What physicians and medical practices need to know about MSOs

MSOs and compliance: ©Nicoelnino - stock.adobe.com

Management service organizations (MSOs) remain a popular approach to structuring health care relationships and transactions. Although easy to organize and operate, there are many legal and compliance issues to be aware of in order to ensure a long-term and successful undertaking. This article will explore how and why MSOs are used in health care and some of the specific challenges in the current health care legal environment.

MSOs explained

An MSO is a third-party entity that provides a variety of nonclinical services to health care providers. These services can include practice management, revenue cycle management, human resources, compliance, information technology support, marketing, billing, collections, compliance, payer contract negotiation, vendor contract negotiation, payroll, payment of taxes and more. Some MSOs also provide infrastructure, such as practice space, surgical suites and equipment. Essentially, MSOs act as business partners, enabling health care facilities to outsource administrative burdens and optimize their resources.

For physician practices, an effective MSO can play an important role in implementing quality improvement programs, enhancing patient satisfaction and maximizing efficient administration by offering industry insight, consulting and related guidance. Additionally, by outsourcing nonclinical functions, health care providers can arguably reduce overhead costs associated with maintaining in-house departments and allocate more time and resources to patient care, improving overall health care quality and patient outcomes.

Many practices seem to thrive when using an effective MSO, with streamlined operations and improved efficiency. MSOs can be an excellent way for a practice to stay current and ensure ongoing compliance with a variety of significant legal concerns, such as the Health Insurance and Portability Act, the Anti-Kickback Statute (AKS), the Physician Self-Referral (Stark) Law, billing and coding compliance, contractual relationships, state licensing laws and Medicare and Medicaid reimbursement rules. Many MSOs also help practices structure and run effective fraud and abuse compliance programs that they would not be able to support on their own. Addressing these legal challenges requires MSOs to have a comprehensive understanding of health care laws and regulations, engage legal counsel with expertise in health care law and implement robust compliance measures to mitigate legal risks effectively. At a time when many independent providers are overwhelmed with administrative, legal and other burdens of operating a health care business, MSOs can be the solution for practices that feel challenged to remain independent.

The role of MSOs in transactions?

In many states, clinical practices can be owned only by licensed health care practitioners. This is based on the corporate practice of medicine (CPOM) doctrine. Generally, CPOM is intended to prevent unlicensed people from involving themselves in key decision-making of a clinical practice in a manner that would impact patient care. In some states this doctrine is codified while in others it has been developed through case law or administrative decisions.

To avoid the CPOM doctrine in applicable states, MSOs do not directly own the clinical practice and instead enter into a long-term management agreement with it. Through these agreements, the MSOs manage and provide all nonclinical needs of the practice. In return for its management services, MSOs are paid a significant management fee, with MSO profits ultimately distributed to the MSO owners. With the wide array of services and items being provided by the MSO, the management fee typically draws out all revenue of the practice other than clinical provider compensation.

The MSO approach is also the structure used in most physician practice sales to private equity (PE) entities. In the typical model, the PE buyer acquires all of the nonclinical assets of the practice (furniture, equipment, space and equipment leases, etc.) and hires all of the nonclinical staff providing services to the practice through the MSO. The management agreement between the MSO and the “acquired” practice will then provide and control nearly all of the operational needs and services of the practice. The only function of the practice at that point is the clinical care of patients and the payment of management fees to the MSO for handling all other nonclinical aspects of the practice.

Most MSOs are careful to comply with CPOM by taking steps to ensure that only physicians make decisions impacting clinical care and operations. Often this is done through the creation of physician-led advisory boards that retain the power to control clinical-related decisions as well as having all licensed health care providers directly employed by the practice and not the MSO. However, many decisions controlled by the MSO can still impact clinical operations, such as nonclinical staffing levels, scheduling, choice of equipment and supplies and similar matters. For this reason, there are still many who argue that this approach has allowed MSOs to become a vehicle for unlicensed persons to become overly involved in the day-to-day operation of health care practices, which ultimately influences physician decision-making and impacts patient care. This very issue is the subject of a lawsuit against Envision Healthcare, which is facing a challenge from the American Academy of Emergency Medicine, which has accused Envision of violating CPOM. The accusation is based on the assertion that establishing medical protocols, setting staffing levels, establishing patient encounter quotas and determining physician best practices and quality metrics constitute a level of control in violation of CPOM. This case has not been decided but is a good example of the type of risk that may be faced by MSOs that do not take the time to carefully construct their roles in a manner that does not pose legal risk of violating the CPOM.

From a compliance perspective, parties must be cognizant of many other laws that can impact arrangements between MSOs and health care practices. This includes the federal Stark Law and AKS as well as the state equivalent of such laws, which can impact the structure and amount of management fees that can be charged. Additionally, other state laws including fee-splitting restrictions can impact the management arrangement and fees between an MSO and a practice. All of these laws must be reviewed with regulatory health care counsel.

Recent challenges

Due to increasing concerns about the role that nonclinical parties are playing in the health care industry, many states have started to scrutinize health care transactions by requiring advance state approval. The new laws involving health care practices are intended to capture transactions that are too small to trigger federal antitrust filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which mandates reporting of significant transactions to the Federal Trade Commission and the U.S. Department of Justice Antitrust Division. States with these laws now have the opportunity to evaluate the potential impact of certain health care transactions within their borders but it is too soon to determine the ultimate impact of such laws. As of Jan. 1, 2024, the following states had reporting requirements for health care transactions: Connecticut, Illinois, Massachusetts, Minnesota, New York, Oregon, Rhode Island and Washington. In any type of MSO-related health care transaction, it will be key for participants to check with counsel to determine whether these state laws apply to a transaction and, if so, how to meet the filing requirements.

The future of MSOs

As the health care landscape continues to evolve, MSOs are expected to play an increasingly integral role. Advances in technology, such as telemedicine and artificial intelligence-driven analytics, likely will shape MSO offerings, thereby enhancing efficiency and patient engagement. Furthermore, MSOs may facilitate collaborative care models and support population health management initiatives, driving better health outcomes on a broader scale and reducing health care costs.

MSOs are pivotal in supporting health care providers by handling administrative complexities, enhancing operational efficiency and ensuring compliance with regulatory standards. While challenges exist, the benefits of partnering with MSOs far outweigh the risks, making them a cornerstone of modern health care management strategies. As the industry continues to innovate, MSOs undoubtedly will remain indispensable partners in delivering high-quality, patient-centered care.

Ericka L. Adler, J.D., is a shareholder and manager of the Healthcare Practice Group at Roetzel & Andress in Chicago, Illinois. She focuses her practice on regulatory and transactional health care law and in compliance counseling, structuring and implementing complex joint ventures to comply with state and federal laws and regulations. She can be reached at eadler@ralaw.com.