Setting Management Fees [Video]
You’re entering into a management service agreement (MSA), the contract between a management company (MSO) and a healthcare practice. How do you set the management fees? Firmwide Managing Partner, Erin Jackson, describes two basic compensation models and some key legal traps to avoid.
You’re entering into an MSA, or management service agreement, a contract between an MSO (or management company) and a medical practice. How do you set the management fees? I’m Erin Jackson with Jackson LLP Healthcare Lawyers. This is a common question for those entering into MSAs, and it’s also one of the hardest decisions of the process.
So, if MSAs, MSOs, or the corporate practice of medicine doctrine are new to you, check out some of the other articles on our website or videos here for a little background on what I’m discussing.
View the related blogs, “Management Services Agreements (MSAs)” and “How Does Money Flow Through a Management Services Organization (MS0)?”
Now, when determining how to set a management fee, it’s important to realize this is a discretionary business decision. It’s also important to remember that it can be renegotiated in a year or two if it turns out that your estimate and your numbers that you’re crunching now weren’t quite right.
So, there’s two main models we typically recommend. The first is a flat-fee management fee. This is exactly what it sounds like. The management company is paid a flat amount by the medical practice every month for the management services they’re offering.
The second one is the cost-plus model. Under this model, the management company is reimbursed for its costs each month associated with managing the medical practice. It also is then paid a percentage, or a plus, on top of the reimbursed costs.
There are also ways of reimbursing a management company that run afoul of various health care fraud, waste, and abuse laws but that, nonetheless, are common among those engaged in MSO relationships. Obviously, we advise against these because the penalties can be either financial or criminal in nature. So, you do want to avoid anything that could be construed as a kickback, an improper fee splitting, something that violates the corporate practice of medicine doctrine, or something that violates the practice act of any of the involved license providers.
If you’re entering into an MSO, it’s important that you work with an attorney who is familiar with this process. It requires the establishment of two legal entities at least: one for the practice, one for the management company. Plus, it requires an MSA, which is the contract between the two. It’s really important that all of this be able to pass regulatory scrutiny should anyone come to evaluate whether the management company is operating in a compliant way and that the medical practice is operating independently of the MSO.
If you have questions about this or you’re planning to open a practice in any of the states in which we operate, we encourage you to reach out.
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.