Private equity-backed dermatology groups got COVID-19 small-business loans

The complex business structures of some private equity-backed dermatology groups allowed them to receive millions in COVID-19 funds intended for small businesses, federal disclosures reveal.

Lawmakers and regulators structured the Paycheck Protection Program so that most private equity-owned businesses would not qualify. Only companies with 500 employees or fewer are eligible for the program, which offers loan forgiveness if the loans are spent on qualifying expenses.

If a business is majority owned by a private equity firm, the employees of all the firm’s portfolio companies count toward its total employee tally, thus disqualifying many companies.

However, a variety of factors have allowed some dermatology groups backed by private equity to receive millions in forgivable loans.

At least six groups that received publicly disclosed PPP loans are private equity-backed dermatology groups.

  • DermCare Management, which has 32 practices in Florida, California and Texas, is backed by Hildred Capital Management and Gemini Investors.
  • Soderstrom Dermatology Center, which is part of a group that has eight offices in Illinois and Iowa, is backed by H.I.G. Growth Partners.
  • Oliver Street Dermatology Management is the parent management company of U.S. Dermatology Partners, which has more than 94 offices across the country, and is backed by Abry Partners.
  • Sanova Dermatology Management, which has 13 offices in Louisiana and Texas, is backed by Spindletop Capital.
  • California Skin Institute Intermediate Holdings, which has 44 offices in California, is backed by Goldman Sachs.
  • United Skin Specialists, which has 10 offices in the Midwest, is backed by Tonka Bay Equity.

Combined, the companies received between $16 million and $34 million in forgivable PPP loans. The SBA publicly disclosed names of PPP loan recipients who borrowed more than $150,000.

Private equity funds that invest in healthcare lobbied hard in the spring to try to remove rules requiring affiliated practices to count toward the employee threshold, but lawmakers and regulators ignored their pleas. As a result of the rules, many physician practices owned by hospitals didn’t qualify for PPP loans, said healthcare policy analyst Paul Keckley.

However, state regulations on physician practices and regulatory exceptions opened up workarounds for practices with relationships to private equity firms.

Many states have corporate practice of medicine laws that prohibit corporations from directly employing physicians. Many physician practices, including dermatology practices, choose to initiate a relationship with private equity firms to streamline their administrative operations. The physician practice may retain its current ownership, then contract with a private equity-owned management services organization.

In that arrangement, the physician practice itself wouldn’t necessarily be owned by the private equity firm even if a financial relationship with a private equity-owned managed services organization exists.

“Many private equity-backed groups utilize the management services organization to circumvent corporate practice of medicine laws and structure relationships with physician practices. Depending on how these relationships are structured, a private equity-backed group may be able to navigate the SBA’s affiliation rules and secure a PPP loan under the CARES Act,” said Dr. Sailesh Konda, a dermatologist at the University of Florida who has studied private equity acquisitions of dermatology practices.
Sometimes a group of investors creates a joint venture that is not controlled by one particular entity, which could provide additional flexibility, said an attorney knowledgeable about private equity’s relationship with physician practices.

PPP loans are most useful to entities that have high payroll costs, as a certain percentage of the loan has to go toward payroll in order for the loan to be forgiven.

Some small private equity firms may not face barriers with affiliation rules if the sum of their portfolio companies’ employees is fewer than 500 people.

There are also other affiliation rule exceptions that dermatology groups have used. For example, Hildred Capital Management acquired a 64% equity stake in DermCare Management in October 2019, making it a majority owner of the dermatology-focused physician practice management company. DermCare still qualified for the PPP loan, however, because the company obtained a separate investment from a licensed Small Business Investment Company. The Coronavirus Aid, Relief, and Economic Security Act, the law that created the PPP, states that any business that receives financial assistance from a SBIC is exempt from the affiliation rules.

California Skin Institute has a minority investment from Goldman Sachs, according to the group’s website, so the group may not have counted as affiliated with other portfolio investments. A spokesperson for California Skin Institute said the company is made up of a medical group and a separate management company, and Goldman Sachs provided a loan to the management company that did not give Goldman Sachs equity ownership, board seats or control over the medical practice or business operations.

“CSI’s PPP application was compliant with all regulations and was a critical lifeline that preserved 390 essential workers’ jobs,” the spokesperson said.

U.S. Dermatology Partners declined to comment on its capital structure. The other groups didn’t respond to a request for comment.

Private equity funds have bought a significant number of physician practices in recent years, according to a research letter in the Journal of the American Medical Association published in February. Dermatology practices represent 10% of the 355 acquisitions examined from 2013 to 2016.

The Small Business Administration states that affiliation rules apply to private equity-owned companies just like other businesses. SBA can review a PPP loan at any time to assess whether the loan is eligible for forgiveness or outstanding funds must be repaid.

After reviewing the SBA’s evolving guidance on the PPP, Keckley wasn’t surprised that some private equity-backed groups applied for the forgivable loans.
“You could argue the ethics of private equity-owned medical practices as a separate issue, but private equity had every right to step into this program,” Keckley said.