Mohs and dermpath economics: the procedural revenue most don’t capture

May 6, 2026 · Pouyan Golshani, MD, Interventional Radiologist

Mohs surgery and dermpath are the highest-margin lines in dermatology. Here’s how to evaluate adding them to a practice.

For most of us, the path is straightforward: finish residency, maybe a fellowship, and join or build a practice. The initial focus is clinical excellence and patient volume. But once the practice matures, the questions shift from clinical to strategic. How do you build enterprise value, not just personal income? Adding high-margin procedural services like Mohs surgery and in-house dermatopathology is often the answer. These aren’t just revenue streams; they are powerful multipliers of your practice’s valuation and the key to a financially optimized career. But capturing that value requires understanding the complex interplay of operational investment, reimbursement, and tax strategy. This isn’t just about buying a cryostat; it’s about building a defensible, high-EBITDA business unit that private equity buyers covet. We’ll break down the core financial and strategic considerations, starting with the end in mind: the eventual sale. For a broader look at financial benchmarks and operational tools, the dermatology free tools hub offers a good starting point.

The PE Buyout: Structuring Your Exit for Tax Efficiency

Most physicians fixate on the headline sale price of their practice. A $10 million offer sounds better than an $8 million one. But the number that actually hits your bank account is determined by the deal structure, and the difference can be staggering. When private equity comes knocking, their primary goal is to structure the deal for their tax advantage, not yours. Understanding the two primary structures—an asset sale versus a stock sale—is the single most important financial lesson for a practice owner.

The Asset Sale (PE’s Favorite): In an asset sale, the buyer purchases the individual assets of your practice: equipment, real estate, patient lists (goodwill), and accounts receivable. This is great for them because they get a “step-up in basis” on the assets, meaning they can start depreciating the equipment all over again, generating significant tax deductions. For you, the seller, it’s often a tax nightmare. While the portion of the sale attributed to goodwill is taxed at favorable long-term capital gains rates (currently 20% plus NIIT for high earners), the rest is a minefield. The sale of depreciated equipment triggers “recapture,” taxed as ordinary income. Your accounts receivable are also taxed at your highest ordinary income rate, which can be nearly double the capital gains rate.

The Stock Sale (Your Favorite): In a stock sale, the buyer purchases the shares of your S-Corp or C-Corp directly. The entity remains, just with a new owner. For you, this is beautifully simple: the entire difference between your sale price and your stock basis is treated as a long-term capital gain. The tax bill is clean and predictable.

The Trap and The Negotiation: PE firms will almost always push for an asset sale. Most physicians, unaware of the tax implications, agree without a fight. This is a multi-million dollar mistake. The negotiation isn’t just about the price; it’s about the structure. If you’re forced into an asset sale, your countermove is to demand a “tax gross-up”—an additional payment from the buyer to compensate you for the higher tax liability you’re incurring for their benefit. Quantifying this difference and negotiating it firmly can add 10-15% to your net proceeds.

Equity Rollover: Staying in the Game, Tax-Deferred

In nearly every PE transaction, the offer won’t be 100% cash. A typical structure might be 70-80% cash at closing, with the remaining 20-30% “rolled over” into equity of the new, larger parent company (the “NewCo”). At first, this can feel like a haircut. You’re selling your practice but not getting all the money. But understood correctly, the equity rollover is a powerful wealth-building and tax-deferral tool.

Here’s how it works. Let’s say your practice sells for $10M, and you agree to a 20% rollover. You receive $8M in cash at closing and $2M worth of equity in the NewCo. The critical tax benefit, often structured under IRC Section 351 or 721, is that the $2M rollover portion is tax-deferred. You only pay capital gains tax on the $8M cash portion. The tax on the $2M is deferred until the “second bite of the apple”—the future event when the PE firm sells the entire platform to another, larger buyer, typically 3-7 years down the line.

This has two major advantages:

Tax Deferral: You keep more capital invested and working for you, rather than sending it to the IRS.
Retained Upside: You are now an owner in a much larger, professionally managed organization. If the PE firm successfully executes its growth strategy—acquiring more practices and improving operations—your $2M in rollover equity could be worth $4M, $6M, or more at the next sale.

The Planning Trap: The rollover is not risk-free. You are trading a 100% ownership stake in a business you control for a minority stake in a highly leveraged one you don’t. If the PE platform underperforms, that equity could be worth less than your initial $2M, or even zero. Due diligence is crucial. You must understand the capital structure of the NewCo. Is your rollover equity common stock or preferred? What are the liquidation preferences? If the company sells for a disappointing price, do the PE firm’s investors get paid out before you see a dime? Don’t be afraid to have your legal and financial advisors model these downside scenarios before you sign.

Unlocking Hidden Value: R&D Tax Credits in Your Practice

When most physicians hear “R&D tax credits,” they picture scientists in lab coats at a major pharmaceutical company. They don’t picture their own practice. This is a massive, and common, oversight. The Research and Development tax credit, governed by IRC Section 41, is one of the most valuable incentives available, and many dermatology practices qualify without realizing it.

The definition of “research and development” for tax purposes is much broader than you think. It’s not just about inventing a new molecule. The credit is designed to reward activities that attempt to develop or improve a product or process, involving a process of experimentation. In dermatology, this can include:

Developing Proprietary Skincare Compounds: If you are formulating or even just systematically testing and refining custom cosmetic products, cleansers, or topical treatments for your patients, the costs associated with that process (including staff time and supplies) can qualify.
Improving Clinical Processes: Did you develop a new, systematic method for tracking melanoma patient outcomes? Did you build a custom template or software plug-in for your EMR to better manage biologics patients? The development and testing phase of these internal process improvements can qualify.
Testing New Techniques or Devices: The process of evaluating and integrating a new laser or diagnostic tool, particularly if you are developing a novel protocol for its use, often involves a period of experimentation that falls under the R&D definition.

The How-To: The credit is generally calculated as a percentage of your “Qualified Research Expenses” (QREs). This includes the wages of the staff involved in the R&D activity, the cost of supplies consumed, and a portion of any contract research expenses. The documentation is key. You must be able to demonstrate that you were trying to eliminate uncertainty through a process of experimentation. Contemporaneous notes, project plans, and testing results are vital.

The Trap: Simply using a new technology isn’t R&D. You must be trying to improve it or your process for using it. The biggest mistake practices make is failing to document their work. They perform qualifying activities but have no records to support the claim if audited. A specialized accounting firm can help identify qualifying activities and establish the necessary documentation process, often uncovering tens of thousands of dollars in annual tax savings.

Practice Valuation: The EBITDA Multiple and Its Drivers

Private equity doesn’t buy your practice based on revenue. They buy it based on a multiple of your EBITDA—Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is a proxy for cash flow, and it’s the single most important metric for determining your practice’s value. A practice with $5M in revenue and $1M in EBITDA is worth far less than a practice with $4M in revenue and $1.5M in EBITDA.

The valuation formula is simple: EBITDA x Multiple = Enterprise Value.

Your job as a practice owner is to maximize both parts of that equation. Maximizing EBITDA means running an efficient operation, managing overhead, and optimizing your revenue cycle. Adding high-margin services like Mohs and in-house pathology is a direct and powerful way to boost EBITDA. But the multiple is where strategic decisions create enormous value. A small, single-provider general dermatology practice might sell for 5-7x EBITDA. A large, multi-location practice with a Mohs surgeon, an in-house lab, and a thriving cosmetics business could command a multiple of 12-15x or even higher.

What drives the multiple up?

Scale and Provider Mix: More providers, more locations, and a mix of services (medical, surgical, cosmetic) signal a more stable, diversified business.
Ancillary Services: In-house dermatopathology and Mohs surgery are the kings here. They are high-margin, sticky services that PE loves because they are less susceptible to reimbursement cuts than standard E/M codes.
Recurring Revenue: Do you have a membership model for cosmetic services? A strong retail product line? These predictable revenue streams are valued more highly than one-off patient encounters.
Geographic Density: A strong, defensible position in a single metropolitan area is often more valuable than a scattered collection of clinics in different states.

Understanding these drivers allows you to make strategic investments years before a potential sale. Do you hire another general dermatologist or a fellowship-trained Mohs surgeon? Do you invest in building out a lab? These decisions directly impact your multiple. Using tools like CenterIQ rate intelligence can help model the financial impact of adding these service lines by providing clarity on local payer rates, which is essential for building an accurate pro forma. For those considering a full build-out, engaging an ASC/OBL feasibility advisory service can de-risk the investment by analyzing the entire operational and financial picture before you break ground.

The 199A QBI Deduction and the Physician Phase-Out

The Tax Cuts and Jobs Act of 2017 introduced one of the most significant tax breaks for business owners in decades: the Section 199A Qualified Business Income (QBI) deduction. In theory, it allows owners of pass-through businesses (like S-Corps and LLCs) to deduct up to 20% of their business income right off the top. For a physician with $500,000 in pass-through income, that could mean a $100,000 deduction, saving over $37,000 in federal tax.

However, there’s a catch designed specifically to target high-income professionals. The law defines certain fields as “Specified Service Trades or Businesses” (SSTBs), and this list explicitly includes “the performance of services in the field of health.” As a physician, your practice is an SSTB.

This doesn’t disqualify you entirely, but it does subject you to a strict income limitation. For 2026, the QBI deduction for SSTB owners begins to phase out at a taxable income of approximately $394,000 for single filers and $787,000 for those married filing jointly. Once your income exceeds these thresholds, the deduction is gone completely. Most successful dermatologists, especially those with profitable ancillary services, will find themselves well above these limits, losing the deduction entirely.

The Trap and The Strategy: The common trap is assuming there’s nothing you can do. While you can’t change the fact that your medical practice is an SSTB, you can be strategic. First, aggressive tax planning to reduce your taxable income becomes even more valuable. Every dollar you can defer into a retirement plan like a 401(k) or a cash balance plan not only saves you tax at your marginal rate but might also bring you back under the QBI threshold. Second, if you have non-SSTB business activities—for example, if you own the medical office building in a separate LLC and lease it to your practice—that rental income is generally *not* considered an SSTB and may fully qualify for the 20% QBI deduction, regardless of your total income. This strategy of “cracking and packing” can segregate qualifying income from non-qualifying income, preserving a valuable deduction that most of your peers lose.

Building a financially successful dermatology practice goes far beyond clinical skill. It requires a CEO mindset focused on operational efficiency, strategic investment in high-margin services, and a sophisticated understanding of the tax code. By focusing on the drivers of enterprise value and planning for an eventual exit from day one, you can ensure that the rewards of your hard work are captured by you and your family, not lost to taxes or a poorly structured deal.