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Dermatology franchise groups expanding nationwide

Dermatology in the United States has traditionally been a small-office specialty. Even today, with a growing number of physicians practicing as employees, more than 60 percent of dermatology practices are solo or two-physician offices. Yet with a health care system in upheaval and a clear trend toward fewer young physicians hoping to open their own practices, a number of significant players in the health care industry are making bets on what they believe will be a big part of the future of dermatology: Practices that are owned and managed by a central entity.

The changing face of medicine

As reported in April’s issue of Dermatology World, only one in 20 dermatology residents (5.3 percent) plan to enter solo practice and only 13 percent of young physicians within eight years of residency currently practice in that setting. Increased administrative and regulatory burdens have been held up as the twin causes of this dramatic workforce shift, and as a result, groups like Maitland, Fla.’s Advanced Dermatology and Cosmetic Surgery have grown by leaps and bounds, both by hiring young dermatologists to fill new offices and by purchasing established offices from physicians who wish to either retire or significantly scale back their administrative responsibility.

The practice, run by dermatologist Mark Leavitt, DO, runs 50 locations in 10 states. It also has an exclusive contract with Humana in its home state, giving it a competitive advantage over other dermatology operations in the area. In February 2012, it was announced that Boston-based hedge fund Audax Group, which manages more than $5 billion in capital, had acquired Advanced Dermatology and Cosmetic Surgery for an undisclosed amount.

Apart from acquiring growing private practice companies, private equity has also shown interest in a model that resembles a franchise model, where a centrally managed group of industry experts purchases full or partial ownership of individual practices, taking a controlling stake but allowing the dermatologist(s) to remain with the same staff and run their offices as partners or employees. The two largest companies — U.S. Dermatology, based in Arlington, Texas, and Integrated Dermatology Group, based in Boca Raton, Fla. — are backed by private equity and investors. Practice management consultant David Wagener, president of Advanced Dermatology Management, Inc., said that dermatology has become increasingly business-focused in recent years. [pagebreak]

“What is happening is that there are certainly dermatology groups that are being run like businesses today, and there are business people leading the charge with a for-profit motive. Dermatologists are taking positions that are basically as employees in these organizations,” he said. “It’s a tremendously uncertain time — that’s for sure. I think that people aren’t prepared or don’t have the capital to put at risk and don’t want to add to their student loans and take on additional risk. As a result, they’re taking these positions.”

William Brady, senior manager of practice management resources at the American Academy of Dermatology, said that in examining the franchising option and the changing paradigm of medicine, it’s important to remember the historical context.

“This model has been around before, became popular for a time, and experienced some decline. Now, all of the sudden, it has crept back, Brady said. “Back then, you had HMO pressures, and here we have potential ACO pressures that may or may not come to fruition. It’s also important to note that there’s a parallel path with what’s happening with other medical groups, where you have hospitals essentially absorbing primary care and certain specialty practices by buying them out or arranging strategic alignments,” he added. “The growth of companies like U.S. Dermatology and Integrated Dermatology is certainly in response to health care reform and the need to build synergies by managing patient populations through effective care coordination and technology infrastructure.”

Brady said that for physicians nearing retirement or hoping for expansion, joining a large group practice may offer the most expedient route.

“Given current macroeconomic pressures in health care, I could see these physician practice management models being very compelling, especially to dermatologists in smaller practices who are on the verge of retirement or are looking for ways to grow but cannot attract a dermatologist to constitute a group,” he said. “The next best thing would be to find themselves folded into a larger network of practices to stay alive and stay competitive.” [pagebreak]

Selling control

While joining this shifting paradigm might seem a non-starter for some practitioners who value their independence and autonomy, growing front- and back-office demands on small practitioners have made many physicians reconsider their stance over the last couple of years, according to Jeff Queen, managing member of Integrated Dermatology.

“The reality is that we all know that there are changes on the horizon in health care. No one quite knows what that’s going to be, and of course 60 percent of dermatologists are in solo practice today,” Queen said. “Organizations like ours have all the benefits that a group provides you, but the autonomy of being a solo operation. Our pitch to physicians interested in joining our group is focus on what you love and what you’re best at. Let us take care of the back office.’ These are some of the main things that are causing people to join — the security of the group and the autonomy of running your own practice.”

In addition to the administrative help, large groups also allow dermatologists to purchase supplies through the group at rates comparable to a hospital’s, and many provide cloud-based practice management and EHR software as part of the contract. While different groups offer different services to partner or employee physicians, they all revolve around selling dermatologists the idea that there will be more time for patients and family and less time with paperwork and billing.

The arrangement can resemble a traditional small-business franchise, according to dermatologist Lucius Blanchard, MD. He runs Las Vegas Skin and Cancer Clinics, a 30-practice group, and knows the franchise model from his history as a franchisee for both Baskin-Robbins and Subway.

“There are so many differing state regulations that rule out some of the traditional aspects of franchising, but there is definitely a trend to do something resembling franchising in medicine,” Dr. Blanchard said. “Very soon, there’s going to be some big company that comes in and become the U.S. Oncology Group or the 21st Century Group of dermatology and starts to roll up all these little practices into corporate ownership.” [pagebreak]

A number of groups are expanding rapidly toward the goal Dr. Blanchard describes. According to Queen, Integrated Dermatology plans to purchase 100 dermatology practices in 2012 and replicate that number each year through 2016, with the stated goal to become the largest dermatology provider in the country. While graduating residents previously found interviews through medical school mentors or recruiters, dermatologists seeking employment can now find positions through hedge fund job boards, too.

For physicians pondering a lighter workload or retirement, selling to a group that will continue to manage the practice may prove an attractive option. Rather than having to entice a buyer or a partner with five or six other job offers to consider, the physician can cede control either fully or partially and know that the patients and staff will not suffer from any disruption of continuity, Queen said.

“Once that doctor retires, we’ll source a new board-certified dermatologist to step into their shoes. The practice has an immortality built into it with us,” Queen said. “The doctor knows their patients and staff will be well taken care of. The problems with succession planning that dermatologists have today go away.”

Taking direction

While the administrative burden may lighten on physicians who join large multi-practice groups, the locus of control for the practice moves at least partially outside the dermatologist’s office. One major source of revenue for these organizations is pathology, so dermatologists with close relationships with an outside reference lab or pathologist may find themselves needing to adjust to the in-house lab process. The topic also brings up questions about the Stark Law and the legality of such an arrangement, though Dr. Blanchard said that larger organizations such as these are very careful to clear such contract measures with legal counsel. [pagebreak]

“Because of the Stark Law, it can be difficult to require a doctor to purchase supplies or pathology by contract. They don’t allow you to have those kind of contracts in place because of anti-competition,” Dr. Blanchard said. “At our practice, we’ve asked our attorneys to look into ways to enter into that arrangement and still be in compliance [with both federal and state laws]. There are a great deal of regulations and laws that vary state to state, but that’s why I have so many attorneys advising the practice. We let doctors be doctors.”

In addition to pathology, many of the organizations bolster a practice’s bottom line through the addition of more services or a full Mohs surgery facility, and through increased negotiating leverage with insurance providers.

“We have in-house general counsel negotiate insurance contracts, and we do set up a full Mohs lab in almost every practice if there’s enough potential in the area, to help the doctor make more money,” Queen said. “We bring in ancillary services that might not have existed in the practice before, and the doctor gets to benefit from those additional fees. Let’s start by acknowledging that if you’re used to doing something a certain way, there will be an adjustment period. The change is minimal in the sense that if you were practicing pretty close to our method, there’s not a lot of change required. If you were kind of far off, then the change is appreciated because it’s bringing you closer to best practice.”

Another significant consideration for physicians moving to sell and remain at a practice is that nearly all of the groups require the use of not only the group’s practice management platform, but also some form of certified EHR. Physicians who join Integrated Dermatology, Queen said, typically use the company’s EHR and practice management system, and find that it helps increase the efficiency of patient encounters. The message to physicians, he said, is that the future of medicine lies in electronic record keeping. [pagebreak]

“As far as going from paper to electronic, show me any industry today that’s still on paper. Medicine’s one of the few areas today that is paper, and one of the beautiful things about our system is that instead of slowing dermatologists down, we find that it actually speeds them up,” Queen said. “They spend less time having to do paperwork in the practice. If we take it so that you’re finished and signed out at the end of your day, we’ve done a good thing. You can either go home a little earlier than you’re used to or see an extra couple of patients, depending on if your motivation is additional income or additional quality of life. The training that’s involved is directly rewarded with results.”

Dermatology’s future?

While many health care companies attempt to understate the change they hope to bring to the practice of medicine, Queen makes no attempt to hide Integrated Dermatology’s view that the specialty will be going through extraordinary change in the coming decades.

“Our philosophy is that dermatology can’t stay a solo specialty going into the future. My crystal ball’s only as good as our vision, and we don’t know any better than anyone else what the future’s going to hold, but judging from the general health care environment, we feel that there will be changes in the specialty of dermatology,” he said.

Though dermatologists have, in the past, been largely defined by their independence, Brady said that professional psychologies can prove surprisingly adaptable to large-scale changes. [pagebreak]

“Historically, dermatologists have been outside the orbit of hospitals and large care organizations, and are very entrepreneurial and self-motivated. They’ve had little need to rely on a structured top-down environment,” Brady said. “Even given that, it doesn’t mean that they’re frozen in time. Psychologies can evolve and the current model is about how a team can effectively deliver care. To that extent, you can say that for dermatology, the challenge is to find a spot on that team.”

Dr. Blanchard takes a different view, acknowledging that this new model will continue to grow, but also maintaining that physicians are naturally predisposed to aspiring toward leadership roles in their daily lives.

“It’s never going to be the [only] operating model for dermatology, because dermatologists have too many opportunities on their own, too many other options. I think it will become a niche market for some areas and some providers,” Dr. Blanchard said. “Doctors like to be independent, and are used to being important and in charge. They like to be in charge of what they consider their operation.’ But there’s going to be growth in these groups, no doubt about it. It’s going to be fun to see what happens in the next 10 years. Dermatology’s a great field to be in.”

Going national

Over the past five years, a number of large group practices have expanded throughout the country. Below is a map of the current state-by-state presence of some of the largest dermatology groups, which will serve as a framework for their expansion in the coming years.



Going national