As management services organizations or “MSOs” become more and more prevalent throughout the modern U.S. healthcare space, we continue to see increased scrutiny by commercial and government regulators regarding non-compliant management service organization structures. Therefore, it is of utmost importance, particularly in the current climate, for both MSOs and their affiliated medical provider entities to ensure that the management or administrative fees paid by the medical entity to the MSO are fully compliant with state and federal laws and regulations, as well as jurisdiction-specific prohibitions on the corporate practice of medicine.
The Importance of a Compliant Management Fee
When structuring an MSO-provider relationship, a compliant management fee is key to ensuring that the arrangement will pass scrutiny if challenged or reviewed by third parties such as commercial insurers, government regulators, or plaintiffs’ attorneys. For example, if the medical entity in an MSO-medical practice structure receives federal funds, the management fee must be structured to comply with several Federal healthcare fraud and abuse laws such as the Federal Anti-Kickback Statute and Stark Prohibition on Physician Self-Referrals. In most instances, this requires that the management fee be “set in advance, is consistent with fair market value in arm’s-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal health care programs”[1] This may limit the types of management fee structures that can be utilized in a given circumstance.
A compliant management fee is also a key piece of evidence when defending against claims by regulators, commercial , and state medical boards that a given MSO relationship violates state corporate practice of medicine prohibitions. These actors will generally point to a non-compliant management fee as evidence of a “sham relationship,” where the MSO exerts an undue level of control over the providers’ practice of medicine as no reasonable provider would enter into an arm’s length management contract with such a fee. This can lead to medical board disciplinary actions and potential claims of insurance fraud. For example, in scenarios where a commercial payor argues that claims for reimbursement by the provider entity are fraudulent, due to an improper level of control over the provider entity by the MSO.
Common Management Fee Structures
Management fees can be structured in various ways, and are commonly linked to costs, revenues, or set at a flat monthly or annual amount. These fees can also be tied to, and/or adjusted annually, based upon an agreed-upon annual budget. Some examples of common management fees structures are as follows
- Flat or Fixed Fee – A fixed monthly or annual fee (regardless of revenue)
Fixed fees are simple, and may be necessary in some circumstances based upon the payor mix and management services being provided. On the downside, they may not accurately reflect the true costs incurred by the MSO in connection with the services provided over time.
- Cost Plus – A fee a percentage of the costs incurred by the MSO
Reimbursing the MSO for costs plus a pre-set profit margin can be a reasonable way to set a fee that accounts for the risk taken on by the MSO
- Percentage of Revenue – A fee based on a percentage of the provider’s revenue or collections
Basing the fee on a percentage of the provider’s revenue or collections aligns with value but may raise fair market value concerns or create jurisdiction or payor-specific compliance issues.
While these varying forms exist, it is important to understand that certain options for fee structures may be impermissible in certain circumstances. For example, certain jurisdictions may prohibit fees based on a percentage of revenues or collections. In other instances, when the MSO provides certain marketing services, a fixed fee may be required in order to comply with state or Federal law.
Best Practices and How Frier Levitt Can Help
When developing or adjusting a management fee for an MSO-provider relationship, the parties involved should consult with experienced healthcare counsel to determine the jurisdiction and transaction-specific considerations that may influence or limit the types of management fees which may be appropriate. Healthcare counsel can then work with an experienced national healthcare valuation firm to develop a management fee that is fair market value, commercially reasonable, and appropriate given the payor mix, jurisdiction, and any other unique circumstances. The value of a well-supported management fee valuation cannot be understated, as it serves as one of the best defenses against claims of an improper MSO-provider relationship.
Frier Levitt provides comprehensive transactional and regulatory counsel to stakeholders interested in utilizing an MSO model to achieve their business objectives. Contact us to speak to an attorney about implementing or reviewing your MSO model and/or management fee structure.
[1] 42 CFR § 1001.952(d)(1)(iv)
