Management Services Organizations: A growing strategy for physician groups

MSO can be a growth avenue for physician groups: ©Donson - stock.adobe.com

Forming a Management Services Organization (MSO) — also known as an Administrative Services Organization (ASO) or Business Support Services Organization (BSSO) — is becoming an increasingly popular strategy for physician groups for a variety of reasons.Essentially, this entails a medical practice creating a new legal entity to act as the MSO, and moving its management team, other non-clinical staff, equipment and premises to the MSO, which then provides the services of such personnel and transferred assets back to the practice, essentially serving as the practice’s “back office”.

Why form an MSO?

The main reasons medical groups form MSOs are as follows:

• Non-physician medical practice executives (e.g., CEOs, COOs, CFOs, etc.) cannot be owners of medical groups in many states due to laws prohibiting the “corporate practice of medicine,” but these executives can be owners of an MSO, which enables groups to:
  1. Better align and incentivize their management team members to improve operations, profitability and overall value (which could be important in order to retain key executives)
  2. Boost a group’s ability to recruit new experienced executives to be part of the group (via its MSO)
• If the MSO’s “founding group” has a seasoned executive team with proven success in managing the medical practice, then such executive team — via the MSO —can contract with other practices in the region (who then become “MSO clients”) to help improve and streamline their operations and increase profitability, and this allows for part of the MSO’s costs to be paid by such “other MSO clients,” thereby decreasing the overhead of founding physician group and increasing its profitability; and
• Forming an MSO – regardless of whether it services only the founding physician group, or also other medical practice clients – could strategically position the group for a potentially lucrative partnership, affiliation or sale in the future, and help to streamline any such future transaction.

How to form an MSO

The MSO is set up as a business entity separate from the medical practice and can be a limited liability company (LLC) or general business corporation.The type of entity to use for the MSO (and in which state to form it) is driven by legal, accounting and tax considerations, but most times is an LLC in the founding group’s state or in Delaware.

“Ownership” in the MSO can be in multiple forms, including full equity or “profits interests.”Unlike full equity, profits interests have no value when issued but provide financial rights in the growth in the MSO’s value following issuance and therefore is “tax-free” when issued.Thus, profits interests are a very popular tool for aligning and incentivizing MSO staff to grow the MSO’s profitability and overall value.

Once the MSO is formed, the medical practice then “spins out” its non-clinical staff, non-clinical assets and non-clinical contracts to the MSO.The medical practice continues to employ the physicians and all other licensed or certified health care providers who provide direct patient care.

When a medical practice transfers its non-clinical staff and assets to the MSO, it is important to structure such transfers in a tax-free manner (or otherwise tax-efficiently), and thus, it is crucial to obtain advice from the practice’s accountant and legal counsel.

MSOs typically put in place the same (“mimicked”) benefit plans for its staff as the medical practice.Medical equipment required to be licensed by the state, as well as drugs, typically remain assets of the medical practice, while all non-clinical equipment and supplies generally are transferred to the MSO, along with relevant service contracts and warranties.All non-clinical equipment and supply contracts, real estate leases, billing & collection agreements and other vendor agreements are transferred to the MSO.

Further, all practice agreements involving the provision of clinical services remain with the medical practice, such as governmental and commercial payor agreements, remote radiology reading contracts, medical director agreements, on-call coverage agreements, clinical affiliation agreements, and other agreements relating to the provision of professional services to hospitals or other facilities.

It is imperative that all vendor contracts be reviewed to assess if they require consent from the vendor prior to assigning them to the MSO. Key consents that are typically required include: any lenders and lienholders, landlords, and certain vendors. Most vendors consent because they want to continue the relationship. In the case of real estate leases, the landlords may require physician group to guarantee the lease or request that the MSO provide documentation of its assets and financial wherewithal.

Finally, effective on the “go live” date of the transfer of the relevant assets and staff to the MSO, the medical practice enters into a management services agreement (MSA), otherwise known as an administrative services agreement, pursuant to which the MSO provides its assets and the services of its staff to support the operations of the medical practice. The services included typically consist of all or a subset of the following:billng and revenue cycle management, human resource functions, recruitment, payroll, information systems and support, network development, scheduling, credentialing, and contracting services with a variety of vendors.

In exchange for the above services, the medical group pays a fee to the MSO. As further discussed below, some states have laws that restrict how the MSO Fee can be structured, such as a fee-splitting prohibition or other rules that would prohibit a fee based on a percentage of the practice’s revenues or profits.Generally, the MSO Fee should be based on fair market value of the services being provided, and generally it can be adjusted each year.

Legal considerations in forming an MSO

MSOs must be carefully structured to comply with a complex web of federal and state regulations. The federal Anti-Kickback Statute and Physician Self-Referral Act (“Stark”) (as well as any state law versions of these statutes), as well as state fee-splitting and third party billing laws, must be considered and assessed when structuring a compliant MSO arrangement.

Some states, like New York, prohibit MSO fees based on a percentage revenue, while other states, like Florida, restrict percentage-based MSO fees if the MSO’s services include assistance in expanding the service lines of the medical practice. Furthermore, MSOs serving medical practices that receive government reimbursements (such as federal health care program dollars such as Medicare and/or Medicaid) must ensure that the terms of the MSA and the MSO fee comply with federal laws.

Common MSO fees include:

• a fixed monthly fee
• a percentage of revenue (if not prohibited by state law)
• “cost-plus” models, where the MSO charges its actual costs plus a mark-up (either a fixed amount or a percentage of costs)

Regardless of the MSO fee model, it is advisable to have written support or documentation that the MSO fee is fair market value.

Conclusion

Forming MSOs can be beneficial for physician groups in many respects, including achieving economies of scale and increased medical practice profitability, and strategic positioning for a potential lucrative sale transaction.

It is imperative, however, that MSOs be carefully and properly structured to achieve the strategic objectives of the group’s physicians in a legally compliant and tax-efficient manner.

Gary Herschman, Esq. has been advising physicians on strategic positioning and major transactions for over 30 years, and is the Co-Chair of the Health Care Transactions Group and a partner at the national healthcare law firm of Baker Donelson. He represents dozens of physician groups of all specialties throughout the country on growth strategies and major transactions. Gary’s email is: [email protected]

Lisa Gora, Esq. has been a healthcare regulatory and transactions attorney for over 12 years and is partner in the national healthcare law firm of Baker Donelson.She represents many physicians and other healthcare providers and facilities (including behavioral health) on regulatory issues and healthcare transactions in multiple states across the country. Lisa’s email is: [email protected]