The legal risks of an MSO agreement

August 24, 2018

Management service organization (MSO) models can be risky for physicians who may not consider the legality and associated financial and legal risks before agreeing to the arrangement.

Medicine is big business. For this reason, everyone wants a piece of it, including those who are not physicians or involved in healthcare in any way. As a result, it is not uncommon to find businesspeople, venture capital firms, and those looking to profit from medicine opening medical businesses. This is easily done in some states as laypeople can hire physicians, own medical practices, and profit from the practice of medicine. In other states, this process is more complicated because of laws limiting the involvement of nonphysicians in the practice of medicine, such as the corporate practice of medicine doctrine, as well as limitations on sharing physician fees and similar restrictions.

In those states where it’s more difficult for businesses to engage in the practice of medicine, a popular approach is to use a management service organization (MSO) model. Under this model, a management company is formed to “operate” a medical/professional entity. The MSO may provide the space, equipment, supplies, nonprofessional staff, and other needs of a practice. For the practice itself, however, a professional entity must be formed and, most importantly, a physician must be found to own the professional entity. This approach is especially popular for medical spas and urgent care centers.

Physicians who are invited to own a professional entity under the MSO model are often referred to as “friendly physicians.” They are usually paid a small monthly fee for medical director services, though they may actually render clinical services as well. These types of arrangements can be risky for physicians who may not consider the legality along with the associated financial and legal risks when they accept the position.

Before accepting a position, here are some questions for “friendly physicians” to consider.

What type of insurance will physicians need to maintain? In addition to malpractice, directors and officers liability (D&O) insurance may also be required.

Does owning the professional entity or providing services on behalf of such entity impact the physicians’ full-time position or existing medical practice, if applicable? It’s always important to check any employment agreements for noncompete provisions and other restrictions. Many MSOs will also require physicians to enter into a noncompete provision, which need to be carefully considered.

Is the financial arrangement legal? Certain arrangements may not comply with state fee-splitting laws. Furthermore, these arrangements may not be written in a compliant manner if the MSO involves patients who are covered by a government program. Any medical director or other agreement should be reviewed to comply with applicable federal and state laws.

What is the financial risk for the physicians who agree to these arrangements? Typically, the MSO-through a management agreement-arranges all the vendors, the space lease, the billing and collections, and the taxes. Even if the MSO is overseeing these tasks, the contracts and expenses can be in the name of the entity, for which the physicians are listed as owner. If the MSO goes out of business or defaults on these obligations, what protection do physicians have from creditors? What information is shared with physicians about the financials, so they can be protected? Indemnification provisions are extremely important in this type of arrangement and, depending on the structure of the deal, additional precautions may be appropriate.

How will physicians’ name, Tax Identification Number (TIN), and the professional entity’s provider number be used, especially if the MSO is handling the billing and collection activities? What liability might she face for fraudulent or wrongful billing in which the MSO engages in her (or the entity’s) name? I recommend purchasing an insurance policy to cover this possible event as well as indemnification provisions. Physicians should also fully understand how their information will be used when billing payers.

Are physicians required to file and review certain supervision agreement/prescriptive authority documents with the state? MSOs may or may not be familiar with these requirements. Additionally, state laws may limit physicians to supervising only those professional activities that they are experienced in. These are important considerations for the physician since it implicates their license.

These are just a few of the concerns that arise in “friendly physician” deals with an MSO. Physicians must consider the legal and financial risk they may be taking in such deals, especially if the role is merely side work and not their primary job. Government investigation, bankruptcy, unpaid taxes, and other possible repercussions can have a serious impact on physicians’ licenses and their reputation in the community. While these types of transactions are certainly doable, it’s important to have legal counsel review all documents before they are executed.

 

Ericka L. Adler has practiced in the area of regulatory and transactional healthcare law for more than 20 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. She also works with providers on a wide variety of compliance issues such as Stark law, Anti-Kickback Statute, and HIPAA. Ericka has been writing for Physicians Practice since 2011.