By Dana Jacoby

A management services organization (MSO) is an entity that provides practice management and administrative support services to individual physicians, private practices, or medical groups. These services encompass billing and collection, provision of EHR, payer credentialing, supervision of non-clinical staff, HR functions, group purchasing, malpractice discounts, and much more.

MSOs can also be used to limit liability or improve asset protection.

In other words, MSOs simplify the non-clinical, administrative services related to the operation of a medical practice. This enables the development of economies of scale that are not realistically attainable for most small or medium-sized practices. There are many types of MSO. Some provide a few select services; others offer wide-ranging support. Today we will look at the best way to structure them, and how to tackle compliance.

Turnkey Experience

Full-blown MSOs are effectively a turnkey experience for medical practices, helping to alleviate administrative burdens and allowing clinicians to focus more fully on patient care. In particular, practices are drawn to the prospect of greater efficiency and impressive cost savings. However, MSOs also provide a useful vehicle between licensed physicians and non-physicians.

In the always-evolving healthcare setting, and particularly against the background of the COVID-19 pandemic, many practices are exploring the benefits of a Management Services Organization (MSO) to their overall strategy. In fact, interest in MSOs has grown more quickly in the last three years than in the previous decade.

The utility of the MSO model in the highly regulated healthcare industry has captured the attention of the private equity (PE) community, which is wary of the prohibition on non-physician-owned medical practices. Nevertheless, when forming an MSO there are important regulatory issues that demand careful consideration. It is important to structure the organization properly to satisfactorily meet the business needs of the participants.

The Implications of CPOM

The corporate practice of medicine doctrine (CPOM) is designed to ensure that profit motives do not lead to over-utilization or interfere in the exercise of a licensee’s clinical judgment. Licensees are bound by ethical rules in a way that makes them harshly accountable. An individual state’s position on CPOM is addressed in statutes, regulations, court decisions, and actions taken by medical licensing boards.

New York State is considered a strict CPOM state; Ohio is seen as relatively lenient. However, even in the latter case, the notion of non-interference in the exercise of a licensee’s clinical judgment is evergreen.

The consequences of violating the CPOM are discipline for the authorized practice of medicine, violation of fee-splitting laws, or self-referral prohibitions. There may be challenges from payors, with any false claims subject to punishing clawbacks. The Federal Anti-Kickback Statute (“AKS”) enforces criminal penalties against individuals or entities that knowingly offer, pay, solicit, or receive unauthorized remuneration.

Convictions mean a fine of up to $25,000 per incident and up to five years in prison!

MSO Structure

MSOs are established as limited liability companies or general business corporations.

Many are formed as Delaware LLCs or corporations because of the state’s pro-business laws. LLCs are flexible in terms of how profits can be distributed, and they can be converted to a corporation at a later stage without any significant tax implications.

Once the MSO is formed, it enters into a management services agreement (MSA) with the medical practices involved. This action creates the foundation of the business relationship (including a clear stipulation of the management fee) between the MSO and the practices.

It is possible to assign leases and transfer assets from the practice to the MSO. However, it is crucial to bear in mind that an MSO is simply a vendor of service for the practice.

In the quest to generate decent returns to investors, many participants look to establish a truly robust MSO, with strict requirements for the practice and a long-term commitment of five years or more.

Calculating the management fee is tricky. Most PE organizations charge a percentage, but this is not permitted in all states. Under the popular cost-plus model, the management company rents the office of the practice, employs all the non-clinical staff, and acquires all the supplies and equipment — providing wide-ranging operational and administrative support to the practice.

With this approach the associated costs are charged back to the practice, helping the MSO to break even.

Changing Status of the MSO

Past attempts at an MSO-like model in healthcare fell way short of expectations — with the physician practice management companies of the 1990s the most glaring example. However, the arrival of the Tax Cuts and Jobs Act in 2017 (TCJA) made waves in the industry as small and mid-size practices became alert to the prospect of tax advantages.

An MSO can provide extraordinary non-tax benefits, such as improved access to capital and extra revenue streams for established practices, as well as time savings on administrative tasks. MSOs are also helpful in assisting medical practices to comply with a number of federal laws, including the Stark Law on self-referrals.

A firewalled, payor agnostic MSO gives some assurance to managed care organizations (MCOs) when engaged in contract negotiations — and it can also help to raise the percentage of worldwide risk that the risk-bearing entity has access to.

The shifting landscape of value-based reimbursement, an urgent need to harness technology to boost efficiency, and the expansion of consumerism in healthcare all provide openings for MSOs to thrive in the present environment.

Whatever your plans, Vector Medical Group can offer you friendly, cutting-edge physician practice consulting.

That includes advice on MSO formation.

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