Private Capital-Backed Dermatology Groups Obtained COVID-19 Small Business Loans


The complex business structures of some privately-backed dermatology groups have enabled them to receive millions of COVID-19 funds intended for small businesses, federal disclosures show.

Lawmakers and regulators have structured the paycheck protection program in such a way that most privately owned businesses would not qualify. Only businesses with 500 or fewer employees are eligible for the program, which offers a loan discount if loans are spent on qualifying expenses.

If a business is majority owned by a private equity firm, the employees of all companies in the firm’s portfolio are counted towards its total number of employees, thus disqualifying many firms.

However, various factors have enabled some privately backed dermatology groups to receive millions in forgivable loans.

At least six groups that have received publicly disclosed PPP loans are privately funded dermatology groups.

  • DermCare Management, which has 32 firms in Florida, California and Texas, is backed by Hildred Capital Management and Gemini Investors.
  • The Soderstrom Dermatology Center, part of a group with eight offices in Illinois and Iowa, is supported by HIG Growth Partners.
  • Oliver Street Dermatology Management is the parent management company of US 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, with 10 offices in the Midwest, is backed by Tonka Bay Equity.

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

Private equity funds that invest in healthcare lobbied in the spring to try to remove rules requiring affiliate practices to count against the employee threshold, but lawmakers and regulators have ignored their calls. Due to the rules, many hospital-owned medical practices were not eligible for PPP loans, said health policy analyst Paul Keckley.

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

Many states have corporate medical practice laws that prohibit companies from directly employing physicians. Many physician offices, including dermatology offices, choose to initiate a relationship with private equity firms to streamline their administrative operations. The medical practice can retain its current ownership and then contract with a privately owned management services organization.

In this arrangement, the medical practice itself would not necessarily be owned by the private equity firm, even if there is a financial relationship with a managed services organization owned by the private equity.

“Many privately supported groups use the management services organization to circumvent laws on the practice of medicine in the workplace and structure relationships with medical practices. Depending on how these relationships are structured, one supported group by private funds may be able to navigate the SBA membership rules and obtain a PPP loan under the CARES Act, ”said Dr. Sailesh Konda, dermatologist at the University of Florida who has studied private equity acquisitions dermatological practices.
Sometimes a group of investors creates a joint venture that is not controlled by a particular entity, which could provide additional flexibility, said a lawyer knowledgeable about private equity’s relationship with medical practices.

PPP loans are more useful for entities with high salary costs, as a certain percentage of the loan must be allocated to the payroll for the loan to be canceled.

Some small private equity firms may not face hurdles with membership rules if the sum of employees in their holding companies is less than 500 people.

There are also other exceptions to the membership rules that dermatology groups have used. For example, Hildred Capital Management acquired a 64% stake in DermCare Management in October 2019, making it a majority shareholder of the dermatology-focused medical practice management company. However, DermCare was still eligible for the PPP loan as the company secured 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 an SBIC is exempt from the membership rules.

According to the group’s website, the California Skin Institute owns a minority investment in Goldman Sachs, so the group may not have been considered affiliated with other portfolio investments. A spokesperson for the California Skin Institute said the company is made up of a medical group and a separate management company, and Goldman Sachs gave the management company a loan that did not give Goldman Sachs of participation, seat on the board of directors or control over medical practice or business operations.

“CSI’s PPP request complied with all regulations and was a vital lifeline that preserved the jobs of 390 essential workers,” the spokesperson said.

US Dermatology Partners declined to comment on its capital structure. The other groups did not respond to a request for comment.

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

The Small Business Administration states that the membership rules apply to private equity firms just like other businesses. The SBA can review a PPP loan at any time to assess whether the loan is eligible for a forgiveness or if the unpaid funds need to be repaid.

After reviewing the SBA’s evolving directions on PPP, Keckley was not surprised that some privately backed groups requested forgivable loans.
“You could discuss the ethics of medical practices held by private equity as a separate issue, but private equity had every right to intervene in this program,” Keckley said.

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