Michael Pennington used his background in middle-market investment banking to establish Platinum Dermatology Partners eight years ago. Now with 400 providers across five states, the physician-owned practice is thriving in a marketplace beset by challenges such as wage inflation and declining reimbursement models.

In this episode of The Corner Series, Michael describes the foundation of success to host Geoff Cockrell. He acknowledges that navigating healthcare markets is more difficult than ten years ago, but he also promotes the unique advantages in the dermatology space. Here’s one: “I worry about a lot of things at night,” Michael says, “but patient demand is not one of them.”

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner Geoff Cockrell as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host Geoff Cockrell, a partner at McGuireWoods. Here at The Corner Series, we try to bring together dealmakers and thought leaders to discuss a number of areas where investment in healthcare and healthcare provider services has been very active. One of our recurring segments that we've been expanding a bit is to bring in executives of larger healthcare provider services platforms to kind of talk about the dynamics of those businesses and some specifics about their sector. Today I'm joined by Michael Pennington, the CEO and founder of Platinum Dermatology, one of the leading dermatology practices in the country. And we're going to talk about both headwinds and opportunities in dermatology. But Michael, maybe introduce yourself and Platinum a little bit.

Happy to, Geoff. Thanks so much for having me here today. Glad to be with you here to talk about our industry and our company, Platinum Dermatology Partners.

My background prior to starting Platinum Dermatology Partners was in middle market investment banking in the healthcare services space. So I've been around healthcare services now for a couple decades. And really, Platinum Dermatology partners started eight years ago with some dermatologists that I knew well with really a vision to build an organization at scale that did dermatology the right way for the benefit of our physicians, for the benefit of patients, and really ultimately have a profoundly positive impact on the specialty. And that's what we're working to do every day. We are roughly 400 providers across South Florida, Dallas, Texas, Phoenix, Arizona, Las Vegas, and Southern California, and just have the benefit of partnering with outstanding physicians that share our vision of everything that I set forth initially. So looking forward to digging in with all this you today.

Michael, maybe we can start with some of the challenges for larger platforms and dermatology in particular. There's been a lot of discussion around the impact of inflation on provider services with a key focus of that being wage inflation of providers against a reimbursement model that is either not as quickly responsive to that or moving in the other direction. With respect to dermatology and with respect to Platinum, how do you think about the challenges around wage inflation and how are you responding to them?

Yeah, it's a great question and it's not easy, but we spend a lot of time thinking about that. The reality is that running a physician practice is just far more difficult today than it was in years past. That's certainly true from two years ago, five years ago, certainly 10 years ago. And all the factors that you listed, whether it's rampant wage inflation, declining physician reimbursement schedule, there are challenges in every ways.

I would say in general though, being a part of a larger group, especially large in the individual markets that you're in, allows you to have a bit of a disproportionate advantage in that regard. And we try to find ways to really be good stewards of managing our practices and supporting our physicians to see their patients. So that's where I think when you are able to really share labor across a market, it allows you to not focus solely on your one clinic. You're looking over 15, 20, 25, 30 offices in a given region. It can just allow you to be more effective in managing labor across those as well as being able to provide better benefits for your employees, be competitive with wages and benefits. I'm sure everyone listening fully understands how much more competitive that was in years past.

And this is an area where I think dermatology sits uniquely in a better position relative to other specialties in that there is no shortage of patient demand in most any market that you're in. If you have a very well-qualified physician and a great market is not difficult to be busy. So you can focus more on throughput, other ways to make sure that you're getting enough providers to see those patients. So I always say I worry about a lot of things at night, but patient demand is not one of them. It's really more how are you getting enough providers within your organization to see those patients.

A related question, and I know you have practices in California where there's been a prohibition against restrictive covenants, restricting competitive activities for quite a while, there's a fair amount of discussion surrounding, how do you think about moving away from sticks to keep people connected to a business, non-competes and more towards carrots? How do you think about provider alignment in a way that's going to not just attract but retain people?

You bet. And I mean, look, at the end of the day, we can control only what we're in control of. And the two things that we have from the day we started Platinum that continues to be just a cornerstone of the way we manage the businesses is we don't rely on non-competes, but what we do think about first and foremost is being a culture-centric organization.

Dermatologists are very fortunate that they have a lot of choices. They're very highly sought after. There's a supply-demand imbalance. They can go a lot of places. So the best thing that we can spend time, energy, and money in is to being a culture centric organization that people are not going to want to leave and provide them resources and competitive advantages that they would not be able to get on their own.

So that's what we spend more time on more than anything. Furthermore, we are and have always been very proudly physician-owned ever since we started eight years ago, that our physicians own a material amount of the company. So Platinum Dermatology Partners is not only physician-led but it is materially physician-owned as well. So I think having both economic alignment as well as cultural alignment, if you get those right, whether non-competes are here or they're not, it makes it much more of a secondary concern if you get those other two things right.

Another kind of broad headwind on larger healthcare provider services companies, in particular focus on ones that have financial investors in them, is that there's a lot of scrutiny on whether or not these large platforms are helpful against the triple aims of society from a policy perspective of improving patient access, improving patient outcomes, and bending the cost curve. There's a lot of dark rhetoric around some of these larger practices, which frankly has kind of been inconsistent with what my experience has been and what I have seen. But from Platinum's perspective, how would you describe Platinum's role in improving outcomes, access, and controlling cost?

I'm using when I get questions like this from various antidotes of what people claim groups like ours do. All I can tell you is, look, from the minute we partner with physician practices, we are very involved in a number of activities that first and foremost are there to serve patients, give them the best experience possible. We measure patient experience at a pretty profound level, and that is our overall objective is to deliver the best experience, the best care to our patients as possible. An extension of that is really giving the physician, the provider, that constituency the best experience, the best support they can as part of a larger group to be able to tap into the resources that they would not have on their own.

And so I think in all these things I can point to just time and time again, whether it's the dollars and resources that we invest in compliance, whether it's providing care in new regions that were not available, there's no aspect of improving the level of patient care that is any way at odds with our objective and really everything we carry out on a regular basis. So I'm very honored to be a part of that because it's important work, and I'm super grateful to see how our organization and many others have been able to really improve patient care.

Another kind of question that we get a lot, especially as it relates to more mature markets of which I would consider dermatology to be one of them, is that kind of in the early endings of provider consolidation, the pathways of growth were pretty easy and obvious. It was a super fragmented market and kind of growth through acquisition was readily available. As markets become more mature, some of those easy growth pathways become a little bit more difficult. How would you describe from the perspective of dermatology in general, what are the avenues for growth looking forward, and then how are you thinking about that specifically at Platinum?

Yeah, I would say, Geoff, even though the industry is a bit more consolidated than it was a few years ago, that's a little bit of a difficult number to really track because a lot of these practices, they might've had an older retiring physician and then younger physicians start new practices. And so even though I do agree that it's more consolidated, there still is a great deal of conventional acquisition activity to be had, certainly in the markets we're in as well as others where I think that will always be a pretty robust avenue for growth.

But I can tell you having done a lot of acquisitions over the last eight years, we still do acquisitions, but we've shifted in a couple of regards of really looking to some of the larger acquisitions, whether that's a smaller kind of group practice like ours as well as a market leader going a little bit up market just in terms of bringing on more physicians at once relative the past. That's been a different strategy of ours.

But furthermore, once you have the benefit of a more established market share, it really opens you up to a whole host of opportunities for growth. I'll give you a couple examples. It's not uncommon to perhaps partner with a physician practice that maybe they have one very busy 4,000 square foot office that you can then double to 8,000 square feet, or add a new de novo office in a new part of town. So I think having that incumbent kind of market share allows you then to serve patients in a broader swath than you did initially. And I can tell you being mostly a major market, we have started to... We're not shifting, but we're complementing kind of the major market approach that we've had in areas like Dallas and Phoenix to serve more outskirt communities that we have previously that are maybe an hour, two hours away from the center of a town like Dallas.

And furthermore, I think one of the things that dermatology really lends itself to are what I would call complementary specialties. You've seen increasing popularity of the model known as med spas or retail aesthetics, whatever, cosmetics as a category, just it's a much bigger category than it was five, 10 years ago. That looks only to be continuing to expanding. So that offers... That word cosmetic means a lot of things underneath it, as well as surgical.

So I think one of the things that dermatology benefits from is that there are natural service line extensions and complementary ways that patients want services that are a natural extension of the core dermatology suite of services.

You mentioned moving out of major metropolitan areas. In a lot of different sectors, there's a ton of thinking of how to kind of expand into more rural communities, certainly against those kind of initial triple aims, expanding access, there are a lot of areas where access to care is pretty limited. The delivery models of that can be challenging. How do you think about moving into less densely populated areas?

Yeah, like I said earlier, we're not abandoning our major market approach. It's still our bread and butter. But we've just seen opportunities where we can leverage our incumbent strength in a more rural setting. And so I can tell you over the last two years we've done that in probably six new offices, mostly in California, Arizona and Texas, where you know there's an unmet need and your labor, both in terms of the physicians that are willing to see those patients as well as support staff are at a reasonable drive.

And as you and I think most others know is that usually serving these more rural communities it's really more of a challenge of recruiting. And so I think we're looking for opportunities where existing providers will be willing to spend some time there while we allow ourselves to set up a site of care that allows us to take a more long-term recruiting approach there. So it's something that's been a nice extension to kind of our core major market strategy that we'll probably continue to do a fair amount of going forward.

On the M&A front, which you talked a little bit about your view that it's while more mature, there's still opportunity for M&A growth avenues, how do you think about pricing in those markets? Those have been super challenging, especially on the smaller end, a pretty material disconnect from the perspective of buyers and sellers as to what an appropriate price is, especially when you start to factor in cost of capital with interest rates and a lot of dynamics that have made that challenge. What sort of pricing experience have you had?

That's a great question. I mean, look, I think the downside is that gone are the days where you're buying physician practices at three, four, five times EBITDA, at least in dermatology. Those are pretty scarce scenarios and there's usually a reason why it's occurring. So physicians, and I know I can speak mostly for dermatologists, they're pretty educated folks and they know how to get down to the core metrics.

So what I would say is relative to five to 10 years ago, the bottom end of pricing has kind of held firm and gone up a little bit. And so from that perspective, it is a bit more expensive than it used to be. But the good news is that these physicians have typically become more educated and they understand some of the outlandish prices that were never realistic in the first place. Those expectations are gone by the wayside. So when you hear about a large aggregator practices trading 14, 15, 16 times EBITDA, usually those expectations have gone out the way. And so the variance in terms of pricing expectations is much tighter now than it was five, 10 years ago.

A recurring source of consternation in provider consolidation that I encounter centers on the question of, well, what is the end game for some of these larger platforms? Is there avenues to public markets? Is there always a bigger transaction to occur? When you get to a certain scale, where do things go from there? That's got to be a question that you all encounter. And there's different answers, and I get a lot of different answers, but I'd be curious on your perspective.

Geoff, I hate to give you probably the canned answer that a lot of people give you, but the reality is I don't worry too much about what that specific avenue is, but what I am confident in is that we build an organization where our patients and our physicians are ridiculously happy, we're consistently growing earnings, there will be some source of capital that's going to want to invest in that type of company, whether that's another private equity firm, a number of private equity firms, public markets. I think all options are kind of on the table there. But I know if we get the culture piece right and it results in good financial outcomes, I'm not worried about attracting capital.

You can look over time now where private equity is an asset class, probably gains more attention from more people than it ever has, but the one consistent theme is that it performs very well. So whether that comes from private equity, comes from public markets, I think both of those are an option. I think that the concept of a public markets type of event is a bit novel. I don't believe it's been attempted really in our space or too many others, but I could see that is certainly something that could transpire at some point.

You mentioned earlier pressure on the reimbursement rates being in a declining environment. What are you reading the tea leaves on that front? Is there going to be relief in that arena or is that pressure going to just continue?

Yeah, I think in general the way our US healthcare system's going is I don't know how there's not going to continue to be pressure. So I do expect pressure, but in the near term. And I'm fortunate to have really good conversations with people that are knowledgeable about these things that I think at least for our specialty should be relatively flat in the near term. And the specific risks at play, we're very well aware of of how those would affect our organization. And so I think dermatology benefits from just the way that the nature of the patient visit occurs, I think we'll always be in a decent spot there relative to a lot of other specialties. And so my expectation is kind of neutral to slightly down over the next kind of couple years with one or two caveats of risks around that.

With respect to Platinum, kind of looking forward, what are the things that you're most enthusiastic about as you look forward in the future for Platinum?

It really is the disproportionate amount of time and energy and money that we are investing in our culture. I think that is probably the next evolution of a lot of great healthcare leaders that I've been around that have built just truly impactful organizations and other specialties.

I think that's yet to really occur in the physician space in a profound way, as well as dermatology is really investing in the experience of our physicians, of our patients, and not just doing it in the colloquial sense, I think a lot of people talk about it, but really doing it at scale, doing it with discipline to where the best competitive advantage I can create is where the physicians in our specialty become to know us as is the organization of choice for dermatologists. That is the best competitive advantage that our organization can really establish.

So I think that and as well as being really on the front lines of the ways that I think technology will play a meaningful role in offsetting some of those inflationary headwinds that we discussed as well as a lot of the other challenges is that I don't think some people might take a dystopian view of medicine that's just going to continue to erode, but I don't really accept that. I think technology continues to disrupt and innovate, and I don't see why medicine is going to be anything unique there.

So we're really looking at several technologies that will allow us to not feel quite the full magnitude of the inflationary pressures that we've been experiencing over the last three to four years and really excited about things to come there.

How significant is value-based contracting in kind of that evolution of healthcare and evolution of dermatology?

It's an interesting question, Geoff, because one of the things I like about dermatology, that dermatology in general is on the right side of healthcare, and what I mean by that is everything we do is a net cost saver to the system. By and large, the biggest contribution we make is preventing cancer at a more profound level. Skin cancer is very treatable, but if it's not treated, it can be very costly, obviously tragically to the patient's life, but also to the healthcare system at large.

So everything we do is geared towards saving the aggregate healthcare system money, and so how you distill that into a value-based framework, it's kind of challenging because dermatology is usually not on top list of payers and other people's minds as you think about a sophisticated value-based framework. And so we've had some of those discussions where we're in various capitated arrangements where those incentives are aligned. But I would say in general, dermatology is not a specialty where both sides, both the providers and the payers are thinking deeply about a strategy there just because I think there's bigger dollars at stake in other specialties. But I think over the next five years, that conversation will continue to evolve a little bit and we'll be in some great win-win scenarios where payers are receiving real value, patients are receiving value, and all parties involved are getting great outcomes financially out of it.

Yeah, I think the value-based contracting paradigm is going to continue to shift in ways that may benefit sectors like yours in that I think you're exactly right that right now so much of the focus is on areas where you can squeeze some cost out, whereas the focus should be on areas where you can invest and have preventative outcomes that lower the cost. While value-based care hasn't wheeled around specifically in dermatology, I think there's a lot of room for that to happen in ways that'd be beneficial for your sector.

Absolutely. I mean, I can just give you a few anecdotes that we've engaged with a number of payers and had some very constructive conversations around just the overall savings to them by product of catching skin cancers early. You can really quantify the savings to the system at large. We've had some very good dialogues there, as well as we take great pride in the caliber of physicians that are at our group.

One of the things you will see in all specialties in dermatology is no different is that there are a lot of people that kind of fly below the radar and they're really offering suboptimal care. These are people that are not trained properly, they're really not doing the scope of medicine that they set out to do. And when we can really differentiate and articulate a value proposition to the payer of, "Hey, this patient is going to receive the most exceptional level of care, this is going to benefit not only them and you," that's really where I think we stand out there.

So it's a great point. There's a lot of ways that if we can do a good job, that's a challenge for us is really articulating value. Our specialty is kind of hard in that it's really because there's no singular metrics. I don't think anyone would think that MIPS really captures it fully. If we can figure out how to quantify and measure that accurately, I think it's something that both sides of the table will get excited about.

Well, Michael, you've certainly done a tremendous job building a national leader in Platinum Dermatology, and thanks a lot for joining our podcast. This has been a real ton of fun.

I appreciate it, Geoff. Thank you for having me here today. Appreciate everything you're doing in the space and glad to be with you today to discuss this a bit.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcquirewoods.com. We look forward to hearing from you.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.