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Key Takeaways
- Compliant MSO Funds Flow Follows a Recognized Order
Money in an MSO structure should follow a specific sequence: clinical providers are paid first, practice operating expenses are covered next, and the MSO receives its management fee last to preserve compliance.
- Management Fee Design Is a Central Compliance Decision
The structure of the MSO management fee is a key legal and regulatory issue, as it directly impacts whether the arrangement complies with fair market value (FMV) standards and avoids the risk of prohibited fee-splitting.
- Investor Returns Depend on Proper FMV and Funds Flow Structure
Non-physicians and investors may earn compliant returns through an MSO, but only when the management fee is set at fair market value and the funds flow structure is correctly implemented.
How Does Money Flow Through an MSO?
Money flows through an MSO in a structured, legally significant sequence. Patient revenue is first collected by the medical practice, clinical providers are paid for services rendered, operating expenses are covered, and the MSO receives its management fee last. This MSO flow of funds is designed to ensure the management fee remains compliant and is not tied to clinical volume or referral activity.
Most practice owners spend their day balancing patient care with administrative responsibilities. They may review treatment plans, resolve billing issues, approve payroll, address facility concerns, and update their general liability insurance in the same afternoon. Management services organizations (MSOs) help by taking over many of these business functions so healthcare professionals can focus on patient care.
But before securing assistance from a management services organization, all parties involved must understand the ins and outs of compensating an MSO.
A Typical MSO Funds Flow Structure
In a typical MSO arrangement, patient revenue comes into the medical practice first, and the MSO receives its management fee last.
This order matters because it keeps compensation clearly separated from clinical revenue and helps ensure the arrangement remains compliant under an MSA agreement with an MSO.
When a practice develops an agreement with a management services organization, the MSO’s fees will be a key focus of negotiations.
In most compliant MSO arrangements, money flows in the following order:
- The practice collects patient revenue
- Providers receive compensation
- Practice operating expenses are paid
- The MSO receives its management fee
- The MSO pays its own expenses and distributes profits to owners
To simplify payments, many practices implement an automatic bank transfer arrangement called a “sweep account.” In this arrangement, funds flow to the MSO automatically on the agreed-upon schedule. Practice owners looking to use an MSO can talk to their bank about how to establish sweep accounts. If the practice receives Medicare or Medicaid payments, federal rules also limit who may control the bank account that receives those payments, so any sweep arrangement should be structured with those requirements in mind.
A fundamental operational safeguard is maintaining separate bank accounts for the MSO and the medical practice. Each entity must operate through its own account, and funds should not be commingled (pooled in one account). Commingling is one of the most common and most easily identified compliance failures in MSO arrangements and can quickly raise regulatory concerns during audits or investigations.
The Legal Order of Payments vs. the Physical Movement of Funds
One area that often causes confusion is the difference between the legal order of payments and where the money physically sits. In many MSO arrangements, patient revenue is deposited into a bank account owned by the medical practice. Under a sweep arrangement, excess funds are then automatically transferred to a separate MSO operating account as required by the management services agreement (MSA).
The MSO does not own all the swept funds, even though they may be held temporarily in the MSO’s account. Instead, the MSA determines how the money is spent.
This distinction is important because the MSO generally should not have direct access to the practice’s bank account. Many structures instead use sweep arrangements and periodic reconciliations rather than allowing the MSO to withdraw funds directly from the practice account.
MSO Funds Flow: An Example
Imagine a medical practice maintains a practice revenue account with a minimum operating balance of $10,000. At the end of a particular day, the account contains $50,000.
Under the MSA’s sweep arrangement, $40,000 is automatically transferred from the practice revenue account to the MSO operating account, while $10,000 remains in the practice account.
The MSO then uses the swept funds according to the order established in the management services agreement. For example:
- Providers are compensated for clinical services
- Practice expenses such as rent, staff payroll, software subscriptions, and vendor invoices are paid
- The MSO receives its agreed management fee
- Any remaining excess funds are returned to the practice or credited as provided in the MSA
As a result, the money may physically move through the MSO operating account, but the MSA determines how those funds are allocated. The MSO cannot simply retain all swept funds. Instead, the agreement establishes which amounts belong to the practice, which amounts reimburse practice expenses, and which amounts constitute the MSO’s compensation.
Have questions about how this process works and what steps you need to take to set up this type of arrangement? Contact our team of healthcare lawyers today to learn more.
How Are MSO Management Fees Structured?
Once the parties determine what services the MSO will provide, they must decide how the MSO will be compensated. MSO compensation is generally designed around three primary fee structures, each carrying different compliance considerations:
- Flat Fee: A fixed monthly or annual payment for defined management services, regardless of patient volume or revenue.
- Cost-Plus: The MSO is reimbursed for actual costs plus a defined markup that reflects administrative value.
- Percentage-Based: Compensation is tied to a percentage of practice revenue, which can draw heightened scrutiny depending on state law and regulatory context.
Among these, the flat fee structure is generally viewed as the safest from a compliance standpoint because it is the least likely to be interpreted as tied to patient volume or referral activity. When properly defined and supported by documentation, a flat fee helps reinforce the separation between clinical revenue and administrative compensation, reducing regulatory risk under both state corporate practice of medicine (CPOM) rules and federal oversight frameworks.
Regardless of the fee model, the management fee should reflect fair market value. In practical terms, that means the practice should pay approximately what an unrelated business would pay for similar administrative services under similar circumstances.
Understanding these structures is closely tied to broader entity setup and operational design decisions, including choosing a business structure, which can influence how MSO arrangements are implemented and regulated.
Why Does the Order of Payments Matter?
The order of payments matters because regulators want to ensure the MSO is compensated for legitimate administrative services rather than receiving a share of professional fees. As a result, two issues receive particular scrutiny: how the MSO is paid and whether the MSO exercises control over clinical decision-making.
Beware of Payment Agreements Based on Patient Volume
MSO compensation should reflect the fair market value of the administrative services the MSO provides. One of the primary compliance concerns in healthcare is whether an MSO’s compensation increases based on patient volume, referrals, or the value of professional services provided by licensed clinicians.
Regulators generally seek to prevent financial arrangements that could influence clinical decision-making. As a result, many states scrutinize compensation structures that allow an MSO to profit directly from professional fees generated by healthcare providers. In states that follow the corporate practice of medicine doctrine (CPOM), these arrangements may raise concerns about improper control over a professional practice.
Federal laws can create additional risk. The Anti-Kickback Statute and Stark Law both examine whether compensation is tied to the volume or value of referrals or services, though the Stark Law applies only where a physician has a financial relationship with an entity that furnishes designated health services. Even if an arrangement appears permissible under state law, it may still warrant review under applicable federal requirements.
For example, a practice might agree to pay an MSO a fixed monthly fee of $8,000 for billing, scheduling, and administrative support. This arrangement is generally easier to defend than one in which the MSO receives a percentage of every patient visit because the MSO’s compensation does not automatically increase as clinical volume grows.
Because state laws vary, percentage-based compensation models should be evaluated carefully before implementation. Some states permit them under limited circumstances, while others impose significant restrictions or discourage their use altogether.
Some Decisions Must Stay With Licensed Providers
A useful rule of thumb: if a decision involves diagnosis, treatment, medical necessity, referrals, or patient care, it generally belongs to the licensed provider, not the MSO.
Just as improper financial incentives can distort MSO compensation, allowing non-clinical staff to influence care decisions creates a parallel compliance risk.
If a healthcare practice gives an MSO authority over the wrong decisions, it may violate the laws and ethical obligations governing licensed professionals. Consequences could include disciplinary action, including fines and, in serious cases, license revocation. Infractions can also invite civil action under a state’s consumer protection laws.
For example, a billing manager may explain a charge or discuss payment options. However, recommending a particular treatment or suggesting a patient see a specialist crosses into clinical judgment that should remain with a physician or licensed provider.
In this scenario, the physician or licensed provider should immediately correct this error with both the MSO and the patient. The biller has no qualifications to advise the patient on what care would or would not be beneficial, nor to refer the patient to another specialty.
Red Flags: Signs Your MSO Funds Flow May Not Be Compliant
The following warning signs often indicate that an MSO arrangement warrants closer legal review.
- The MSO’s management fee is tied to patient volume or collections without legal support. If the MSO is paid based on a percentage of revenue or patient volume without a clear, state-permitted structure, it may indicate improper fee-splitting or regulatory exposure.
- The MSO and medical practice share a single bank account or commingle funds. Shared accounts or routine mixing of funds between entities is a major compliance failure and often one of the first issues identified in audits or investigations.
- The management fee is not consistent with fair market value. A fee set significantly above or below the value of services provided can raise concerns about disguised profit-sharing or improper inducements.
- The MSO is influencing clinical decision-making. Involvement in staffing, treatment protocols, or referral decisions risks crossing into the practice of medicine by an unlicensed entity.
- The MSO collects revenue directly from patients. Patient payments should flow to the medical practice first; direct collection by the MSO can undermine the required separation of clinical and administrative functions.
- The payment order pays the MSO fee first. If the MSO fee is paid before clinical providers or operational expenses, it departs from the expected MSO flow of funds and may signal structural noncompliance.
- The MSA does not match actual operational behavior. If the written agreement differs from how the MSO operates day-to-day, regulators may disregard the contract and evaluate the real-world conduct instead.
Identifying these issues early is far less costly than addressing them after a regulatory inquiry or audit. A healthcare attorney can review an existing arrangement for compliance risks, including common ownership and compensation pitfalls.
How Non-Physicians and Investors Make Money Through an MSO
One of the most common questions from entrepreneurs and investors is straightforward: If I cannot own the medical practice, how do I make money? The answer is that the MSO earns revenue for providing business services. The practice pays the management fee, the MSO covers its operating costs, and any remaining profit may be distributed to the MSO’s owners.
Because most states prohibit non-physicians from owning medical practices under corporate practice of medicine rules, an MSO model is a legal vehicle used to participate in healthcare economics. The MSO owns or manages the non-clinical infrastructure, contracts with the medical practice, and earns a management fee for administrative services.
From there, the MSO pays its operating expenses and distributes remaining profits to its owners through standard business distributions. Returns come from management fees, not clinical revenue or patient billing.
MSOs are often valued based on their recurring earnings. When properly structured, they generate predictable, recurring administrative cash flow that is attractive to investors.
This model only works legally and financially if the management fee reflects fair market value and the funds flow is structured correctly from the outset. Seek legal guidance before entering any healthcare investment model involving MSOs, including decisions around choosing MSOs over private equity.
We Provide MSO Legal Guidance for Healthcare Providers and Investors
MSO arrangements require more than a well-drafted contract. The management fee, flow of funds, operational authority, and day-to-day practices must all work together to support compliance. Whether you are a practice owner evaluating an MSO or an investor structuring a new arrangement, legal review early in the process can help prevent costly restructuring later.
Jackson LLP is a healthcare law firm that handles MSO arrangements for independent private practices across multiple states, helping align contract terms with real-world operations. Our work in this area includes structuring funds flow, drafting and reviewing MSAs, setting management fees at fair market value, and advising on ongoing compliance issues.
Because MSO rules vary by state, clients receive jurisdiction-specific guidance across the states where we are licensed, including Illinois, California, New York, Texas, and Wisconsin.
To learn more, schedule a free consultation with one of our attorneys.
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Frequently Asked Questions About How Money Flows Through an MSO
What is the correct order of payments in an MSO arrangement?
In a properly structured MSO, payments follow a recognized sequence: clinical providers are paid first for professional services, then the medical practice’s operating expenses are paid, and the MSO receives its management fee last. This order helps separate clinical revenue from administrative compensation and is a key indicator of a compliant structure. Paying the MSO fee ahead of the practice’s obligations is a common compliance red flag.
Can an MSO charge a percentage of a medical practice’s revenue?
Yes (sometimes). But it often increases regulatory risk. Percentage-based MSO fees can be viewed as tying compensation to patient volume or utilization, which may raise concerns under state fee-splitting laws and the federal Anti-Kickback Statute. Many compliance-focused structures instead use fixed management fees based on fair market value. A healthcare attorney should review any percentage-based arrangement before implementation.
What happens if the MSO funds flow is not set up correctly?
Improper MSO funds flow can trigger significant legal and regulatory exposure. Potential consequences include state licensing board investigations, corporate practice of medicine violations, payor audits with repayment demands, and, in more serious cases, scrutiny under federal fraud and abuse laws such as the Anti-Kickback Statute.
How is an MSO different from private equity ownership of a medical practice?
Private equity generally involves direct ownership of a business, but in most states, non-physicians cannot own a medical practice due to corporate practice of medicine restrictions. An MSO provides a compliant alternative by allowing investors to own a management company that contracts with the medical practice for administrative services. Returns are generated through management fees rather than direct clinical revenue, creating a structurally different legal and financial model.
How much does it cost to work with Jackson LLP Healthcare Lawyers, and what can I expect from the process?
We begin with a free 15-minute consultation to identify your MSO needs. Afterward, we provide a written fee quote that outlines the scope and cost before any work begins.
