Private equity in dermatology: A cloud on the horizon of quality care?

Abstract

In this edition of the Journal, authors from the United States (US) and Denmark tell a cautionary tale of the entry of private equity (PE) into the field of dermatology practice in the United States.¹ The last 10 years has seen a growing interface between external investors and dermatology clinics in North America. This represents a departure from the traditional model of physician-owned and operated practices, still the norm in Europe.

The administrative burden of managing all aspects of a dermatology practice may be onerous, and the prospect of being relieved of this an attractive one. A professional investment company may bring expertise in management, human resources, information technology and economies of scale that would be beyond the individual or small group practitioner. Investors may also bring capital to enable expansion of services and acquisition of new technologies. The clinician may be given the impression that they are freed from the burden of practice management to focus on patient care, and furthermore may even be financially incentivized to sell as a part-owner of a clinic.

However, the ‘dark side’ of this financial moon is the focus on profits that such investors bring to clinical enterprise. With a responsibility for returns on investment, the priority of PE is money-making, and not clinical or focussed on academic excellence and training.

A typical PE acquisition involves a series of short-term investments lasting perhaps 4–7 years. PE firms often consolidate clinics into chains and try to maximize profits, typically by making economies of scale or by cutting costs. The ultimate goal of the PE investor is to then ‘flip’, meaning sell, the business and make profits for shareholders. This focus on profits is illustrated by one study comparing 204 hospitals acquired by private equity between 2005 and 2027, and 532 control hospitals without PE backing, it was found that PE acquisition was associated with higher annual net income and higher hospital charges.²

This divergence of focus between clinicians and financial backers results in negative changes to practice, of which several examples are given by Oscherwitz et al. The most striking is a shift in the proportion of cosmetic work in PE clinics—40% compared to 20% in non-PE clinics. This reduction in time devoted to medical or oncological dermatology may yield a healthier balance sheet, but suggests that less clinician resource is being directed to patients with genuine need.

Staffing costs are one of the greatest areas of expenditure for dermatology practices. Those working in a PE clinic may face pressures to increase patient throughput, with shorter appointment times. Clinical work may be reallocated the less-qualified practitioners such as Physician Associates.³ This creates a double threat: first, a reduction in accuracy of diagnosis and treatment, in a hurried consultation; secondly, a pressurized clinic template with high volumes of patients may contribute to the risk of burnout.

While wariness at an individual and practice level about the possible consequences of engaging with private equity investors is one defence against the aforementioned dangers, legislative measures are another possible mechanism for regulation, and thus protecting patients. In the United States, politicians have raised increasing concerns, with active legal steps now being taken at both State and Federal level to scrutinize and control PE firms in their attempts to buy healthcare facilities. The challenge in Europe is that while it is growing, PE is not currently a common presence in the healthcare space. It is likely that the development of legislation will be reactive rather than proactive. Thus, the harms described by Oscherwitz et al. may be seen on this side of the Atlantic before legislative action is taken.

A white paper published by the American Antitrust Institute in 2021 on the soaring involvement of PE in healthcare concluded that the ‘PE business model is fundamentally incompatible with sound healthcare that serves patients’ and that the focus on ‘short-term revenue generation… destabilizes healthcare markets’.⁴ As part of the patient advocacy activity of dermatology organizations such as the EADV, we should be united as a community in defending the high quality of clinical care which we seek to uphold. We need to learn from the experiences of our neighbours.

Neither Dr Seaton nor Dr Walsh have any conflict of interests to declare.