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, New York 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 has come only recently, when the state permitted Nurse Practitioners 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 New York, 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
Unlike some very restrictive states, New York allows MSOs to perform just about any business or management service for a medical practice – so long as the MSO does not interfere with or have control over any clinical aspect of the practice. In other words, the MSO can be paid by the practice to manage its scheduling, billing, accounting, ordering of supplies, and even physical location. But it cannot employ or supervise licensed medical professionals or decide how a healthcare provider carries out examinations and treatments. Crossing the line into medical decision making or other types of control is a blatant violation of New York’s Corporate Practice of Medicine laws. 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 New York law.
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. 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.
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 New York and Washington, prohibit any type of percentage-based payment.
In fact, several laws in New York prohibit a percentage-based compensation because it violates several laws that prohibit fee splitting arrangements. Fee splitting is an activity where a healthcare professional compensates a third party through a percentage based or per-patient payment. Most often these payments are given to marketing companies who bring in business to the practice, but they also apply to any third party. The law specificcally prohibits:
- Directly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or in connection with the performance of professional services; or
- Permitting any person to share in the fees for professional services, other than: a partner, employee, associate in a professional firm or corporation, professional subcontractor or consultant authorized to practice medicine, or a legally authorized trainee practicing under the supervision of a licensee.
In other words, New York 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, New York 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
New York allows a medical practice to be organized in several different ways: a sole proprietorship, professional corporation, professional limited liability company, professional partnership, etc. 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 New York 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 New York 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 New York 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 New York 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!