Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Dermatology Practices
Transcript
- Lucas: If you have a suspicious mole or a stubborn case of acne, the chances are growing that the practice you walk into is now owned, at least in part, by a private equity firm. Luna: I've definitely noticed more dermatology clinics popping up under the same brand names. A lot of them seem to have been acquired recently. Lucas: Right. And the pace has picked up dramatically. Between 2020 and 2025, the number of dermatology practices owned by private equity-backed platforms roughly tripled. One of the biggest players now is U.S. Dermatology Partners, which has rolled up more than 80 clinics since 2020. Luna: Eighty clinics in five years. That's a lot of integration work. What makes dermatology such an attractive target for this kind of consolidation? Lucas: It's a combination of predictable volume and favorable reimbursement. First, dermatology is heavy on elective, cash-pay procedures—cosmetic injections, laser treatments, mole removals. Those have high margins and aren't subject to the same insurance headaches as primary care. Second, the medical side—skin cancer screenings, psoriasis management—generates steady recurring visits. Patients typically come in once a year for a full-body check, and many need ongoing treatment. Luna: So you get the stability of recurring revenue plus the upside of discretionary spending. That's a nice mix for a PE model. Lucas: Exactly. And the reimbursement picture is actually better than in many other specialties. Dermatology procedures are often reimbursed under Medicare's physician fee schedule at rates that have held up relatively well. The average dermatologist generates around $700,000 to $900,000 in annual revenue per provider, with EBITDA margins of 20 to 30 percent. That's attractive compared to, say, primary care, where margins can be in the low teens. Luna: So a typical practice doing $2 million in revenue with $500,000 in EBITDA—that's a viable acquisition target for a platform. Lucas: Exactly. And the acquisition multiples have been pretty consistent. A platform practice—the initial acquisition that becomes the hub—usually trades at 7 to 9 times EBITDA. Then the add-on acquisitions, the smaller clinics that get rolled in, come at 4 to 6 times. The PE firm uses debt to fund the add-ons, levering up the platform's cash flows to boost equity returns. Luna: That sounds a lot like the dental roll-up model, but with higher margins and less insurance complexity. Lucas: It's similar, but dermatology has an extra advantage: the pipeline of new treatments. Biologics for psoriasis, new JAK inhibitors for eczema, and the explosion of cosmetic injectables like neuromodulators and fillers—these keep driving patient demand. The global aesthetic dermatology market was estimated at over $50 billion in 2025, growing at about 8 percent a year. Luna: That's a tailwind that can sustain a roll-up even if the economy softens a bit. People still want to look good and get their skin checked. Lucas: And that's the key. The model works as long as patient volume doesn't drop off. PE firms are betting that dermatology is relatively recession-resistant. You might postpone a Botox treatment, but you won't skip a skin cancer screening if you have a family history. And the cosmetic side—well, it's been remarkably resilient. Luna: I want to push back on that a little. Dermatology is a referral-based specialty in many cases. Patients come in because their primary care doctor spotted something. So isn't the PE model reliant on maintaining those referral relationships? And if the roll-up ends up squeezing margins on the medical side, could that affect quality or access? Lucas: That's a really good question. The data so far is mixed. Studies from 2024 and 2025 suggest that private equity-acquired dermatology practices do increase patient volume—they often add evening and weekend hours, and they invest in marketing. But some research has found that wait times for new patient appointments can actually increase, because the practices are trying to maximize the number of visits per provider. Luna: So the classic tension: more access in terms of hours, but less availability for the specific appointment you need. Lucas: Right. And there's concern about upcoding. Some investigations have found that pe owned dermatology practices are more likely to bill for higher-level evaluation and management codes. That's not necessarily fraud—it could reflect that they see sicker patients—but it does raise questions about whether the financial incentives are changing clinical behavior. Luna: So the model works on paper, but the real test is whether it can scale without eroding the trust that fuels those referrals. Lucas: That's exactly where the industry is right now. And on that note—one thing we hear a lot from listeners is that they appreciate we don't run ads on these shows. If you've found these breakdowns useful for your work or your investments, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep this ad-free and focused on the deals that matter. Luna: Yeah, we've heard from a lot of people in healthcare and private equity who say these episodes help them see the bigger picture. Even a small contribution goes a long way. Lucas: So back to the roll-up. One thing that could change the math is interest rates. The typical acquisition debt for these deals is structured as a floating-rate term loan. With the Fed holding rates at around 4.5 percent as of mid-2026, the cost of leverage is higher than it was in 2021. That means firms need to extract more operational improvement from each acquisition to hit their return targets. Luna: That's a big shift. In the low-rate environment, you could just refinance your way to higher returns. Now you actually have to improve margins. Lucas: Exactly. And that's leading to more aggressive management. Firms are pushing practices to standardize protocols, negotiate better supply contracts, and centralize billing. Some are even introducing proprietary teledermatology platforms to extend the reach of each physician. Luna: Teledermatology is interesting because it could amplify the scale benefits. One dermatologist can review hundreds of digital images from multiple clinics in a day. That improves utilization without adding headcount. Lucas: And it's becoming more accepted by insurers. Medicare permanently expanded coverage for teledermatology during the pandemic, and many commercial plans have followed. So the platform model can leverage that technology across all its clinics, which a standalone practice might not have the resources to build. Luna: But it also raises the barrier to entry for independent dermatologists. If you want to stay independent, you might need to partner with a teledermatology vendor or join a network. Otherwise, you're at a competitive disadvantage. Lucas: And that's exactly the dynamic that feeds more consolidation. The independents feel squeezed, and the pe backed platforms are ready to buy them. The question is whether the buyers will be able to exit at the multiples they're hoping for. Luna: What does the exit landscape look like for these platforms? Historically, they've sold to larger PE firms, strategic buyers, or gone public. With the IPO market still sluggish in 2026, are strategics the most likely buyers? Lucas: Strategics are definitely active. Large dermatology chains like Schweiger Dermatology Group and U.S. Dermatology Partners are backed by PE themselves, but they're also potential acquirers of smaller platforms. There's also interest from larger healthcare services companies like Optum and some hospital systems that want to own the full continuum of care. A sale to a strategic buyer at 10 to 12 times EBITDA is the most likely exit for a well-run platform. Luna: That's a decent multiple, but it's lower than the 14 or 15 times that dental platforms were fetching a few years ago. So the returns might be more moderate. Lucas: More moderate, yes, but still attractive. A typical deal structure: a platform acquired at 8 times EBITDA with 50 percent debt. Then add-ons at 5 times EBITDA, funded with debt. If the combined entity can grow EBITDA from, say, $10 million to $25 million over five years, and then sell at 10 times, the IRR works out to about 20 percent. That's solid, even in a higher-rate environment. Luna: So the math still pencils out, but it's more dependent on operational execution than financial engineering. Lucas: Exactly. And that's where the discipline of the management team matters. The best platforms are the ones that can integrate new clinics without disrupting the patient experience. That means retaining the local brand, keeping the same front-office staff, and slowly introducing standardized back-office systems. Luna: I've heard that some platforms are also investing in physician ownership. They offer equity to the dermatologists who join, so they have skin in the game. That seems like a smart way to align incentives. Lucas: It's becoming more common. The typical structure gives the founding physicians a minority equity stake, often 20 to 30 percent, with a liquidity event tied to the exit. That keeps them motivated to grow the practice and refer other doctors. It also helps with retention, which is critical because the biggest asset is the relationship between the dermatologist and their patients. Luna: So the roll-up model is evolving. It's not just about buying and cutting costs—it's about creating a platform that can attract top talent and deliver consistent care across many locations. Lucas: Right. And the next frontier might be vertical integration. Some platforms are starting to add their own pathology labs and pharmacy services, capturing more of the revenue per patient. If you can keep the biopsy reading in-house and dispense topical creams directly, that adds a few percentage points to the margin. Luna: That makes a lot of sense. Pathology is a high-margin business, and dermatologists generate a huge volume of biopsies. Owning the lab is a natural extension. Lucas: And it's not just about margins. It's also about quality control and turnaround time. If the platform's own lab processes the slides, the dermatologist gets results faster, which improves patient care and reduces the chance of a second visit. Luna: So the model is moving toward an integrated healthcare delivery system, not just a collection of clinics. Lucas: That's the vision. But it's a capital-intensive one. Building a lab requires upfront investment, and you need enough volume to justify it. That's why scale matters. A platform with 100 or more providers can spread those fixed costs across a much larger base. Luna: And that scale also helps with negotiating payer contracts. A large group can demand higher reimbursement rates than a solo practitioner. Lucas: Absolutely. That's one of the core value drivers of any roll-up. A dermatology platform with 200,000 covered lives can go to an insurance company and say, 'We're the only network in this region. If you want your members to have access to dermatology, you need to reimburse us at a reasonable rate.' That negotiating power is hard to replicate independently. Luna: It's a classic network effect. The more clinics you have, the stronger your bargaining position, which attracts more clinics, and so on. Lucas: And that's the engine that drives continued consolidation. I think we'll see a handful of national platforms emerge over the next five years, each with 500 to 1,000 providers. The independent dermatologist will become increasingly rare, at least in metropolitan areas. Luna: That raises a question for patients: when every clinic in town is owned by the same private equity firm, does competition suffer? And do prices go up? Lucas: It's a legitimate concern. There's evidence that consolidation in physician markets leads to higher prices for commercial insurance plans. A 2023 study found that when a hospital acquires a physician practice, prices for outpatient visits increase by 10 to 15 percent. We don't have the same data yet for dermatology-specific roll-ups, but the dynamics are similar. Luna: So the trade-off might be: better access and more standardized care, but at a higher cost to the system. And patients may not see the price difference directly because insurance absorbs some of it. Lucas: Right. And that's the debate. The PE firms argue that their scale leads to lower costs through efficiencies, and that any price increases are offset by quality improvements. But the jury is still out. What we do know is that the capital flowing into dermatology isn't slowing down. Through the first half of 2026, there have been at least 40 add-on acquisitions by the top five platforms. Luna: That's about eight a month. So the pace is actually accelerating. Lucas: It is. And with the number of dermatologists graduating from residency only growing at about 2 percent a year, the competition for acquisition targets will only intensify. The platforms that move fast and integrate well will be the ones that win. Luna: It feels like we're in the middle of a structural shift in how specialty care is delivered and owned. The next few years will tell us whether this model benefits patients and physicians, or just the financial sponsors. Lucas: And that's exactly the story we'll keep following. For now, if you want to support our coverage, head to buy me a coffee dot com slash fexingo. We'll be back next week with another episode on the deals shaping the economy.