What is an MSO's Management Fee in an MSA?
A management fee is what the PC (Professional Corporation: the clinical practice entity) pays the MSO (Management Services Organization: the business entity) in a PC-MSO structure. To comply with state regulations on the Corporate Practice of Medicine (CPOM), a management fee should be set at a “Fair Market Value” (FMV) of the management and administrative services that the MSO is providing a PC. In practice, the management fee in a PC-MSO structure is a way for non-physician MSO owners and investors to participate in earnings from a physician-owned medical practice (a common model in private equity and healthcare entrepreneurship).
What’s a Fair-Market Value MSO Management Fee in an MSA?
A “Fair-Market Value” management fee is one that two parties in a marketplace would freely arrive at, without influence from a close relationship between the parties. Regulators look for a fair-market management fee between an MSO and PC to be confident that the MSO-PC structure complies with state Corporate Practice of Medicine prohibitions. If a management fee is excessive, that could be a sign that the PC is not independent from the MSO, and that the non-physician owners and managers of the MSO might be using the PC to evade CPOM restrictions. For this reason, it’s important to set a fair-market value management fee in a PC-MSO structure that establishes the independence of the PC from the MSO and thus strengthens CPOM compliance. To establish a FMV, some firms will hire an independent third-party to make an assessment. The independence of this third party (and documentation of their assessment) can support the argument that the resulting management fee is fair-market.
What Types of MSO Management Fee Structures are there in an MSA?
There are several types of management fee structures one could have in an MSA. Four of those are listed below:
- Fixed Fee
- Revenue-based
- Tier-based
- Cost-Plus
Fixed-Fee MSO Management Fee Structure in an MSA
Fixed-fee management fees are one of the most common structures for a management services agreement. In this structure, an assessment is done of the value of services that the MSO is providing. Based on that assessment—and examples across the marketplace—a fixed fee is proposed (for example, $10,000 per month). The benefits of a fixed-fee structure are that it can be quite rigorous and defensible, if the valuation is done faithfully to services provided or by an independent third party. (Documentation of this assessment can help as well.) The downside is that it’s quite brittle: As the practice grows, the cost of the management services also grows, and thus the fee may need to change. The fixed fee model has less flexibility to evolve with this growth.
Revenue-based MSO Management Fee Structure in an MSA
Revenue-based management fees in an MSA are generally not recommended by healthcare attorneys. That’s because they can be construed as fee-splitting and violate various state and federal anti-kickback laws. On the surface, the fee structures have the appeal of flexibility that a fixed fee doesn’t have (e.g. scaling based on a practice’s growth), so they don’t have to be reset regularly to capture practice changes. But the risk of violating fee-splitting prohibitions outweighs the benefits of this flexibility.
Tier-based MSO Management Fee Structure in an MSA
A tier-based management fee in an MSA is another way to structure a management fee with flexibility to evolve as a practice grows. In a tiered structure, certain milestones are outlined to shape an overall management fee schedule, with different fee tiers based on those different milestones. One example is a management fee tiered by the number of clinicians in the PC’s clinical practice. A management fee could be set as $5,000/month when the practice has 10 full-time clinicians that the MSO supports the management of, $10,000/month when the practice has up to 25 clinicians, $15,000/month when the practice has up to 50 clinicians (and so forth). Other tiers could be the number of states or jurisdictions a practice operates in, as well as other proxies for the growth and complexity of the management responsibilities of the MSO (E.g. potentially, patient volume tiers).
Cost-Plus MSO Management Fee Structure in an MSA
A cost-plus management fee is a fourth common option in a management services agreement. In his model, the clinical practice entity (the PC or PLLC) owes the MSO for all of its costs administering the practice plus some additional amount. This can be an additional percentage on top of those costs, assessed based on fair-market value for the services and a analysis of what’s standard in the marketplace The benefit of a cost-plus management fee is that it’s less brittle than a fixed fee (e.g. can evolve as a practice’s complexity grows without needing to be reassessed). At the same time, it can typically be structured to avoid violating fee-splitting prohibitions and anti-kickback laws that a revenue-based management fee might violate.
How are MSO Management Fees Structures Determined?
To establish a FMV, some firms will hire an independent third-party to make an assessment. The independence of the third party and the documentation of their assessment can support the argument that the resulting management fee is fair-market.
Permit’s support on management fee structures and MSAs
As part of supporting PC-MSO structures with our healthcare attorney partners, Permit helps conduct an independent third-party FMV evaluation with rigorous documentation, to support strong compliance for your business. One important note: State requirements can vary on management fees, including what structure they can take and how frequently they can be assessed (for example, New York and New Jersey have stricter guidance here). Permit can help navigate these state-by-state requirements. Please reach out if you'd like to learn more.
