Understanding how management services agreements (MSAs) function is essential for healthcare professionals and practice owners aiming to establish compliant and efficient business structures. These agreements play a crucial role in defining the relationship between medical providers and management entities, ensuring legal compliance, and safeguarding professional independence. As healthcare practices grow increasingly complex, a thorough grasp of MSAs helps prevent legal pitfalls and facilitates smooth operational workflows.
What Is a Management Services Agreement?
A management services agreement (MSA) is a contractual arrangement that formalizes the business relationship between two separate entities involved in healthcare operations. Typically, it involves a non-physician-managed entity and a medical practice owned and operated by licensed providers. The non-physician entity often takes the form of a limited liability company (LLC) or corporation functioning as a management services organization (MSO). These MSOs are usually controlled by unlicensed individuals, private investors, or healthcare professionals who are prohibited by law from owning a medical practice outright.
The healthcare practice itself is generally structured as a professional limited liability company (PLLC) or a professional corporation (PC). Ownership is restricted to licensed physicians or other qualified providers. Throughout this discussion, we will refer to it as a “friendly PC,” although it could also be a PLLC, depending on state law.
Distinguishing between LLCs and PLLCs (or PCs and corporations) is important because the “P” in PLLC or PC indicates a provider entity that offers professional services, such as healthcare. Most states mandate that licensed healthcare services be delivered through these professional entities. If your practice is set up as a standard LLC or corporation, you may not be operating under the correct legal structure for your licensed services.
An MSA is a legally binding document that clearly delineates the responsibilities and roles of each party—specifically, the MSO and the friendly PC. It emphasizes that while both entities collaborate on a joint business venture, they remain legally separate. The friendly PC maintains control over all medical and clinical aspects, including providing healthcare services, hiring and disciplining licensed staff, establishing fee schedules, and managing the flow of revenue generated from patient care.
Conversely, the MSO handles the business side of operations. Its responsibilities include providing or contracting for services such as legal and accounting assistance, payroll, billing, waste disposal, administrative staffing, appointment scheduling, IT, and marketing. Clarifying which entity performs each function is vital for maintaining a compliant and transparent arrangement, especially to prevent legal issues related to the practice of medicine.
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When Is an MSA Necessary?
In many states, laws prohibit unlicensed individuals from owning or profiting directly from physician services. This legal principle, known as the Corporate Practice of Medicine (CPOM), is rooted in the belief that medical judgment should remain free from commercial influence. An improperly structured arrangement can lead to violations of this doctrine, risking severe penalties.
A properly drafted MSA helps navigate this legal landscape by allowing physicians in the friendly PC to retain independent medical decision-making authority while the MSO manages non-clinical functions. The agreement stipulates that the MSO charges the practice for management services, which are typically structured as a flat fee or a cost-plus arrangement based on the fair market value of the services provided. This approach helps avoid conflicts with CPOM restrictions, which generally prohibit fee-splitting or profit-sharing based on patient revenues.
State laws vary regarding ownership and profit-sharing arrangements. For example, some jurisdictions permit certain non-physician professionals, such as registered nurses, to participate in practice ownership or management roles only through MSAs with licensed providers. Therefore, even if both parties are licensed, an MSA may be required to ensure compliance with local regulations.
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How Do Profits Flow Without Violating CPOM?
A central concern in structuring MSAs is preventing improper fee-splitting, which could influence clinical decision-making. Under CPOM laws, payments for medical services must go directly to the licensed practice entity, not to unlicensed management companies or MSOs — to protect the integrity of medical judgment.
To comply, the MSA typically establishes a management fee paid by the friendly PC to the MSO. These fees are usually set as a flat dollar amount or based on reasonable market value for the services rendered. In many states, the fee cannot be a percentage of practice revenues; for example, charging 50% of all billings would be considered excessive and potentially unlawful. Instead, the fee should reflect the actual cost of management services, avoiding any appearance of profit-sharing from clinical revenues.
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How Does the MSO Cover Expenses?
The MSA outlines the order of payments from the practice’s revenue, ensuring that all expenses are covered appropriately. Typically, the MSO disburses funds to various parties based on a predetermined hierarchy, such as:
- Salaries for physician owners
- Operating expenses (including staff wages, rent, utilities, PPE)
- The management fee owed to the MSO
Regular financial reviews and audits are essential to ensure that the practice maintains sufficient funds to meet ongoing obligations. Proper oversight helps prevent cash flow issues and maintains compliance with all legal and contractual requirements.
Risks Associated with MSAs
While MSAs serve as valuable tools for legal and operational structuring, they carry inherent risks, especially if not carefully drafted and managed. Physicians generally face the highest risk because their professional judgment must remain uninfluenced by business interests. Any appearance of undue influence or control could lead to licensing board scrutiny or disciplinary action.
Unlicensed individuals involved in management or ownership pose additional risks of violating state laws against unauthorized practice of medicine. Violations can result in hefty fines, license suspension, or other penalties.
Furthermore, improper fee arrangements could inadvertently trigger violations of federal anti-kickback statutes, which prohibit offering or accepting remuneration to induce or reward referrals of items or services paid for by federal healthcare programs. For physicians practicing across multiple settings, understanding when financial transactions cross the line into illegal inducements is crucial. Working with an experienced healthcare attorney helps ensure your MSAs are compliant and shield you from potential violations.
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Is an MSA Necessary for Your Practice?
If you’re a physician considering a partnership with a management company, an MSA is typically essential to formalize the terms of your relationship. It’s also advisable to have additional legal documents, such as a stock transfer agreement, to clarify ownership rights should the partnership end.
Discussing compensation arrangements upfront with your legal counsel helps prevent disagreements later. Since fee structures are often a primary point of contention, aligning expectations and ensuring legal compliance from the start is critical.
For healthcare providers like nurses or non-licensed professionals aiming to establish related businesses, an attorney can advise whether an MSA is appropriate for your specific goals and licensure restrictions. Explore options in your state, and consider consulting with experienced legal professionals to craft arrangements that adhere to all applicable laws.
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Please note that this content is for educational purposes only and does not constitute legal advice. Always consult a licensed attorney in your jurisdiction before entering into any legal agreements.