Going to sell you your practice?

You know I am certain that we physicians are never going to be paid much more than we get paid right now. Now we may get occasional 0.5% increases from Medicare, but after no pay increase for 15 years and with the new unachievable payments for quality, I am not optimistic. So, I have been talking to corporate physician buyout companies, specifically amalgamators of dermatologists. I mean, in the words of the “Fat Man” in “The House of God,” who wants to pass up a “fortuna”?

I’ve finally figured part of it out. Who are these corporate groups and what are their business models? Why do these companies, usually backed by venture capital, pay a lot, sometimes millions, for dermatology practices that would have been bought by or assumed by a young dermatologist a few years ago?

In June 2017, as far as I can tell, there were 17 corporate dermatology groups out there employing about 1,200 “providers” which includes extenders, and there are several “models” of assimilation.

There are extremes on either end. The least invasive is the group that buys you for a dollar, hopefully has better insurance contracts, and charges you a percentage for billing and management of your practice. If you want, you can buy yourself back for a dollar. In this setting, you just have to keep a close eye on how expenses are calculated. And there is no guarantee that this group won’t sell out to venture capital in the future, so you have to be prepared to reassume control of your practice if you don’t want to be acquired along with the group.

Another category is what I call the bottom feeders, who set up multiple dermatology shopfronts manned by nurse practitioners and physician assistants, who are loosely supervised by a physician, often remotely, who may not even be a dermatologist. The only requirement is that they have a medical license in that state. This group will come to town and bid for all the dermatology work from managed care companies. Typically, they are happy to settle for 85% of Medicare payments.

The more common model is based on acquiring practices, then selling them to other venture capital groups for a return to other venture capital groups. Venture capital groups are behind all the corporate practice acquisitions except for one, which funds out of a personal fortune. They all view medicine, particularly dermatology, as a fragmented industry that they can consolidate for a profit.

The basic plan of these groups is to pay you five to eight times EBITDA (earnings before interest, taxes, depreciation, and amortization) up front, which works out to be about 2 or 3 years net profits. Usually, they want you to take at least 40% of your “buyout” as company stock, which they promise may appreciate greatly, but has no liquidity until they sell to another venture capital group and maybe not even then. The cash you receive can mostly be treated as capital gains if you negotiate it correctly, which will be taxed at 23.8% (the 20% tax rate plus the Affordable Care Act 3.8% supplemental tax, instead of 39.6%, the top current federal bracket.

Generally, their expectations are that you will get 40% of the practice income as salary, overhead will be 40%, and their profit is 20%. So their buyout is really a loan from them, which will be paid off in 5 years. Admittedly, the buyout will be taxed less than your current income, with a possible equity kicker when they flip the practice, which they hope to do three or four times! Also, be aware, the physicians who got in early and represent them get a piece of what you would have been paid (usually $50,000-$100,000 in stock) for recruiting you. There is a reason they are working the company booth at meetings! It’s “Amway for Dermatologists.”

The company then owns your practice, you are an employee, and you owe them at least 5 years of service. They put you on a salary, which is less than you made previously – and interestingly, the difference again usually pays their original investment off in 5 years, usually with some interest. If you are a younger physician who owns the practice, with a longer practice future, you should receive a higher percentage of your former income. If the company can “boost” your practice income, you could make as much as or more than you did before, but most of these outfits do not have better insurance contracts. Their “boost” is based on hiring more physician assistants or nurse practitioners, and having you supervise them.

Once you sell and are owned by the company, they strongly suggest (but do not require, which is illegal) that you send your dermatopathology to your fellow employee, in another state, whom you have never met and probably never will. They will also suggest you send your Mohs cases to a fellow employee you’ve never heard of, who comes to town a couple of days a month to perform the surgeries. They take over your human resources, including your policies and payroll, which may be good if you have overpaid cranky employees you just can’t bear to fire because they have been with you so long. They will standardize everyone’s pay and benefits. They take over your billing, and may be able to get you more reasonable health insurance, and will have a standardized benefit plan. If you need to buy anything for the practice, you will fill out a requisition form. Major capital purchases must be approved in advance.

Your contract will specify that you have to work, on average, at least as many days per year as you have the last 3 years. If you leave early, you will have to pay the money you received, plus penalties. In addition, you may have a 2-year, 20-mile noncompete agreement clause (although this is negotiable) around all sites they operate, anywhere in the United States. If you die, they have an insurance policy on you.

Young employed doctors don’t get the “buy out” or the equity, although they can “buy in” later. They become cogs in the wheel.

The groups then try to roll up as many practices as possible so they can resell the amalgamation to a larger private equity fund eventually for 10-15 times EBITDA if the group is large enough. Maybe so, maybe not, but I have a strong feeling this is not going to end well. These equity funds work with borrowed money, and want double their investment and profit in 5 years or less.

So who wins and who loses? The original dermatologists who fronted for the corporation or started the group will win big if they get their equity cashed out in time. The venture capitalists will win big, except for the last group which will be left holding the bag if interest rates shoot up, or dermatology reimbursements decline dramatically. (See “Time for dermatologists in nine states to start submitting CPT code 99024” ). The dermatologists selling the practice think they are winning big, but may have really just financed an upfront loan to themselves, unless they can liquidate their equity before the music stops. They also usually forget to add up their extensive legal and accountant costs. Young dermatologists lose big time, because they will never make as much in income, and will not enjoy the freedoms of running their own practice.

The biggest losers, however, are the patients. They become a commodity, to be pushed through the office, and will not enjoy the benefits of the best consultants, but instead will have to select from the employees of the company store.

Dr. Coldiron is in private practice but maintains a clinical assistant professorship at the University of Cincinnati. He cares for patients, teaches medical students and residents, and has several active clinical research projects. Dr. Coldiron is the author of more than 80 scientific letters, papers, and several book chapters, and he speaks frequently on a variety of topics. He is a past president of the American Academy of Dermatology. Write to him at dermnews@frontlinemedcom.com.


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