Management Services Agreements (MSAs): What Healthcare Professionals Should Understand
You may have heard of a management services agreement (MSA) or been told you need one to have a compliant corporate structure. If your practice has or needs an MSA, understand its purpose and how it addresses legal barriers to owning a healthcare practice.
What is a Management Services Agreement?
In the most basic sense, a management service agreement (MSA) is a contract that facilitates the business relationship between two distinct business entities: a non-physician business entity and a medical practice.
The non-physician business entity is typically a limited liability company (LLC) or corporation. This article will refer to this type of entity collectively as a management services organization (MSO). This entity is usually controlled by an unlicensed individual or group or by a healthcare professional with a license that does not permit medical practice ownership.
Meanwhile, the medical practice is usually a professional limited liability company (PLLC) or professional corporation (PC). It’s owned and operated by a properly licensed provider or group of providers. Here, we’ll call it a “friendly PC“.
Recognize the difference between corporations or LLCs and PCs or PLLCs, which are two distinct types of business entities. The “P” signals that this entity provides a professional service — in this case, healthcare services. Most states require licensed professionals to operate in a professional entity. Therefore, if you are 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:
- The provision and oversight of all medical-related services
- The hiring and firing of licensed medical professionals
- Determining the fee schedule for medical services and procedures
- Receiving funds generated from medical services
Meanwhile, the MSO focuses on business-related activities such as:
- Contracting of management personnel
- Onboarding services
- Technological support
- Scheduling assistance
- Billing and bookkeeping
Clarifying which entity performs which services is key to maintaining a compliant MSA arrangement.
When is an MSA Required?
In most states, unlicensed individuals may not own or directly profit from physician services, a prohibition 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. CPOM applies to all unlicensed individuals, LLCs, and business corporations owned (even if owned in only a small part, in some states) by unlicensed individuals.
A properly structured MSA solves this problem, allowing the providers within the friendly PC to make medical decisions independent of the MSO. Meanwhile, the MSO charges the friendly PC for the business services that it renders.
Even if both parties are licensed providers, a healthcare practice may still need an MSA. The type of licensure matters. Some states only allow certain types of medical professionals to own a practice together. 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 idea behind fee-splitting prohibitions echoes that of CPOM, and is as follows: if an unlicensed person receives payments that originate from medical services, that person may exert influence over the physician’s patient care decisions. Therefore, many states also prohibit fee-splitting between physicians and unlicensed individuals.
Keep in mind that CPOM and the parameters of fee-splitting 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. Other states strictly prohibit any sharing of fees procured by physicians.
A majority of states prohibit patient fee-splitting between unlicensed and licensed providers. In these states, patient dollars may flow to the friendly PC instead, and not directly in the MSO’s bank account. So how do MSOs receive a cash flow?
Establishing Management Fees
The friendly PC usually pays the MSO for the business services they provide. Payments are usually distributed as 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 revenue from patient care. Instead, the MSO may structure a flat fee or cost-plus fee that is based on the fair market value of the MSO’s business services provided 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 on behalf of the friendly PC to the necessary parties. An example of the order of payments might be:
- Physician-owner’s salary
- PC or PLLC operating expenses (employee salaries, PPE, rent, utilities)
- 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 specific license and business situation. But in general, licensed healthcare providers should be aware that improper professional practices under this type of arrangement can have serious consequences.
For instance, MSO involvement may invite scrutiny about who is making medical decisions in practice. Thus, there must be proper oversight of providers and 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 nature of 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 felony 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.
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?
Are you a physician that needs help with business management and is ready to take on a partner? Perhaps you’re a nurse looking to open a medical spa and think this may be the arrangement necessary to begin operations. A healthcare attorney can help you assess whether an MSA is necessary for your licensure status and business goals.
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.