In this episode, hosts Brad and Michael uncover the complexities of the management services organization (MSO) model. Tune in as they share a cautionary tale illustrating the consequences of improper implementation of the MSO model. Explore the critical components of the MSO structure, including ownership, compliance, and flow of funds. Discover the pivotal role understanding MSO model plays in a business’s success and gain valuable strategies for navigating potential risks.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real-world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I am your host Brad Adatto, with my co-host, Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season, Brad, we are riding the emotional rollercoaster of the crises that will arise in the operating season of a business. Our theme this season is Running a Business This season will be illustrating the types of problems that arise when running a business and the typical crisis that can pop up. We will do this through real client stories and as we’ve talked about, have at some point, a few guests.
Brad: This’ll be so much fun and Michael running a business, honestly, is just one season of a business. Maybe for those who don’t know, can you tell them what some of the other seasons are? [00:01:00]
Michael: We have the building season. We did that last season. That’s starting a business. And where we are right now, the operating season, we have the scaling season that’s growing a business and the buying and selling season.
Brad: That’s awesome. Thanks. Well, well said Michael. And as we’ve done throughout this season, we’ve had these little fun mini stories that we discuss. Unfortunately audience members, we just couldn’t figure out how to make it into a full episode. What do you got today?
Michael: Brad? Do you remember when I played a criminal defense attorney?
Brad: You know, Michael, I think I would remember you “playing” a criminal defense attorney. But maybe you were confusing yourself with when I used to clerk at the district attorney’s office when I did that for about two years, but maybe I’d be the wrong person since I was helping put the bad guys away to as opposed to keeping them off the streets.
Michael: Well, maybe criminal defense attorney is a little dramatic. Do you remember when I defended a speeding ticket?
Brad: [00:02:00] Oh, okay. I see. Now the question should have been more like, do you remember when Michael defended a doctor for the lowest level of misdemeanor possible, or a few hundred dollars fine? Yes, Michael, I actually remember that. And excuse me, for not recognizing it as a “criminal matter”.
Michael: You’re excused.
Brad: Thank you.
Michael: Our client in this mini story is Dr. Meredith Grey.
Brad: Michael, I think you’re better than this. Let me guess because our client is an ER doctor. You were naming her after the main character of the longstanding TV show, Grey’s Anatomy. I would object because I think Dr. Grey has been a character in a prior episode, but lucky for you, I’m feeling really too lazy to confirm this. And besides, because it’s a mini story, just go with it, buddy.
Michael: Let’s roll with it. Dr. Grey called me on a Monday and wanted help with a speeding ticket. This was way back when you and I first started working together.
Brad: Yeah. Now I’m thinking about, ironically, I think Grey’s Anatomy was still on the air when this actually story happened. And I remember we had a guy we referred to for all our speeding tickets. [00:03:00]
Michael: You mean the guy that you used for your speeding tickets?
Brad: Michael, sir, you have me mistaken. I always – mostly rarely speed.
Michael: Yes, Dr. Grey first wanted me to hear her story when she called. She was called to the hospital over the weekend while on call and was pulled over for speeding in the middle of the night while racing to the hospital.
Brad: Well, that actually seems like a very reasonable excuse.
Michael: I know, I know. She kind of brought me in with her story and I was actually surprised that she received a ticket in the first place.
Brad: Yeah. Then did you give her to our referral source?
Michael: I tried. Dr. Grey was insistent that she wanted me to defend her.
Brad: Please tell me you said no. I’m actually aware of your strengths, and I don’t think that’s one of them.
Michael: Current wiser me totally [00:04:00] agrees with your sentiment. Unfortunately, I was much younger, and I was flattered that Dr. Grey was so insistent that I could help. So instead of saying a firm, no, I kept trying to talk her out of it. I noted that she would pay me far more than she would even pay for the fine itself or the referral source. And by the way, the referral source could probably do it better.
Brad: Kennedy, did you catch that? Michael’s long-winded answer there that kept going on and on. I believe you took the case.
Michael: Yes, Brad. I took the case
Brad: Michael, Michael, Michael, Michael, this is a lose, lose situation. Like, you either win and Dr. Grey pays you way too much or you lose, and Dr. Grey paid you way too much and she has got to pay this fine.
Michael: I felt this pressure to the core from the moment I said yes.
Brad: I bet you did.
Michael: To make matters worse, I was a young partner at our old firm, and as you may remember, we didn’t have a lot of control over [00:05:00] our billings. Like, we had some parameters, but it’s not like I could just hard code charge some low flat fee for this. And so, my workaround was, I built the minimum amount of time I could get away with at the firm and spent the majority of my time working on weekends, on my own time to teach myself how to handle a speeding ticket case – way too competitive.
Brad: Again, lose, lose, lose, lose. Okay. You were an actual litigation attorney back then. It could not have that been that big of a stretch, though.
Michael: Well, that was my thinking when I said yes, Brad. But the procedures in criminal law and civil law are very different. And so on one hand, being a litigator gave me some confidence of standing in a courtroom, and thought, “Oh, I can do this. If I can do a big civil business case, I can do a speeding ticket case.” But in other ways it [00:06:00] hurt because it was like trying – the procedures were like trying to learn a foreign language.
Brad: All right, Michael. Well, how’d it turn out?
Michael: Well, Brad, I thought it was an urban legend that if the police officer does not show up, that the case would be dismissed. I actually learned that this is true. The officer did not show up and the case was dismissed. By the way, I was extremely nervous walking into court that day because it was all new stuff over a couple hundred dollars fine. But apparently Dr. Grey is an ER doc and of course, this all makes sense now. She knew tons of police officers, she had a lot of friends, and these other officers had reached out to the officer and suggested it might be a good idea if he didn’t show up to court that day.
Brad: Kennedy, did you hear that, he had nothing to do with this dismissal?
Michael: Yeah, pretty much. The lesson I learned though, Brad, was never to take on something that I don’t do in the future.
Brad: Well, I hate to do this, but I’ll actually give you a compliment. You actually retired from practicing criminal law, undefeated. Well, congratulations. But let’s move on to something that you do know about. Can we shift to healthcare to be our main story?
Michael: Alright, let’s jump in. Our main character today owns a wellness clinic in Texas. Okay. He’s a spine surgeon by training, with a passion for regenerative medicine.
Brad: All right, Michael, I think we have our first vocabulary word of the day. You know, for those not familiar with regenerative medicine, it is focused on developing, applying new biological techniques to heal tissues and organs and restore functions lost during aging or disease or even damage. And this treatment can be directly at the site of the damage, or there could be transplants of cells and stem cells. As such, this term is actually widely used to describe lots of different types of medical treatments and medical clinics.
Michael: And this is a major growth [00:08:00] area in the area of elective medicine. Elective medicine is cash pay. And so, you’ll sometimes see terms like anti-aging. I’ve heard terms like “a longevity practice.” And weight loss centers tend to be kind of in that world. The catch is that they all oftentimes are branded as a wellness clinic.
Brad: Yeah, and like I said earlier, we’re starting to see these wellness clinics and medical spas overlap as they’re often offered these exact same types of services. They’re just branding themselves different, basically. But you know, we’re talking about the story, you never even told me the name of the main character so far.
Michael: Let’s call him Dr. Hat.
Brad: Oh my gosh. Do I dare ask why Dr. Hat?
Michael: Well, you’ve heard the expression “all hat no cattle?”
Brad: Yes. I have lived in Texas most of my adult life. And for those not in Texas, this expression is used when city slickers dress up with like cowboys, but in reality, they, they really [00:09:00] never stepped foot on or near any farm or livestock whatsoever. So, it’s kind of like they are all form, no substance.
Michael: Yes. Dr. Hat had partnered with his sister who was a naturopathic doctor. We will call her Ms. Granola.
Brad: I think we have our second vocabulary word of the day. And according to the Association of Accredited Naturopathic Medical Colleges, naturopath is an educated on the basics of science, complementary and alternative treatment modalities. Man, I don’t know if I want to use their vocabulary anymore – focusing on body, mind and spirit.
Michael: Well, importantly to the story, Texas does not license naturopathic doctors.
Brad: Okay, now I see why you probably called her Ms. Granola instead of Dr. Granola. And there’s a lot of confusing information out there about a naturopathic doctor. I mean, most of it stems from the fact that only half the United States actually recognize it as a licensed profession. [00:10:00] To add to the confusion, in states that do recognize a naturopathic doctor, their scope of practice can vary about what services they can provide either “medical” or even non-medical. So, that’s probably one of the confusions that a lot of people don’t realize about that profession.
Michael: And even in those states, trying to figure out who they can work with is super complicated. But here it was clear because there’s not a license, and so you’re dealing with an unlicensed person. So, when Dr. Hat set the practice up, we had to deal with the corporate practice of medicine since the services provided in the wellness clinic were considered medical services, and as you know Brad, on the streets, corporate practice medicine is called CPOM.
Brad: Yeah. And audience members, if you haven’t noticed, I think Michael keeps trying to stick me with the vocabulary word. So Michael, why don’t you define CPOM for our audience who’s not familiar with it?
Michael: So many states, including Texas, in fact, a vast majority of the [00:11:00] states have some level of the corporate practice of medicine or CPOM. And the idea is this, it’s a law that says if your business is providing medical services, essentially, that that business has to be owned by a doctor. Now, there’s any number of exceptions to that, but oftentimes this is in Texas that an unlicensed person cannot co-own a business that is providing medical services.
Brad: Yeah. And as you’ve heard us discuss this in the past, when you have a CPOM state like Texas, the utilization that the management service organization model, or as Michael likes to call it, from his tattoo on his bicep, the MSO model, can allow non-docs to participate in the medical enterprise; it’s not direct ownership. And obviously, when implemented correctly, an MSO can be a successful vehicle for several different models and arrangements and a lot of different reasons you can do it. [00:12:00] You know, when you are implementing these things, when you want to put that MSO together, obviously regulatory rules have to be scrutinized, given the risk and depending what state you’re in; this is a highly regulated area, but it’s an opportunity for non-physicians to participate by having ownership in an MSO.
Michael: Yeah. And so the idea at a very big picture, trying to verbally describe a corporate structure is you have this MSO that you just described that in this case would be owned by Ms. Granola and Dr. Hat. And then they have a management services agreement with a properly owned medical practice. So, setting Dr. Hat and Ms. Granola up with the MSO makes sense. And because Dr. Hat had a non-compete with his private practice, they got their cousin, who’s an internal medicine doctor, to be the owner of this professional entity. And we’ll call the cousin Dr. Friendly. [00:13:00]
Brad: I’m just making sure I got that, Dr. Hat who has I’m assuming the non-compete is not the issue for the story on the ownership of the MSO. And then we have this person who is Ms. Granola, and now you have this name Dr. Friendly. Is this because he’s just a nice person, Michael?
Michael: Well, first, Brad, you’re right. The non-compete is not really a relevant part of this story, other than the fact that that caused Dr. Friendly to become an owner. And Brad, you know that would be way too obvious if I named him Dr. Friendly, just because he was friendly. Dr. Friendly was serving this role to help out family, but he had no real interest in being a part of the enterprise. He didn’t want to take on business risk, all that stuff. And so, he had agreed already to serve as the medical director and he was going to be compensated in that role. But when we set up an MSO and we need [00:14:00] someone to fill that ownership role, but they’re not really involved in the risk side of starting the business, and running the business will refer to the MSO model as the friendly PC model because the physician who owns the medical practice is doing so to have an entity that’s compliant, but they’re not really, again, involved in the business risk side of the business. So of course, his role would continue to be proper supervision and delegation and fulfilling the CPOM requirements.
Brad: Okay. Well, this sounds pretty straightforward. Maybe Kennedy, he forgot this was like a crisis season.
Michael: Well, at this point it was going very smoothly, Brad, because everyone was family, we actually got through the entire MSO setup process in four weeks.
Brad: Nice.
Michael: We had two whiteboards during that time. Very nice. The first whiteboard, we walked through kind of the [00:15:00] corporate structure, the MSO model, and showed them how to operate the MSO and made some really important decisions on the setup. And then we even had another whiteboard where we got into the kind of ownership relationship between Dr. Hat and Ms. Granola on the MSO side.
Brad: Yeah. Again, Michael, I don’t know if we’re going to be able to keep this episode. I don’t see a crisis yet.
Michael: Still smooth, Brad.
Brad: Okay.
Michael: Now, we could have interjected to have you run it and it probably would’ve created some crises, but so far this was really smooth.
Brad: Cut that.
Michael: So in fact, Brad, they signed all the documents and even opened their business.
Brad: So, I’m guessing the crisis popped up since they were running their business.
Michael: Oh, context clue. What season are we in? Yes, look at the big brains on Brad. Yes. I learned that they were running the business through the MSO entity, and that they [00:16:00] never did anything to actually implement this beautiful model that I helped them set up.
Brad: Two beautiful whiteboards. That does sound like a crisis. How was this compliance even discovered?
Michael: Well, let’s go into a commercial Brad, and on the other side, we’ll talk about how this compliance issue is uncovered and get into a little legal talk.
Access+: Many business owners use legal counsel as a last resort, rather than as a proactive tool that can further their success. Why? For most, it’s the fear of unknown legal costs. ByrdAdatto’s Access+ program makes it possible for you to get the ongoing legal assistance you need for one predictable monthly fee, that gives you unlimited phone and email access to the legal team so you can receive feedback on legal concerns as they arise. Access+, a smarter, simpler way to access legal services. Find out more, visit byrdadatto.com today.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host [00:17:00] Brad Adatto, with my co-host, Michael Byrd. Now Michael, this season, our theme is Running a Business, and we’re talking about real stories that happen to our clients when things just pop up during their operation of a business. Now, Michael, can you kind of explain to our audience the meaning of running a business through the MSO entity?
Michael: Yeah. So let’s take a step back and go back to the MSO setup, and one of the things that was actually covered in one of our whiteboards is this concept of flow of funds. And so, remember when we were talking about CPOM, the corporate practice of medicine is regulating that a business that’s providing medical services has to be doctor owned. Well, when the MSO is charging the patients in the eyes of the law, they’re the business that are treating patients. And so, you’ve now kind of rendered useless the purpose of this [00:18:00] friendly PC that we talked about. So, a really important principle across the country when you’re dealing with corporate practice of medicine, is that when patients are being treated, they need to pay to the friendly PC, and so this tends to be almost an anchor point issue when you’re looking at compliance. And so, how does the money come in? Patient into the friendly PC. A secondary issue that tends to be really important, and in some states it’s critical from a compliance perspective is how you get the money out of the friendly PC over to the MSO. And so in this case though, we had walked through all of this in the whiteboard. Did I say that twice now?
Brad: Yes, you did.
Michael: Yeah, I think so. Well, it’s important because they did nothing. They just said, well, it seems so much more straight line just to have the MSO charge for this.
Brad: Maybe if they had gone [0019:00] through my whiteboards, they would’ve gotten it done correctly – maybe. But I think well said, as the flow of funds and for audience member understand, that means it’s bouncing from the bank account of the friendly PC to the bank account of the MSO, that’s an important element of it, Michael. But when we went to commercial, you promised something. How did this compliance problem get discovered though?
Michael: Great question. And Kennedy, I’ll allow you to keep that this time because Brad needs to be boosted a little bit today, I can tell. They originally opened Cowboy Wellness in a temporary lease to kind of get the business up and going.
Brad: You can’t just slip in the name the “wellness center” without an explanation. I’m guessing you’re calling this because Dr. Hat wanted to be a real cowboy.
Michael: Yes. But we know Brad, from the story that there’s no cattle.
Brad: Oh, Michael. before we move forward, and I think there’s a lot to chase here but for me, who needs a little more context, and I know audience, can you explain, was [00:20:00] Cowboy Wellness the MSO’s name or the medical practice owned by Dr. Friendly?
Michael: Important question. So the MSO was not named Cowboy Wellness, but the MSO owned the intellectual property for this name. And in fact, they’re not part of the big part of the story, but they actually had a trademark that they owned for the name Cowboy Wellness.
Brad: Okay. So now that we established that the MSO owned that, can you talk about if they were doing this model correctly. How can an MSO allow that name, that intellectual property that they had to be used by Dr. Friendly who owned Dr. Friendly’s PC. So, if the MSO owns it, how is it now being used by another entity?
Michael: I’m not going to say it’s a good question, Brad, but I’m going to say it’s another important question for the audience to understand. So, the reason for that is that remember, the friendly PC is who needs to be treating the patients. [00:21:00] We agree with that, right? Well, if the friendly PC needs to be treating the patients, the friendly PC needs to have a right to be in the space, that business needs to be in the real estate space. And so if there’s a name on the door and you’re showing the world, this is the name of a business, the friendly PC needs to be using that name if that’s the brand name. Well, the problem is that the intellectual property, the name and the asset of this name, Cowboy Wellness, you want the risk takers, the people that are starting the business and running the business to be the owners of that. So, we have the MSO that owns it. And in this management services agreement, they license the name over to the friendly PC, so that the friendly PC can do business under the name Cowboy Wellness.
Brad: That makes sense. And audience members sometimes you might hear, that’s a DBA, doing business as, or in some states an assumed name. [00:22:00] There’s a lot of different versions of that. But Michael, we kind of took a sidebar, so sorry about that audience, but let’s get back to the story. We were talking about they were doing an expansion and they needed update their lease, so what’s the next step here?
Michael: Yeah. So, to kind of reset because I think you caused us to get sidetracked.
Brad: I’m sorry.
Michael: Yeah. So, to reset. They were in this temporary space, they wanted to build out a nice retail setup, and so they needed funding to do that. They needed a line of credit. And so, it’s really common for startups to set up initially in a low cost space that they can kind of prove the concept that they started doing really well and they were ready. And so, they wanted to take out a loan for the finish out and some other kind of capital investments that they were going to do in conjunction with that. And it was the bank Brad, that actually discovered the compliance problem.
Brad: That, first off audience members, that’s unusual, but [00:23:00] how did the bank discover this?
Michael: So Dr. Hat, as a spine surgeon actually had great credit, but the bank was loaning money to the business and they just happened to have a lender who was experienced in health care, and so they were actually taking a look at the compliance side of Cowboy Wellness. Now the reason they were really looking at it, I’ll talk about it in a minute, but what they did is they flagged that the financials did not indicate that patients were being treated by Dr. Friendly’s entity. The financials showed that the funds were flowing directly into the MSO owned by Dr. Hat and Ms. Granola.
Brad: I’m assuming that this health care lender must be listening to our podcast, so flag that. So, it’s pretty good. But that just goes back to all your whiteboards and y’all have heard us talk about this before; that’s a total form of substance concept, which is you think you’re compliant because you have the form in place, which is the management [00:24:00] service agreement between the two entities. But based on the flow of funds discussion you had a few minutes ago, the substance was not there.
Michael: So I foreshadowed a moment ago as to why this bank would even have this heightened level of compliance consideration. Well, the banker was a little, when they saw the types of services that were being provided, that put them on a higher alert than if it were some other kinds of traditional type of practice. And so, he realized that there was a lot of alternative treatments that were being provided, and so that’s what caused him to start digging a little deeper into compliance.
Brad: Yeah. And those not familiar with this, it’s interesting when bankers — we’ve sat in these rooms before and, and they’re trying to understand your business because they want to make sure if they lend you money, they get that money back. And when you’re in an alternative area and wellness centers or med spas, this is a new language to them. It may be health care, but you may be saying, oh, we’re doing peptides, [00:25:00] or we’re doing semaglutide, or we’re doing DLP ones, or some type of hormone replacement, and they’re not familiar with those types of treatments. So, that just puts them at a heightened risk to them because they don’t even understand how is that profitable? How are you making money? What’s the risk associated with it? So, I can understand that not only do they see that in the wellness center, but then the funds don’t seem to be going to the right place, so I could see why that would trigger it. So what happened with cowboy Wellness and their loan?
Michael: Well, it was interesting that I ended up getting on the phone with them to talk through the services.
Brad: Not another whiteboard?
Michael: No, no, no, just got on the phone with the bank and was able to talk through kind of their chain of care and their processes on the services in Cowboy Wellness, and they actually had really good kind of systems set up. They had all the right consents [00:26:00] and were pretty tight on that, and the banker was satisfied. We did have to kind of step back and clean up the mess created by the fact that they didn’t actually implement the MSO on the operational side. They were delayed by a few months on their build out, because going back and, and fixing things and there’s a lot of fixing on the accounting side as well. And so, between that and between the assurances that we had to give on the kind of the alternative treatments, fortunately for him was just a delay, although I don’t think he felt it fortunate at the time.
Brad: Yeah, and this is a great reminder that when you are building out a compliant model that hopefully your attorneys explain to you that you yourself either need to make sure that those who have to implement the model so that your admin team, [00:27:00] your CPA or whoever else is involved to watch the flow, they actually understand it too. because this is – we’ve talked about people drifting out of compliance. They just didn’t ever implement the compliance, so there was no drifting in this particular situation. They literally, from day one, sound like they didn’t truly understand it that where the flow of funds had gone. And I’ll give Michael credit, I’ve seen him do whiteboards. I’m quite certain you explain it that way. I think people just sometimes don’t realize that yes, there are going to be two different bank accounts and yes, you’re going to have to move funds either daily, weekly, monthly, however you plan to do that. And it does add an administrative burden. And if you, the owner, understands it, but if your team doesn’t understand it or your CFO, your COO, whoever’s been in charge of it, it doesn’t help. And it sounds like in this particular case, maybe the two owners maybe understood it at a high level but never really explained it to their team, and they just started – they opened for business and money started coming in. Well, Michael, we’re getting ready to wind down, [00:28:00] so any final thoughts?
Michael: When it came to speeding ticket defense work, I was all hat and no cattle, Brad. And I should not have said I would do it in the first place. And for me, thankfully I got away with it and have stayed in my lane ever since. Dr. Hat learned a valuable lesson as well. It only cost him a few months delay, but it could have been much worse if there would’ve arisen in context to a medical board investigation.
Brad: No doubt on that. Well, Michael next Wednesday’s show we will be discussing a story about a crisis when the FBI calls a medical practice. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client [00:29:00] relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. [00:30:00] Please consult with an attorney on your legal issues.
