Dermatology practices were generally coming off a strong year and poised for another robust performance in 2020. All four dermatology sectors – medical, surgical, dermatopathology, and cosmetic – exhibited impressive patient activity for the first 10 weeks of this new year. Merger and acquisition activity was also moving at a brisk pace, with one major platform trading, several others in the midst of investment bank-led processes, and many smaller acquisitions.

COVID-19 brought most of this to an abrupt halt.

According to research conducted during the first week of both April and May, the hardest-hit medical specialties included allergy, dental, ophthalmology, ENT, and dermatology, which all experienced declines beyond 50%. This reflects what happened during the last recession, when the dermatology segment delineated at a high level to absolutely what was medically necessary and lifesaving – and what wasn’t.

The Different Segments of Dermatology

Medical dermatology generally represents 50% of the U.S. market, surgical 20%, and dermatopathology and cosmetic about 15% each. Many practices outsource pathology to regional or national laboratories due to the high expense of testing and diagnostic equipment. Depending on the emphasis placed on each of the dermatology segments, the mix can materially differ among practices. These first three segments are clinically necessary and primarily reimbursed by Medicare and commercial insurance carriers. A lot of interest continues to focus on the fourth segment, cosmetic, occasionally referred to as aesthetic. This segment is not medically necessary – it’s elective and therefore self-pay. Cosmetic skin care is generally provided in physician practices or in a medspa. Treatments comprise mostly skin resurfacing and rejuvenation, laser hair removal, body sculpting, and injectables.

After laser hair removal, injectables often garner the highest volume. Injectables comprise two segments, neurotoxins and dermal fillers. Neurotoxins – (the standard brand is Botox) – are designed to reduce wrinkles in and around the face and are administered approximately every three to four months. Another anti-aging technique is dermal fillers, which, instead of reducing facial wrinkles, fills them in. Dermal fillers last longer and require treatments about twice per year. Neurotoxins and dermal fillers are often the gateway into cosmetic services, and people who seek to look younger are motivated and committed to obtaining these services.

With COVID-19 lockdowns, all dermatology practices and medspas stopped providing these injectable treatments as they are medically unnecessary. But as different states allow medical clinics to reopen, services are once again being offered. The greatest demand for these services will be existing patients who have enjoyed the benefits of injectables in the past and who already purchased treatment packages. Whether they come in for treatments will depend on how motivated they are to optimize the appearance of their skin – the vanity factor. Those having real issues with their wrinkles and appearance will be more motivated to come in, get those treatments, and pay out of pocket.

Transitioning to the New Normal

To get these patients and others back into practices, providers will focus intensely on safety, cleanliness, and sanitary practices. Patients want to know it, see it, touch it. It’s the new normal. This issue of relaunching and modifying operating models to be responsible and compliant with new regulatory requirements is often daunting. There’s new training requirements with staff and changes to efficiencies and flow when considering that a routine volume of daily patient visits in a busy dermatology office had been around 50 patients per medical dermatologist.

In a COVID-19 world, how much time will be required to make sure everything is safe, clean, and sanitary? Between patient visits, how much staff work will be required to wipe down surfaces and sterilize instruments to make sure the environment in which the next patient will be examined and/or treated is absolutely safe? It takes time and staff power to do this, so it will reduce the number of patients typically seen, so 50 patients could go down to 25. It will take a long time to get the patient count back to 50. The staff and providers will have to work longer hours to maintain a safe, clean, and sanitary environment.

The other question is what are the materials, supplies, and equipment needed to do that work to ensure safety, cleanliness, and a sanitary environment, as well as their cost? Medical supplies tend to make up a small portion of the overall clinic-based operating expense, so the actual availability of personal protection equipment is much more important, even though the cost will have a material impact on profitability. Pre-COVID-19, clinic-level operating margins generally ranged between 20% and 30%. Corporate operating expenses ranged between high single digits to 15%, which generated an overall profitability or earnings before interest, taxes, and amortization of 10% to 20%.

There are a lot of moving pieces to manage and optimize profitability at a clinic and at a total entity level. But the key successful practice management approach, regardless of the specialty, is building an efficient and cost-effective operating model where expenses are appropriately matched with revenue.

Headwinds Ahead for Dermatology

Possibly the biggest challenge dermatology will face is a shortage of dermatologists. Even before the pandemic, there were fewer dermatologists practicing than what the demand required. Only about 300 new doctors per year are entering the private practice in the U.S., and they don’t balance the number who have died or will retire or semi-retire. Some physicians, ages 35 to 40, have told me, ‘I’ve got so much student debt left, I haven’t been able to ramp up my practice. I’m moving to a new career.” New doctors will have to be enticed to enter the specialty to make up for the shortfall.

Meanwhile, some support staff won’t want to come back over safety concerns. Recruiting, training, and retaining appropriate types and numbers of staff to support physicians will be key.

Going forward, there will be a lot of disruption, starts, and false starts in trying to figure out the new normal of patient demand. Many people will be reticent to obtain care unless they believe they really need it. Overall, all segments of dermatology will be negatively impacted, and it’s going to be a slow but hopefully steady rebuild of patient visits and volumes. Despite these challenges, however, I believe the fundamentals of dermatology all point to optimism.

About Steve Straus

Steve Straus is a principal at the Altumeta Group, LLC. He previously served as CEO and Board Member of Sona Dermatology and Medspa, a private equity sponsored network of patient-centric, clinically respected dermatology centers that provide a comprehensive array of medical, cosmetic, and surgical services in several U.S. markets. Before that, Steve was CEO of American Laser Skincare, where he was recruited to restructure and reposition the largest PE-backed medical aesthetics provider in the U.S. He currently serves as Board Member and Executive Chairman of LaserMD.

This article is adapted from the May 27, 2020, GLG teleconference “Private Practice Outlook: Dermatology and Medspa.” If you would like access to this teleconference or would like to speak with Steve Straus or any of our more than 700,000 experts, contact us.

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