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:
Meanwhile, the MSO focuses on business-related activities. It either directly provides or contracts with companies for:
Clarifying which entity performs which services is critical to maintaining a compliant MSA arrangement.
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).
Among other functions, the MSA formalizes the fee structure between an MSO and a friendly PC.
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?
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.
