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Planning to form an MSO in Illinois? Learn about key legal requirements, payment structures, and compliance with Illinois’ corporate practice of medicine doctrine.
You may have heard of Management Services Organizations (MSOs) and their role in supporting a medical practice’s business operations. If you’re new to MSOs or want to understand the importance of creating a proper management services agreement (MSA), visit our MSO Learning Resources page. Our collection of blogs and videos covers everything from foundational concepts to practical steps for compliance.
The process of forming an MSO and drafting an MSA varies from state to state. This blog focuses on the key considerations for starting an MSO in Illinois. We’ll review the potential corporate structures for these entities, highlight Illinois-specific registration requirements, and explore how Illinois law impacts the way MSOs are paid for their services.
Corporate Structure
In Illinois, you have several options for structuring an MSO. Commonly, an MSO is organized as a limited liability company (LLC) or a corporation, but it can take any corporate form allowed under Illinois law. Because MSOs provide unlicensed business services, they can be owned by anyone. However, the professional entity—the practice owned and operated by the licensed healthcare professional—has stricter rules.
Licensed healthcare professionals in Illinois must operate through a Professional Corporation (PC) or a Professional Limited Liability Company (PLLC) instead of an LLC or corporation. Illinois law limits professional entities to these two structures because the state adheres to the corporate practice of medicine (CPOM) doctrine. Under CPOM, non-licensed individuals are generally prohibited from owning or controlling medical practices.
This restriction reflects a public policy goal: ensuring that business or profit-focused decisions made by unlicensed owners do not compromise the independent medical judgment of licensed healthcare professionals. Allowing shared ownership could create ethical conflicts between a practice’s obligation to prioritize patient care and a co-owner’s interest in maximizing profits. To comply with CPOM, Illinois requires licensed professionals to form PCs or PLLCs when entering management services agreements.
See our related video, “The Corporate Practice of Medicine in Illinois.”
The Illinois Department of Financial and Professional Regulations (IDFPR) oversees licensed activities in the state. Most healthcare professionals are familiar with IDFPR’s role in licensing individuals, but the same agency also regulates the professional entities they form.
When creating a PC or PLLC, healthcare professionals must register the entity with IDFPR. This registration process mirrors the licensing steps healthcare professionals follow in their personal capacity. By contrast, MSOs, which are typically structured as LLCs or corporations, generally do not need to register with IDFPR because they do not provide licensed services.
Payment Arrangements Between the MSO and Professional Entity
Perhaps the most critical aspect of an MSO arrangement is determining how the professional entity will pay the MSO for its services. Payment structures must comply with state and federal laws, including restrictions on fee-splitting. Violating these rules can result in severe civil and criminal penalties.
In Illinois, fee-splitting is governed by the state’s Medical Practice Act, which prohibits licensees from sharing professional fees in exchange for referrals or other improper arrangements. However, the law includes narrow exceptions for percentage-based payments based on licensees’ patient billables, provided they are fair market value. Specifically, a PC or PLLC can pay an MSO a percentage of its professional fees for billing or collections services if two conditions are met:
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- The PC or PLLC retains sole control over the fees it charges and collects.
- All collected fees are:
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- Paid directly to the PC or PLLC;
- Deposited into an account in the name of and under the sole control of the PC or PLLC; or
- Deposited into a “trust account” as defined by Illinois law.
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For all other services, payments must be structured as flat fees or on a cost-plus basis to avoid fee-splitting concerns. Because the exceptions are narrowly drawn, it is essential to draft MSAs that not only comply with Illinois law but also align with federal regulations like the anti-kickback statute and Stark Law.
See our related video, “Setting Management Fees.”
Why You Need Legal Help
Creating an MSO or structuring an MSA requires careful planning and in-depth knowledge of state and federal law. Missteps can lead to significant legal and financial consequences. If you’re in Illinois—or another state where we practice—schedule a free 15-minute consultation with our experienced healthcare attorneys to discuss your options.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.
