Disclaimer: As with many client case studies, the names of the people have been changed to protect the attorney client information. However, the facts and laws are real and should be considered accordingly.
In states with Corporate Practice of Medicine (“CPOM”) restrictions, practices owned by non-physicians often rely on a management services organization (“MSO”) to comply with state law. When set up correctly, an MSO allows physicians and non-physicians to work together in a compliant manner. However, creating the right structure on paper is only the first step. If the MSO model is not incorporated into the business’s day-to-day operations, even a well-designed arrangement can create significant risk.
This case study follows the story of Cowboy Wellness, a Texas wellness clinic that had the right MSO structure in place, but ran into significant challenges because the model was never fully implemented.
The Case of Cowboy Wellness and an MSO Compliance Mistake
Dr. Hat, a spine surgeon with an interest in regenerative medicine, set out to build Cowboy Wellness as a cash-pay wellness clinic, meaning patients would pay directly for services rather than using insurance. To expand the clinic’s offerings to include elective and alternative treatments, he partnered with his sister, Ms. Granola, a naturopathic practitioner.
However, because Texas is a CPOM state, they two could not co-own a medical practice in the traditional sense. Instead, they needed to use the MSO model. At a high level, the MSO structure separates the business into two parts: a physician-owned entity that delivers care to patients and a separate company that manages the business and administrative side.
Their structure included:
- A physician-owned professional entity responsible for providing medical services, which is required in CPOM states where only physicians can own and control the practice of medicine.
- A non-professional entity (the MSO), owned by Dr. Hat and Ms. Granola, responsible for non-clinical operations such as staffing, marketing, and management.
- A family member who is a physician, Dr. Friendly, serving as the “friendly PC” owner of the medical entity and meeting the ownership requirement without taking on day-to-day business responsibilities.
From a legal standpoint, their structure seemed compliant, but having the right setup is only the first step.
Where Did the MSO Model Break Down?
Things were running smoothly when Cowboy Wellness first opened. Patients were coming in and the business was growing. To keep things simple, the team had the MSO entity collect payments directly from patients instead of receiving them through Dr. Friendly’s professional entity, but that decision created a significant compliance issue.
In MSO arrangements, the flow of funds is a key factors regulators use to determine which entity is providing care.
In CPOM states, the entity that gets paid is important because it shows which entity is providing care. By having their MSO collect payment:
- The MSO was receiving medical revenue from patients and started to look like it was providing medical care.
- Dr. Friendly’s entity was no longer clearly the treating entity.
- The MSO paperwork did not match how the business was actually operating.
What seemed like a small shortcut ended up unraveling the structure they initially set up.
How Was the MSO Compliance Issue Discovered?
For a while, Cowboy Wellness was growing successfully, and their structure appeared to be working. Although, when it was time for Dr. Hat and Ms. Granola to expand into a larger space, issues with the structure came to light.
To support the buildout, they applied for financing, and during the loan review process, the lender looked into the clinic’s financials. During that review, the lender noticed that patient payments were going directly to the MSO, rather than the physician-owned entity. This was an issue because there was no clear indication that Dr. Friendly’s entity was the one providing care. ByrdAdatto was then brought in to help evaluate the structure and address the lender’s concerns.
Situations like this are common, as lenders and third parties will review financials closely when a practice is growing or seeking capital. As part of the review, the gap between how the business was structured and how it was actually operating came into focus. What had been an internal operational shortcut quickly became an external obstacle to growth.
Correcting the MSO Compliance Issue and Aligning Operations
Once the issue was identified, Cowboy Wellness shifted its focus from expansion to getting the structure back into compliance. They worked with legal counsel to address the gap between how the business was set up and how it was operating. We helped evaluate the issue, guide the corrections to the flow of funds, and support discussions with the lender as the structure was brought back into alignment.
At the same time, it became clear that this was not just an accounting issue. The team at Cowboy Wellness needed to understand how the structure was meant to function in practice to avoid this issue popping up again in the future. That required:
- Updating internal processes
- Training staff on proper workflows
- Ensuring everyone understood the distinction between the physician entity and the MSO
- Making sure the form matched the substance needed to be compliant
Because payments had been going through the wrong entity from the start, the team had to go back and fix how that revenue was handled. That meant cleaning up the accounting and aligning everything with the correct structure, which added time and delayed their expansion plans.
The Outcome
Once the structure and operations were aligned, the lender was comfortable moving forward. We were there to help address any other compliance concerns during the financial review process.
While the issue was resolved, it demonstrates how quickly operational decisions can create compliance risks if they are not supported by intentional and informed decision-making. In a different scenario, the consequences for their practice could have been much more difficult to manage.
What to Consider When Implementing the MSO Model
Understanding how your structure works in practice can help you avoid compliance issues and reduce risk.
Whether Your MSO Operations Match Your Legal Structure
A compliant MSO model only works if it is followed day to day. The documents alone are not enough.
How Funds Flow Within Your MSO Structure
Where payments go matters. Patients should pay the physician-owned entity, not the MSO, in CPOM states.
Who Is Responsible for MSO Compliance and Daily Operations
Even if the owners understand the structure, compliance can break down if the team responsible for daily operations does not.
How Growth Can Affect MSO Compliance
Lenders, investors, and other third parties will review your financials and look for consistency between your structure and your operations.
The Importance of Early Legal and Compliance Planning
It is much easier to build the right processes upfront than to correct them after the business is already operating.
A thoughtful, well-implemented structure can make a significant difference in how your business grows and how risk is managed along the way.
ByrdAdatto Can Help You Implement and Maintain a Compliant MSO Model
Whether you are building a new health care business or evaluating an existing one, understanding how the MSO model should function is just as important as establishing the legal structure itself.
ByrdAdatto works with health care practices to navigate CPOM requirements, evaluate MSO arrangements, and address compliance considerations as their business evolves. Contact ByrdAdatto to learn how we can help you evaluate your options and address legal and compliance considerations as your practice evolves.
