Introduction
As more entrepreneurs build healthcare companies (and more investors back them) there’s been increased interest in the friendly PC-MSO model. This model allows non-physician founders to start a healthcare business (and for investors to fund it), while staying compliant with state Corporate Practice of Medicine (CPOM) laws.
Central to the friendly PC-MSO model is a set of legal agreements that define and regulate the relationship between a PC and an MSO. This article outlines these common agreements and explains their role in building a compliant healthcare business. Note that this is just a summary: Healthcare attorneys would play an important role in giving more color to agreements and ensuring your PC-MSO structure is compliantly formed. (We're happy to connect you with trusted attorney partners here and get you affordable and startup-friendly rates.)
Management Services Agreement (MSA)
The MSA serves as the cornerstone of the friendly PC-MSO model. It delineates both the services and responsibilities the MSO has towards the PC, as well as the PC's responsibilities toward the MSO. This agreement is also important because it outlines the MSO management fee structure that's owed to the MSO, ensuring clarity in what the PC pays the MSO for its services. Management fee structures may vary, but are often a fixed fee or "cost-plus" structure. For stronger compliance, the management fee should typically be set at a "fair-market value" rate, so the MSO isn't perceived as controlling the PC. (For additional risk mitigation, some companies choose to hire an independent assessor to determine a fair-market value (FMV) for MSO’s services, which becomes the MSO’s management fee. That independent third-party evaluation can help in the event of an inquiry.) Some states, like New York and New Jersey, have stricter regulations of management fees than other states.
Stock Transfer Restriction Agreement (STRA)
This agreement (also called a "Securities Transfer Restrictions Agreement," a "Succession Agreement," or a "Continuity Agreement") makes the PC more resilient by providing a stable pathway for the practice to continue operating if physician ownership ever changes or the physician PC owner wants to transition out of the role. It restricts the physician PC owner from selling their stock or profiting from the transfer of their ownership interest. Depending on the draft, it also may allow for the substitution of the physician PC owner when deemed necessary for ongoing functioning of practice. (Specifically, the PC owner agrees in advance to sell their ownership stake for a nominal sum). The STRA also has requirements that ensure the PC remains in good standing and adheres to compliance requests. If the MSO has a role in selecting the physician PC owner and partner, the MSO is often partnering with a physician who is motivated to enable the business where compliant. The physician owner in this model is thus sometimes called a “friendly PC owner.”
Technology Licensing Agreement
Under this agreement, the MSO licenses its technology platform and intellectual property, such as trademarks and trade names, to the PC. This is an important component of the MSA (and the MSO’s services) and justifies part of the MSO’s management fee. In the case of telehealth companies, the Technology Licensing Agreement ensures that the PC has access to the telehealth platform that the MSO has developed or purchased, while also making sure the PC uses the technology and trademarks legally.
Employee Lease Agreement
This agreement is only relevant once there are multiple PC entities. It allows for all clinicians to be employed under a single entity, known as the "Mega PC," which then “leases” relevant employees to other state-specific PCs. This simplifies payroll processes and avoids the need for separate payroll systems for each PC. It’s less important until a company has formed several distinct PC entities. Four states require (or are ideally served by) a local, distinct PC entity (New York, New Jersey, California, and Kansas). In the 46 other states and DC, the initial PC (the “Mega PC” or "Super PC") can typically be foreign qualified (as a foreign professional corporation) without a distinct new PC entity being formed (assuming the physician PC owner has licensure in those states).
Physician Advisor Agreement
This defines the role, responsibilities, and compensation of the PC owner. It lays out requirements for Directors & Officers (D&O) insurance and professional malpractice insurance, providing additional protection for the physician PC owner. It outlines the term, termination structure, and confidentiality obligations associated with the PC owner’s collaboration. There are requirements for the physician PC owner to notify the partner company in the case of any action or potential discipline against their licensure (or other events which might disrupt operations).
Indemnification Agreement
This agreement is designed to protect the physician PC owner from many liabilities associated with their role. Some of these liabilities include potential claims against the PC owner (from patients or others) based on their role owning and overseeing the practice entities. With the indemnification agreement, the MSO agrees to take liability for claims that are not covered by the physician PC owner’s malpractice insurance and Directors & Officers (D&O) liability insurance. It's a safeguard ensuring that while the PC owner fulfills their responsibilities, they are not unduly exposed to legal risks. Without this protection, a physician PC owner might be more reluctant to partner with the practice and step into the ownership role.
Security Agreement
The Security Agreement is an important financial agreement that allows the MSO to take a security interest in the PC, particularly if the MSO extends a line of credit to the PC. It empowers the MSO to retrieve funds directly from the PC in cases of non-payment. This security interest reduces risk for the MSO (and investors that fund the MSO). If the MSO is working with a lender, the lender might also request that deposit account control agreements (DACAs) be in place between the MSO, the PC, and the PC's bank.
Line of Credit Agreement
The Line of Credit Agreement allows for financial flexibility, enabling the PC to borrow money from the MSO as needed or defer management fee payments. It's an important part of the financial arrangement between the PC and MSO, providing a buffer for operational expenses. Before patient or insurance payments first are paid to the PC, the MSO might lend starter capital to the PC so it can make clinical payroll (and other clinical expenses).
Conclusion
The friendly PC-MSO model's legal framework is designed to balance operational efficiency with compliance for healthcare companies. Understanding these agreements is important before founding a new healthcare company. Permit Health can help you partner with healthcare attorneys to form an affordable PC-MSO structure. If you have questions or if you’d like to chat about anything here further, just drop us a line at hello@permithealth.com.
