How Private Equity Is Buying Up Dermatology Practices

Lucas: If you've had a skin check in the last couple of years, there's a decent chance the practice you visited is now owned, at least in part, by a private equity firm. Luna: I've definitely noticed more dermatology clinics sporting the same corporate logo around town. It's happening fast. Lucas: Fast is the word. Dermatology is one of the last big physician-owned specialties to get the PE roll-up treatment, and it's now in full swing. There are roughly 11,000 dermatology practices in the U.S., and the vast majority are still independent - single or small group shops. But the number of pe backed platforms has more than doubled in the last five years. Luna: So why dermatology? What makes it such an attractive target for private equity right now? Lucas: A few things. First, the demand is structural and growing. Skin cancer rates are rising, the population is aging, and cosmetic procedures keep getting more popular. Second, the business model is fantastic: high-margin procedures - think Mohs surgery, biopsies, injectables - and a lot of recurring revenue from chronic conditions like psoriasis and eczema. A mature dermatology clinic can run at 40 percent EBITDA margins or higher. Luna: Forty percent is really high for a medical practice. That's closer to a software company than a typical doctor's office. Lucas: Exactly. And the market is fragmented, which is the classic PE sweet spot. You can buy a platform practice - usually a larger, well-run group - and then tuck in smaller independent clinics over time, centralizing back-office functions, negotiating better rates with insurers, and capturing more revenue per patient through in-house labs and pathology. Luna: Let's talk about a specific platform. Which one should we focus on? Lucas: Let's look at U.S. Dermatology Partners. It's one of the largest pe backed dermatology groups in the country - it started as a single practice in Dallas and now has more than 200 locations across multiple states. It's backed by a firm called Revelstoke Capital Partners. Luna: And how does a roll-up like that actually work in practice? Take me through the steps. Lucas: Step one: PE identifies a high-quality anchor practice - usually one with a strong reputation, a solid referral base, and a physician owner who's willing to stay on as a partner. They buy a majority stake, often at 8 to 12 times EBITDA. The physician typically rolls over some equity and gets a second bite at the apple when the platform is eventually sold. Luna: So the founding doctor has an incentive to grow the platform. That's a pretty standard model in physician practice management. Lucas: Standard but with a dermatology twist. Because dermatology is so procedure-heavy, the economics of adding a new physician are really attractive. One study found that adding a dermatologist to a practice generates about $1.2 million in incremental annual revenue, with very low overhead because you're not buying expensive equipment the way you would in cardiology or orthopedics. Luna: That's a big number. And the PE firm can also push for more mid-level providers - nurse practitioners and physician assistants - to handle routine medical dermatology while the doctors focus on surgeries and cosmetic cases. Lucas: That's exactly what happens. The ratio of mid-levels to physicians often goes up after a PE acquisition. It's one of the main ways they boost margins. The counterargument is that it can change the patient experience - you might see a PA instead of the dermatologist you've been seeing for years. Luna: And that's a real tension. Patients want access, but they also want the expert they trust. Do we have any data on whether clinical outcomes change under PE ownership? Lucas: There's not a ton of peer-reviewed research yet, but a recent working paper looked at Medicare claims and found that pe owned dermatology practices performed more biopsies and more surgeries per patient, but didn't necessarily find more cancers. That raises questions about whether the financial incentives are driving volume. Luna: So the concern is that the profit motive could lead to over-treatment, or at least more procedures than medically necessary. Lucas: Right. And that's the fundamental dilemma with PE in healthcare. On one hand, these firms bring capital, management expertise, and scale that can improve access and efficiency. On the other, the pressure to hit return targets - typically 2.5 to 3 times their investment in 5 to 7 years - can create perverse incentives. Luna: And the exit is usually a sale to another PE firm or a strategic buyer. So the pressure doesn't let up. Lucas: Exactly. But let's be fair: many independent dermatologists are also happy to sell. They're facing rising administrative burdens, declining reimbursement rates from Medicare and commercial insurers, and the hassle of running a business. PE offers a way to cash out while staying on and practicing medicine without the headaches. Luna: So it's a rational choice for a lot of physicians. And the PE firms are competing hard for good practices now, which is driving up multiples. Lucas: Multiples have crept up from around 7 times EBITDA a few years ago to 10 or even 12 times for premium practices. That means the firms are betting on significant growth to get their returns. They're not just buying cash flows - they're buying a platform they can build. Luna: And that growth comes from tuck-in acquisitions, but also from expanding into adjacent services like pathology, which is a high-margin business that dermatology practices typically outsource. Lucas: Bringing pathology in-house can add 5 to 10 percentage points of margin. It's one of the first things PE firms do. They also invest in marketing - digital ads, SEO, branded content - to drive patient volume. A single practice might have relied on word of mouth; a pe backed group can spend aggressively on patient acquisition. Luna: So if you're an independent dermatologist watching this, what do you do? Sell now? Stay independent? Partner with a hospital system? Lucas: That's the question on everyone's mind. Hospital systems are also buying dermatology groups, but they often pay less and may restrict physician autonomy more than PE. The smart independents I've talked to are either consolidating with peers to gain scale before selling, or they're doubling down on a niche - like pediatric dermatology or advanced Mohs surgery - that's harder for a platform to replicate. Luna: It really feels like a window that's closing. In five years, the landscape might look completely different. Lucas: And if today's conversation helped you think about your own practice or investment strategy in a new way, that's exactly why we do these shows. The Buyout Show stays ad-free because listeners like you support it - you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep these deep dives coming. We really appreciate it. Lucas: So back to dermatology: the key takeaway is that PE is betting on secular demand and operational improvement. Whether that bet pays off for patients and physicians - not just investors - is still an open question. Luna: And one that we'll keep following. Thanks, Lucas. Lucas: Thanks, Luna. That's all for this episode of The Buyout Show.