Private Equity (“PE”) funds often invest in medical practices indirectly through ownership of a management services organization (“MSO”) that purchases the non-clinical assets of a target medical practice, and enters into a comprehensive, long-term management or administrative services agreement (“MSA”) with the practice. This model is used to avoid direct ownership of a medical practice by non-physicians, thus reducing the risk of violating state corporate practice of medicine prohibitions, while maximizing the amount of control the MSO has on the practice’s non-clinical operations (a detailed explanation of the MSO model can be viewed HERE).
The MSO model has recently been challenged by a number of States (including Oregon and California) due to concerns about PE-owned MSOs exercising inappropriate control over the practice of medicine. Critics of the model point to data showing that medical practices managed by PE-owned MSOs drive up the cost of healthcare due to the conflicting obligations of the parties – that is, the practice’s primary duty to its patients and the MSO’s primary duty to its shareholders. To assuage these concerns, PE-owned MSOs should consider restructuring as “Benefit Corporations” (referred to as Public Benefit Corporations in the State of Delaware).
A Benefit Corporation is a form of for-profit corporation recognized by many states which enables the corporation to manage the entity in a manner that balances certain public interests[1] with the shareholders’ pecuniary interests. An entity may elect to file as a Benefit Corporation instead of a traditional “C” corporation for several reasons. According to a 2013 study by MBA students at the University of Maryland, a primary motivating factor for Maryland businesses to file as Benefit Corporations was the enhancement of the public’s perception of their values. MSOs formed as Benefit Corporations have the potential to create a positive public image as compared to traditional MSOs because while Benefit Corporations enable their officers and directors to operate the MSO as a for-profit enterprise and with the same authority as in a traditional corporation, they are also required to make decisions consistent with the specific public benefit(s) identified in the Benefit Corporation’s certificate of incorporation. An example of this type of decision-making may include a focus on value-based care (“VBC”) versus the fee-for-service payment model. While VBC may not yield the same short-term profitability as fee-for-service, its long-term impact of reducing the total cost of care and improving outcomes may be prioritized as a public benefit.
An additional advantage of the Benefit Corporation is the reduced liability exposure to directors and officers for decisions that are not solely intended to maximize shareholder profits. To be clear, profitability remains a critical motive of a Benefit Corporation, but it is balanced with the specifically identified public benefit(s) in the corporation’s charter. Although some investors may be concerned about this mixed-allegiance, they may view the public benefit(s) of a Benefit Corporation as a hedge against the growing tide of distrust for PE-Owned MSOs. A Benefit Corporation may also appeal to the growing category of investors seeking socially responsible investments.
Frier Levitt attorneys are experienced in the structuring and incorporation of Benefit Corporations. For more information, call Frier Levitt to speak with an attorney.
[1] The statutory requirements of the applicable state of incorporation will apply in each case. In the State of Delaware, “Public Benefit” is defined as: “a positive effect or reduction of negative effects on 1 or more categories of persons, entities, communities or interests (other than the stockholders in their capacity as stockholders).”
