Management Services Agreements (MSAs): What Healthcare Professionals Should Understand

Have you been told you need an MSA to have a compliant corporate structure for your healthcare practice? Learn about the purposes and goals of MSAs and how they apply to private practice ownership.

Two healthcare professionals in a business meeting, listening.

What is a Management Services Agreement?

A management services agreement (MSA) is a contract that facilitates the business relationship between two business entities, most often a non-physician-owned business entity and a physician-owned medical practice.

The non-physician business entity is usually a limited liability company (LLC) or corporation acting as a management services organization (MSO). MSOs are typically (but not always) controlled by an unlicensed individual, a group of private investors, or a non-physician healthcare professional who cannot own a medical practice outright (in most states).

Meanwhile, the medical practice is usually a professional limited liability company (PLLC) or professional corporation (PC). It’s owned and operated by a physician or other appropriately licensed group of providers. Throughout this article, we’ll call it a “friendly PC,” even though the practice may operate as a PLLC rather than a PC.

Recognize the difference between LLCs and PLLCs (or, similarly, between PCs and corporations). The “P” stands for “professional” and signals that this business entity provides a professional service – in this case, healthcare services. Most states require licensed services to be provided by a professional entity. Therefore, if you own a healthcare practice operating under an LLC or a corporation, you may not have the correct type of business structure for your services.

An MSA is a binding contract between the MSO and the friendly PC. Significantly, it clarifies that the two parties are separate entities working together on a joint business venture but with distinct responsibilities. The friendly PC operates and controls the healthcare-related aspects of the operations, including:

  • Providing and overseeing all medical services
  • Hiring, firing, and disciplining licensed medical professionals
  • Setting the fee schedule for medical services and procedures
  • Receiving funds generated from physician services

Meanwhile, the MSO  focuses on business-related activities. It either directly provides or contracts with companies for:

  • Legal and accounting services
  • Payroll processing, patient billing, and practice bookkeeping
  • Medical waste disposal and office cleaning
  • Onboarding, training, and managing non-clinical employees
  • Scheduling appointments
  • IT services
  • Marketing services

Clarifying which entity performs which services is critical to maintaining a compliant MSA arrangement.

When is an MSA Required?

In most states, unlicensed individuals may not own or directly profit from physician service. This prohibition is called the Corporate Practice of Medicine (CPOM). It is a legal doctrine based on the idea that a physician’s medical judgment should be free from the influence of corporations, unlicensed individuals, and the pursuit of profits.

A properly structured MSA solves this problem, allowing the friendly PC’s physicians to make medical decisions independent of the MSO. Meanwhile, the MSO charges the friendly PC for its management services.

Many states only allow certain types of medical professionals to own a practice together. Therefore, Even if both parties are licensed providers, an MSA may still be required. Say, for instance, a state prohibits registered nurses from owning a practice with a physician. In that state, an RN would need to establish an MSO and set up an MSA with a physician or other provider who can own the practice (i.e., the friendly PC). 

How do profits flow in a way that does not violate CPOM?

Among other functions, the MSA formalizes the fee structure between an MSO and a friendly PC.

Avoiding Fee-Splitting Prohibitions

The core concern behind fee-splitting prohibitions echoes that of CPOM: if an unlicensed person receives payments that originate from medical services, that person may exert influence over the physician’s patient care decisions. To ensure physicians remain in control of medical decisions, many states prohibit fee-splitting between physicians and unlicensed individuals or entities.

Keep in mind that CPOM and fee-splitting prohibitions vary significantly between states. For example, some states allow for certain types of fee-splitting arrangements between physicians and non-physicians — and even outright ownership of physician practices by unlicensed individuals. However, most states prohibit splitting patient fees between unlicensed and licensed providers. In these states, payments for services can only be paid to the friendly PC and not directly into the MSO’s bank account. So, how do MSOs collect revenue?

Establishing Management Fees

The friendly PC usually pays the MSO for their business services through a management fee determined between the parties and memorialized in the MSA. In many states (but again, not all), the management fee cannot be a percentage of the medical practice’s billables. Instead, the MSO may collect a flat fee or cost-plus fee representing the fair market value of the management services that the MSO provides to the friendly PC. 

In such cases, an MSO typically could not charge, for example, a management fee of 50% of all PLLC revenues. Not only is this arguably too high, but the mere fact that it’s a split of patient payments violates CPOM. So, instead, it would need to be a specific dollar amount based on the negotiated rate of the business services rendered by the MSO.

How Does the MSO Pay Expenses?

Generally, the MSA will dictate the order in which payments are made from the friendly PC’s revenues. The MSO, as part of its management and business authority, may issue these payments to the necessary parties on behalf of the friendly PC. An example of the order of payments might be:

  1. Physician-owner’s salary
  2. PC or PLLC operating expenses (employee salaries, PPE, rent, utilities)
  3. MSO’s management fee

At regular intervals, the MSO should carefully review the books and records of the friendly PC to determine the proper order of payments. Typically, the MSO also has the authority to ensure that the friendly PC retains sufficient funds in its bank account to meet its ongoing business obligations. 

The Risks of MSAs

The risks of MSA arrangements depend on each party’s license and business situation. But in general, physicians have the most risk in these arrangements because everyone involved is expected to operate in deference to the physician’s professional judgment. It’s thus crucial the physician’s judgment remains unimpaired by the MSO’s business interests.

For instance, establishing an MSO may invite scrutiny about who is making medical decisions in practice. Thus, there must be proper oversight of all clinical staff to avoid the risk of professional discipline by a licensing board. 

Meanwhile, the involvement of unlicensed individuals increases the risk that state agencies will investigate the possible unauthorized practice of medicine. Violators could face severe fines or other forms of punishment.

Finally, depending on the relationship between the parties, there may be an increased risk of impermissible referrals — a violation of the federal Anti-Kickback Statute (AKS). AKS makes it a crime to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services payable by a federal healthcare program. For physicians who practice in multiple settings, evaluating when you are being financially rewarded for a referral (even to a practice you control) can be tricky.

Be wary of impermissible referrals and work with an experienced healthcare attorney who can set up your management services agreement in a way that distributes fees in compliance with federal law. 

Do I Need an MSA?

If you are a physician and an investor has proposed setting up an MSO to manage a practice on your behalf, you likely need an MSA to formalize the relationship. You may also need other legal documents — like a restricted stock transfer agreement, which can establish who retains ownership control if the business deal sours. 

Often, the first topic to discuss with your potential management partner and your attorney is the proposed payment arrangement. Because the fee structure is often grounds for disagreement between the parties, it’s crucial to be sure your expectations align — and those expectations are legal – before diving head-on into this new venture.

If you’re unlicensed or suspect that your licensure does not permit ownership of a medical practice, such as a nurse who wants to open a medical spa, a healthcare attorney can help you assess whether an MSA is necessary for your business goals. 

If you are in one of the states where we practice, learn if our MSO/MSA services are right for you. Schedule a complimentary phone consultation with one of Jackson LLP’s healthcare attorneys. 

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.

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