. “Our skin will recover,” offers one practitioner. “And we will begin to look and feel like ourselves again.”

About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.