Balancing Business Objectives with Regulatory Risk
In states with Corporate Practice of Medicine (CPOM) laws, Management Services Organizations (MSOs) often rely on the “Captive Practice” or “Friendly PC” model as a strategic framework to align with regulatory requirements while achieving the MSO’s operational goals. Under the Captive Practice model, a licensed physician owns the professional entity (PC) and retains control over clinical decisions, while the MSO manages administrative functions such as billing, HR, and marketing.
Risk Spectrum of Captive Practice Models
MSOs looking to implement Captive Practice models are more susceptible to regulatory scrutiny where the MSO exerts significant control over the PC, which may raise concerns under anti-kickback statutes, fee-splitting laws and CPOM doctrines, particularly when the MSO may unilaterally replace the physician-owner. These risks are heightened when MSO compensation is tied to patient volume or structured as a percentage of revenue. By contrast, models that preserve physician clinical independence, avoid percentage-based arrangements, use flat or cost-plus fees based on fair market value, and employ protective documentation (e.g., MSAs and equity options held by a friendly physician rather than the MSO) generally present lower regulatory risk. As such, while multiple structures exist, those incorporating these safeguards are more likely to withstand regulatory scrutiny.
Why This Matters
Regulators are increasing their scrutiny of MSO-physician arrangements. An appropriately structured Captive Practice model can support an MSO’s growth while minimizing legal exposure. Depending on the payment source, violations may result in criminal or civil penalties, including prison sentences, civil monetary penalties, recoupment of fees, exclusion from payor programs, and state licensing board discipline.
How Frier Levitt Can Help
Frier Levitt provides comprehensive regulatory counsel to licensees and entrepreneurs interested in forming an MSO to utilize the Captive Physician model to achieve their business objectives. Contact us to speak to an attorney.
