Navigating Management Services Agreements (MSAs): Is a New Entity Essential for the Medical Director?

What are the benefits of creating a new, separate professional entity when creating an MSO-managed healthcare business? 

Physician holding a pen to sign a document.

As we’ve discussed in previous articles, management services agreements (MSAs) enable physicians and other appropriately licensed healthcare professionals in private practice to offload non-medical functions to a management services organization (MSO) owned by individuals who don’t hold the appropriate license to own a practice.

Such arrangements are especially popular in states with corporate practice of medicine (CPOM) laws, which bar unlicensed individuals from owning medical practices. MSAs allow appropriately licensed practice owners, whom we’ll call “medical directors,” to focus on patient care while the MSO owners can participate in the practice’s operations and benefit from the medical practice’s success — without violating CPOM laws.

Sometimes, the medical director entering the new MSA may already have an established practice. For example, a physician with a primary care clinic might form an arrangement with an MSO to open a medical spa. You might assume that using the existing professional entity — i.e., the professional limited liability company (PLLC) or professional corporation (PC) for the medical director’s primary care clinic —  is a logical way to save costs, even though the clinic and the medical spa are entirely distinct businesses.

See our related article, Should I Establish a PLLC or an LLC for My Illinois Healthcare Practice?

But is it a good idea to fold the new venture into the existing professional entity? It certainly sounds easier and more efficient. However, establishing a separate professional entity for the medical spa might reduce liability and prevent costly disputes between the MSO and the medical director.

There are several reasons that both parties can benefit from creating a new PLLC, PC, or other professional entity for the medical director.

Compartmentalizing Risks

In our primary care and medical spa example, the MSO does not manage the primary care practice. Thus, it may be difficult, or even impossible, for the MSO’s manager to identify risks initiated by the primary care practice. But remember, if the medical spa and primary care clinic are housed under the same entity, their fates become legally intertwined. If the primary practice goes under, becomes the subject of a lawsuit, or is otherwise compromised, the medspa, and thus the MSO, will also suffer consequences. Likewise, the primary care clinic will share the liabilities of the medspa. Creating a separate entity for the medspa compartmentalizes the risks.

Clarifying Parties to the Agreement

Creating a new professional entity with the medical director as the single owner clarifies with whom the manager is entering into a business relationship. Otherwise, the physician’s existing entity might have multiple shareholders unknown to the MSO owner when entering the business relationship. 

Avoiding Administrative Confusion

The very purpose of the MSO is to assume some or most of the administrative tasks of the new practice. For example, MSO owners will typically need to handle some aspects of the new practice’s finances, ranging from paying expenses to managing the bookkeeping. However, having a single entity for both practices can make it trickier to differentiate the obligations. It thus becomes more difficult for the MSO to manage a business that’s only partially under their control.

Managing Property Ownership

What happens if the MSO purchases physical assets (i.e., products, equipment, etc.) for the professional entity, and the medical director uses them for both the medspa and the primary care clinic? The blurred boundaries increased the risk of property disputes between the medical director and the MSO. With a separate entity, the ownership becomes clear-cut.

Navigating Insurance Issues

Creating a new professional entity for the MSA arrangement may help with shared policy limits for insurance purposes. It’s beneficial for the medical spa to have its own professional liability coverage distinct from the liability insurance covering the medical director’s primary care practice. 

Ensuring Patient Privacy 

The electronic medical record (EMR) system for the two practices should be separate to avoid the inappropriate disclosure of patient health information (PHI). Separating the two ventures’ PHI within an already established EMR can be complex.

Streamlining Exit Strategies

One can imagine many scenarios in which the medical director’s plans for the medical practice evolve differently from those of the medical spa. For example, what if the medical director wishes to sell the primary practice? What if the medical director finds the reality of owning a medical spa as a sideline does not live up to expectations and wants to back out? Or what happens if the MSO realizes that the medical director is overextended and can’t keep their end of the bargain? A separate professional entity will likely create a more streamlined process if either party wishes to sell or step away from the arrangement.

These are just some advantages of creating a new business entity for the professional side of the MSA arrangement, whether it’s a medical spa or any other type of healthcare practice. Some of these risks may be less relevant in specific situations. Still, the ongoing liability protection and benefits of creating an entirely new entity often outweigh the initial cost benefits of using a pre-existing one. 

Get Legal Help

Creating a new medical practice may seem daunting, but an experienced healthcare attorney who has helped many entrepreneurs create new professional entities and MSOs can streamline the process. If you’re gearing up to establish a new practice or need assistance with an MSA arrangement in one of the states where we practice, consider setting up a free consultation to discuss your matter and learn if our firm is a good fit for you.

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. This blog should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.

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