Introduction
The last few years have seen a wave of investor interest in healthcare businesses. That accelerated with COVID, which drove telehealth adoption (and inspired more entrepreneurs to build in healthcare). But the investor interest began decades earlier, with increased funding for healthcare businesses for a variety of reasons. (Among them, clear unmet needs, predictable revenues, and opportunities for efficiencies.)
These investor-funded healthcare businesses had a challenge: Navigating state Corporate Practice of Medicine (CPOM) law. CPOM regulations prohibit standard corporations (or other non-physician entities) from practicing medicine or employing practicing physicians. In states with CPOM laws (which is the significant majority), only physicians can hold an ownership stake in a medical practice. The primary goal of these laws is to ensure that medical decisions are made solely based on patient care and not influenced by corporate interests. These laws vary by state, but they generally aim to protect the physician-patient relationship from commercial influence.
Around a similar time, a new breed of entrepreneurs began starting healthcare businesses, with a mission to improve access and quality of care. Some of these entrepreneurs had past careers as business operators, but not as licensed physicians. Corporate Practice of Medicine laws similarly posed a challenge for these entrepreneurs in starting their healthcare business compliantly. If only a physician can legally start and own a medical practice, it would be difficult for the them to begin.
How did entrepreneurs and investors comply with these state CPOM regulations? The answer came in the form of the MSO, or Management Services Organization.
What is an MSO in healthcare?
A Management Services Organization (MSO) handles the administrative and non-medical tasks of a healthcare practice—clearly dividing these out from medical responsibilities and decision-making, which remain with a separate physician-owned entity, called the friendly PC. MSOs serve as the backbone for healthcare providers, handling the myriad of non-clinical, administrative tasks that are essential for a smooth operation. From taking over the responsibilities of billing and scheduling to navigating the intricate maze of legal and compliance issues, MSOs help free up medical professionals to focus on what they do best: caring for patients.
The MSO's role becomes even more impotant in the context of Corporate Practice of Medicine (CPOM) laws. As mentioned, these laws stipulate that medical practices must be owned and run by physicians. By creating an MSO that partners with a Friendly PC, it's possible for non-physician founders to start a digital health company (in which they and their employees have an ownership stake). It also allows these healthcare entrepreneurs to take outside investment compliantly with Corporate Practice of Medicine laws. The entity that is actually "practicing medicine" and employing physicians is the partner medical practice entity, the friendly PC.
How do MSOs work with Friendly PCs in healthcare?
A physician-owned Professional Corporation (PC) is a legal entity owned exclusively by licensed physicians to provide medical services. It is not sufficient for a PC owner to be licensed to practice medicine elsewhere: To own a state's PC, they must be licensed to practice medicine in that specific state. While an MSO is the legal entity that hosts the administrative side of a practice, the PC hosts the medical side.
Why is it called a "friendly PC"? That's because, in a friendly PC model, business leadership (e.g. company founders and the MSO management) is given the right to choose the physician PC owner and replace them at will. Because of the ability to influence who is the physician PC owner, the MSO can often find a collaborative physician who is motivated to enable the business where possible and compliant, while maintaining independent medical judgement. (An uncollaborative physician can be replaced.) The physician owner in this model is thus called a “friendly PC owner.”
This MSO-Friendly PC structure is by far the most common method for healthcare entrepreneurs to comply with Corporate Practice of Medicine laws.
What is an MSA (Management Services Agreement)?
The friendly MSO-PC structure is formalized through an MSA, or Management Services Agreement. An MSA is the main contract between a PC and an MSO. It outlines how the MSO services the PC, how payment is structured, and how both parties will maintain compliance with CPOM laws. It's the keystone agreement that formalizes the PC-MSO structure, though there are several other friendly PC-MSO legal agreements involved.
The MSA serves as the cornerstone of the friendly PC-MSO model. It grants the MSO the power of attorney over the PC, delineating both the services and responsibilities the MSO has towards the PC, and vice versa. This agreement is important as it outlines the management fee payable to the MSO, ensuring clarity in financial arrangements and responsibilities.
The management fee set in the MSA is often a key term. When setting the management fee, it's important to avoid breaching fee-splitting or anti-kickback laws, which seek to prevent referrals for licensed clinical services being made for payment (directly or indirectly). Some states, like New York, may require a fixed management fee, while others allow a “cost-plus” structure. (For additional risk mitigation, some companies choose to hire an independent assessor to set a Fair Market Value—also called FMV—for the MSO’s services, which becomes the MSO’s management fee.)
How is an MSO formed?
In a basic MSO-Friendly PC structure, there are typically two entities: the MSO and the Friendly PC. The Friendly PC is a special type of physician-owned legal entity called a Professional Corporation (PC) or Professional Limited Liability Company (PLLC). The MSO can be a normal corporate entity (e.g. Delaware C-Corp, Texas LLC, etc.).
The overallFriendly PC-MSO structure is formed through executing a series of legal agreements between these two entities, the MSO and the friendly PC. Here are some examples of those agreements:
- Management Services Agreement
- Security Transfer Restriction Agreement (also called a Succession Agreement)
- Technology Agreement
- Indemnification Agreement
- Employee Lease Agreement
- Physician Advisor Agreement
- Security Agreement
- Line of Credit Agreement
Please see our blog to read an overview of all of the standard PC-MSO agreements.
What Services do MSOs Provide?
MSOs are the unseen drivers of much of the healthcare industry, providing a spectrum of services that ensure efficiency and compliance. As mentioned, they handle all administrative and non-clinical aspects of the medical practice (while the physician-owned PC employs the clinical staff, makes medical decisions, and delivers care). That allows for compliance with state CPOM laws. Here are examples of functions where an MSO supports a PC:
- Administrative Support: MSOs streamline daily operations, oversee human resources, and enhance staff capabilities through training.
- Financial Management: This includes comprehensive handling of billing, payroll, and accounting tasks.
- Technology & Software: MSOs implement and manage electronic health records, telehealth platforms, and other technology a practice needs.
- Regulatory Compliance: They ensure healthcare providers adhere to the stringent array of healthcare laws and regulations, a task that encompasses everything from licensing to primary source verifications.
- Strategic Planning: MSOs also play a key role in business development and growth strategies of healthcare providers.
- Revenue Cycle Management: This critical function covers credentialing, contracting with health plans, and billing services.
Why Form an MSO?
In the context of starting a new healthcare business, MSOs are typically formed to comply with Corporate Practice of Medicine Laws (CPOM). By dividing out the administrative work from medical responsibilities and decision-making through a MSO-PC model, entrepreneurs can start a medical practice or clinic without themselves being licensed physicians,.
MSO Healthcare Company Examples
Many successful healthcare companies operate as MSOs (with partner friendly PCs), across all categories and sectors of healthcare. Several digital health and telehealth companies have this MSO-PC structure to allow for compliance with Corporate Practice of Medicine laws. Some examples:
- Teladoc
- Lyra
- One Medical
- Hims & Hers
- Ro
- Headway
- Alma
- Carbon Health
- Thirty Madison
- Cityblock Health
- Hinge Health
- Virta
The MSO-PC model is also common for healthcare organizations that have other types of outside investment, including private equity:
- CityMD
- Envision Healthcare
- Team Health
- MedExpress
- Concentra
- US Anesthesia Partners
- Curo Health Services
MSOs are also necessary for independent healthcare entrepreneurs starting a medical practice. At Permit Health, we’ve partnered with independent entrepreneurs to set up new businesses in many different healthcare verticals:
- Women’s/Men’s Health Clinics
- Behavioral Therapy Practices
- Urgent Care Practices
- Primary Care Practices
- Chronic Disease Care
- Medical Aesthetics Practices (e.g., Medspas)
- Psychiatric Care
- Occupational and Physical Therapy Practices
- Speech Therapy Practices
- And many more
In the large majority of cases, an MSO-PC structure is necessary to comply with state Corporate Practice of Medicine laws.
Conclusion
MSOs play a key role in ensuring compliance with Corporate Practice of Medicine laws. They do this by effectively separating the clinical and administrative functions of healthcare operations, a division that is important for legal compliance with state CPOM laws.
In the evolving world of healthcare, MSOs have become more than just facilitators; they're now a key part of how a successful healthcare business gets built. Their role in compliance, operational efficiency, and quality patient care has enabled new entrepreneur to innovate and bring to life new models of care. If you're looking to start a healthcare business and need to comply with CPOM laws by setting up a MSO-friendly PC structure, Permit can help—affordably and fast. Feel free to reach out.
