Management Services Organizations (MSOs) are an excellent vehicle for those wanting to make money from a healthcare practice when they can’t own one because of legal restrictions. For example, Washington requires all medical practices to be owned wholly by physicians (M.D.s or D.O.s), with no other type of healthcare provider or lay person permitted to have any ownership.
The only exception to this is Nurse Practitioners who are permitted to operate their own independent practices. The takeaway here is that if someone is not either a physician or a Nurse Practitioner with an independent practice, that person cannot share in the profits of a medical practice. Enter the MSO model.
MSOs allow non-owners to make money from a medical practice by providing a wide variety of business, management, and technical services. Actually, even healthcare professionals who own practices can also own MSOs if they want to. But in Washington, MSO’s must be set up and run in very specific ways, or these ventures not only may fail, they can get the owners into serious legal trouble.
Services
Washington is one of the most restrictive states for MSOs, severely limiting what services they are allowed to offer. Additionally, the Practice-MSO relationship cannot be set up in violation of certain prohibitions. First and foremost, the MSO cannot interfere with or have control over any clinical aspect of the practice. This means employing licensed medical staff or influencing clinical judgment in any way. Crossing the line into medical decision making or other types of control is a blatant violation of Washington’s Corporate Practice of Medicine laws. The MSO can be paid by the practice to manage its scheduling, billing, accounting, ordering of supplies, and even physical location. Ultimately, the services performed by an MSO must be decided by the practice and the MSO and detailed in a Management Services Agreement (MSA). This agreement must also contain very specific terms and conditions to comply with Washington law.
Prohibited Activities
The following types of MSO activities are unlawful in Washington state:
- Exclusive Management Services Agreements that do not allow practices to choose another MSO
- Long-term MSAs (usually 10 years or more)
- MSOs having control over the leased space that would prohibit a practice from moving elsewhere or that unduly pressures the practice into complying with the MSO in something the practice owners disagree with
- MSOs having inappropriate control of the practice’s money
- MSOs having exclusive decision-making authority about treatments, lab tests, types of equipment, patient quotas, billing rates, etc.
What Can an MSO Own and Control?
An MSO can actually own the name and other intellectual property of the clinic, med spa, or other healthcare company where the patient receives treatment. The practice that provides medical services within the facility must be a separate entity controlled by healthcare providers. But the MSO can own and operate the public-facing name and brand of the facility. This includes owning or leasing the space where the medical practice operates. It is free to charge the medical practice to sublease for using the space, with certain restrictions. The MSO can own most medical equipment and supplies and sublease these to the practice. However, there are some medical devices or other equipment that only physicians can own. So long as ownership of anything by the MSO does not unduly control or influence the practice, it should be fine.
Compensation
Each state allows different types of compensation arrangements for MSOs. For example, many permit any type of compensation the parties choose. This means the MSO gets paid a percentage of what the practice brings in. States such as Massachusetts, Texas, and California allow a percentage-based compensation model, but have certain restrictions. Others, such as Washington and New York, prohibit any type of percentage-based payment.
Washington does not allow a percentage-based compensation of any kind for MSOs. This would too closely resemble MSO ownership in the practice. In short, Washington MSOs cannot be paid a percentage of what the practice makes. They can, however, be paid based on a cost-plus compensation approach, as well as a flat fee arrangement. Whatever the compensation model, Washington requires that all MSO fees be paid at Fair Market Value for the services rendered. This is a somewhat fuzzy standard, but both an MSO and the practice can land in hot water for violating it. MSO compensation is perhaps the most vital aspect of the Practice-MSO relationship and the one that most often gets the parties into serious legal trouble.
An MSO owner will also need to be aware of how to properly set up and use the right bank accounts for patient collectibles and payment of funds to third party vendors. Make sure you seek the guidance of an expert attorney to ensure you are in full compliance with state requirements for MSO compensation and handling funds.
Corporate Structure
Washington allows a medical practice to be organized as either a Professional Medical Corporation (PC) or a Professional Limited Liability Company (PLLC). An MSO can be created as an LLC, corporation, or any other entity that does not require ownership by professional licensees. If one of your duties as an MSO owner is to set up the medical practice’s business, you need to be aware of how to form a valid business entity on behalf of the practice, as well as all other legal filings and requirements.
State Investigations
If a Practice-MSO relationship is not established correctly, the state can and often have launched formal investigations into both companies to determine whether they have violated the state’s Corporate Practice of Medicine laws. Several practices and MSOs have been heavily fined or even shut down as a result of improper and illegal relationships. These are based on the following factors:
- The level of control the MSO exerts over the practice
- An illegal compensation arrangement
- Whether the MSO is merely paying the physician who owns the practice as an employee
- Whether the physician owner of the practice is an “absentee owner” and owns the practice “on paper” only
- Whether the MSO compensation is Fair Market Value, or the MSO is taking almost all the profits.
Management Services Agreement
A Management Services Agreement (MSA) is a vital legal instrument that both binds and protects the parties. It details the services the MSO promises to provide, as well as establishes the exact compensation the practice will pay for these services. It must be written in a way that complies with Washington law but also protects a party in the event that the other party attempts to act dishonestly or illegally. This is not simply another contract; and only a healthcare attorney with deep knowledge of Washington MSO law can draft it properly. You absolutely need to seek a qualified legal expert to draft this agreement; don’t take shortcuts.
Other Documents
In addition to the MSA, a Practice-MSO relationship will require a few other documents, including:
- Employment agreements
- Sublease agreement
- Documents to comply with HIPAA regulations
- Possible separate marketing agreement
- OSHA documents
The necessary documents will depend on the precise business arrangement the parties have agreed to.
Conclusion
Starting an MSO in Washington can be a great way to make money from a medical practice without having any ownership in the practice. But it must be set up and operated in strict accordance with Washington law to avoid serious legal trouble, including losing a lucrative business that you have spent significant time and money to build.
Let us help guide you through the MSO process and set you on the path to safety and success!