Management Service Organizations Are a New Focus of DOJ
In the healthcare industry, Management Services Organizations (“MSOs”) have become an increasingly popular tool utilized by medical practices for a variety of purposes. MSOs are administrative and management entities that develop relationships with physicians or other healthcare providers to provide a broad range of non-clinical services, including revenue cycle management and the procurement of office space or medical and technology related equipment. In many states, medical practices may only be owned by licensed physicians or other licensed healthcare providers due to the prohibition of the corporate practice of medicine. An MSO that provides exclusively non-clinical services, however, may be owned by non-licensees and licensed providers alike. While the concept of the MSO-provider relationship remains lawful, there has been a recent uptick of investigations of these relationships by the U.S. Department of Justice (“DOJ”).
There is an array of federal and state regulations that must be considered when exploring the legality of a proposed MSO model. The “corporate practice of medicine” (“CPOM”), for example, prohibits non-licensed persons, including individuals and business entities, from employing healthcare providers to practice medicine on their behalf. The prohibition is intended to prevent unlicensed individuals from exerting control over medical practices or licensees in order to preserve the integrity of the licensee’s professional judgment. This doctrine is predicated on the idea that an inherent conflict exists between the licensee’s duty to provide appropriate care and treatment to a patient, and the business entity’s interest in reducing cost while maximizing profitability. In addition to CPOM prohibitions, many states have adopted “fee-splitting” prohibitions, which forbid physicians and other licensees from splitting the fees generated from their professional services with others. The principle underlying CPOM and fee-splitting prohibitions is the same: profit-driven decisions must not interfere in the exercise of a licensee’s clinical judgement. When non-licensees are found to exercise control over the practice of medicine, consequences may include discipline for the unauthorized practice of medicine, concealed ownership, and challenges by payors of the practice’s structure (potentially such that all claims submitted by the practice are considered false claims, leading to significant clawbacks and False Claims Act liability). Additionally, the structure underlying an MSO arrangement frequently implicates the False Claims Act (“FCA”) and Anti-Kickback Statute (“AKS”), and can violate self-referral prohibitions, such as the Federal Physician Self-Referral Law (commonly referred to as the “Stark Law”).
The AKS imposes criminal penalties against individuals or entities that knowingly and willfully offer, pay, solicit, or receive any remuneration either to induce or reward referrals of items or services reimbursable by a federal healthcare program. The FCA, in pertinent part, sanctions any person who presents or causes to present a false or fraudulent claim to the government for payment or approval. A claim can trigger the FCA if it is the result of an AKS violation.
Last month, the DOJ issued multiple press releases announcing enforcement activity associated with MSO models, including two related to Texas and Tennessee hospital systems. With respect to the latter, the federal government intervened in a qui tam action originally filed in 2017 alleging AKS violations that caused several million dollars in damages in violation of the FCA. As more fully described in a prior article, the allegations followed a hospital system’s asset acquisition of, and management relationship with, an oncology practice. Although several fair market value appraisals were obtained by the parties with regard to the service relationships in the model, the government has claimed that that the compensation was not set forth in advance. Additionally, the practice failed to provide a significant portion of the management services for which it was paid pursuant to applicable contracts. Accordingly, the payments allegedly did not meet an applicable safe harbor to the AKS and the compensation is being considered by the government as impermissible remuneration used by the hospital to compensate prescribers for referrals to the hospital.
Further, late last year, DOJ announced an indictment that alleged a pharmacy owner conspired with a Florida-based MSO to conceal the MSO’s “involvement in processing over $30 million in fraudulently obtained prescription claims.”
Generally, parties to an MSO arrangement will enter a management services agreement (MSA), which is a contract between an MSO and a medical practice or other healthcare entity that governs the business relationship between the parties. For CMOP and fee-splitting purposes, it is imperative that the MSA distinguishes between the clinical functions of the practice and the non-clinical functions of the MSO. It is also essential that the services rendered and fees charged by the MSO are commercially reasonable and consistent with fair market value to avoid running afoul of the AKS. In addition, many other provisions of a MSA must be carefully drafted, analyzed, and reviewed to ensure full compliance with all pertinent regulations. Importantly, the “four-corners” of a contract only provide the framework within which an agreement may comply with applicable law. To the extent that the parties’ actions deviate from the four-corners of a compliant agreement, the risk of scrutiny will increase.
Despite the enforcement trend and focus of DOJ as it relates to management services models, an MSO arrangement can be used by healthcare providers and non-licensees in compliance with law. Frier Levitt provides comprehensive regulatory counsel to stakeholders interested in utilizing the MSO model to achieve their business objectives. Contact us to speak to an attorney about the implementation or review of your MSO model.