Read the Warning Label Before Starting Your MSO

February 26, 2018

Like aspirin for the treatment of illness, management services organizations (“MSO”) have long served a multi-purpose function in health care compliance. Though newer medicines and creative models have come along, both aspirin and MSOs have stood the test of time and even evolved.

The MSO is similar in structure to its sibling in the dental industry – the dental support organization (“DSO”). An MSO, in essence, is the outsourced back office business operations of a medical practice. The MSO allows these arrangements to navigate the corporate practice of medicine, Stark, and state and federal anti-kickback laws, and can even be used for asset protection strategies and succession planning.

The basic elements of an MSO model are two entities (a professional entity and the management entity) and a management services agreement that binds the two entities legally together.  MSOs contract with professional entities to provide support services such as billing, collecting, non-medical staffing, equipment leasing, and marketing in exchange for a management fee paid by the profession entity. While the MSO model is widely utilized and accepted, it is imperative to read the proverbial warning label before setting up an MSO model.  Each state varies in the financial and control boundaries that must be set between the management entity and professional entity.

Most states create these boundaries through laws and regulations against non-professional ownership and involvement in a healthcare provider’s business called the corporate practice of medicine (“CPOM”). MSOs are often used as a strategy to involve non-physicians into a deal through the MSO model.  However, recent court rulings evidence the need to tailor the MSO model to the state in question and to monitor the developments in enforcement. In 2017, new opinions were issued in both New Jersey and New York that involved insurance companies asserting that physicians, their professional entity, and the MSO committed insurance fraud by submitting insurance claims for services performed by a professional entity that was under the control of a MSO rather than the physician. In Allstate Insurance Company v. Northfield Medical Group, the New Jersey Supreme Court awarded Allstate $4 million stating the arrangement of a professional entity managed by a chiropractor MSO left the physician with little control over the professional entity, gave far too much power to a provider that did not have an unrestricted medical license, and as a result, ruled insurance claims submitted under this structure were false and fraudulent. The management agreement gave the chiropractor so much power that he could override the physician on management decisions and 100% of professional entity profits were being paid to the MSO for equipment leases, fees, and space leases. The court stated that this arrangement “promoted a practice scheme specifically designed to circumvent . . . requirements . . . while appearing compliant.”

Further, a New York appellate court in Andrew Carothers, M.D.P.C. v. Progressive Insurance Company ruled that fraudulent insurance claims were submitted as a result of a professional entity being in violation of CPOM laws. In this case, a violation of CPOM occurred because the professional entity was providing excessive amounts of money to non-professionals in a MSO through inflated equipment lease payments, contained unilateral termination provisions, and lopsided staffing controls.

These cases should not discourage physicians or non-professionals from entering into MSO models, but rather serve as examples taking the time to ensure compliance. As such, when structuring a MSO it is important to make sure key points are strictly followed in form and substance, such as leaving control of medical decisions and staffing in the physician’s hands, and making sure that all equipment leases, management fees, and other payments to the MSO are developed based on the specifics for the deal and the laws governing the arrangement. The MSO is a great elixir for the health care transaction – but it is imperative that you work with your attorney to help build it correctly.

If you have any questions on MSO models or want your current one to be looked over, please contact

ByrdAdatto founding partner Michael Byrd

Michael S. Byrd

As the son of a doctor and entrepreneur, ByrdAdatto attorney Michael S. Byrd has a personal connection to both business and medicine.

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