Management services organizations (MSOs) are revolutionizing the healthcare landscape, offering dynamic solutions that propel growth and slash costs. Imagine an entity that partners with healthcare providers to shoulder the burdens of non-clinical administrative services, freeing providers to focus solely on their passion for patient care. These MSOs can be owned by licensed providers or visionary non-providers, navigating even the strictest state regulations that demand medical practice ownership by healthcare professionals. Picture a seamless operation where financial management, human resource services, information technology, and marketing are expertly handled, translating to elevated efficiency for healthcare practices and facilities. This article will delve into the essential considerations for forming and operating an MSO, uncovering the strategies that help drive success in this transformative arena. Note that while MSOs can be advantageous, before considering forming or joining an existing MSO, due diligence is of the utmost importance for the sustainability and future of the medical practice.
Why Form an MSO?
There are a variety of reasons to consider forming an MSO, which may include the following:
- To create value in a company that may be owned by outside investors, physicians, or non-physicians associated with the practice.
- To use as an asset protection vehicle to reduce the overall exposure of a medical practice to malpractice or other general liabilities.
- To use as an estate and succession planning tool, e.g., non-physician family ownership.
- To consolidate the non-clinical administrative functions of multiple practices to help achieve cost savings through economies of scale.
- To combine non-clinical functions of a large group practice in preparation for a private equity sale.
- To create a “friendly physician” model in states with strict corporate practice of medicine laws.
Choosing an MSO Structure
The choice of entity structure is significant in determining proper tax planning for an MSO. An MSO can be a potential solution to conveying the value of a clinical practice to a tax-favorable entity. Business entity considerations include:
- C corporation: Subject to double taxation, where the corporation pays corporate taxes on its profits and shareholders also pay taxes on dividends received. C corps do not have restrictions on ownership.
- S corporation: Offers pass-through taxation, where income, deductions, and credits pass through to shareholders, avoiding double taxation; however, ownership is restricted to 100 shareholders.
- Limited Liability Company (LLC): Provides flexibility in taxation, as it can be taxed as a sole proprietorship, partnership, or corporation. LLCs enjoy pass-through taxation unless they elect to be taxed as a C corp. MSOs formed as LLCs that file as partnerships provide more flexibility of ownership and governance.
MSOs generate revenue through service fees charged to healthcare providers. The type of services provided and the contractual agreements can affect how this income is categorized and taxed.
- Ordinary Business Income: Income from providing management services is typically considered ordinary business income and subject to federal and state income taxes.
- Self-Employment Taxes: If the MSO is structured as an LLC filing as a partnership, members or partners may be subject to self-employment taxes on their share of the income.
Tax Credits for MSOs
MSOs may be eligible for various tax credits and incentives, such as:
- Work Opportunity Tax Credit: For hiring individuals from targeted groups who face significant barriers to employment.
- Research and Development Tax Credit: If the MSO engages in qualifying research activities, such as developing new software or improving existing processes.
- State-Specific Incentives: Some states offer incentives for businesses that create jobs, invest in certain areas, or engage in specific activities.
Non-Tax Considerations for MSOs
Non-tax considerations are just as important when forming an MSO and encompass the regulatory aspect of the corporate practice of medicine. A management services agreement (MSA) is a contract that is drafted between the MSO and clinical entity that governs the business relationship between both parties. The MSA details all of the services to be provided by the MSO to the medical practice or other healthcare business entity. It also shows the services not to be provided, i.e., clinical services. A properly drafted MSA provides the MSO with the authority to run the medical entity for a management fee that provides for a return to the MSO’s owners. Some items to consider in an MSA are:
- The length (term) of the contract, which may be up to five years or more.
- If permissible in the state, a security interest establishing a lien on the accounts receivables of the medical entity.
- Restrictive covenants.
- A detailed list of management services along with a corresponding fee schedule, which should be supported by a fair market value analysis.
What Services Does an MSO Provide?
The services provided by an MSO may include some or all of the following, but are not limited to:
- Practice Management Services: MSOs provide support for the day-to-day operations of healthcare practices, such as appointment scheduling, patient registration, medical billing, and payor negotiations.
- Revenue Cycle Management: MSOs aid healthcare providers in managing their revenue cycle, including claims processing, payment posting, and collections.
- Human Resources Management: MSOs help healthcare providers with employee recruitment, hiring, training, and benefits administration.
- Compliance and Regulatory Support: MSOs help ensure that healthcare providers follow relevant laws and regulations, such as HIPAA, OSHA, and Medicare/Medicaid requirements.
- Information Technology (IT) Support: MSOs provide support for healthcare providers’ IT infrastructure, including electronic health records systems, cybersecurity, and data analytics.
- Accounting and Financial Management: MSOs manage healthcare providers’ financial operations, including budgeting, accounting, and financial reporting.
- Marketing and Patient Engagement: MSOs can help healthcare providers with marketing and patient engagement strategies, such as social media marketing, email marketing, and patient surveys.
MSO Fee Structures
An MSO is entitled to a fee for providing these services to a healthcare entity. The compensation for these services should bear a reasonable relationship to the cost of the management services provided and be consistent with fair market value. There are three common MSO fee structures to consider: the cost-plus method, the fixed-fee method, and the percentage-of-revenue method.
- Cost-Plus Method: The MSO cost-plus method involves the MSO charging the practice for all expected costs plus a fair market value profit margin. The costs are essentially a pass-through, and then an appropriate markup is applied.
- Fixed-Fee Method: Under the fixed-fee method, the MSO charges the practice an annual fixed fee. Different fees may be accrued for the services selected, e.g., revenue cycle, HR, IT, etc. This fee reflects an agreed-upon budgeted total with caveats. Those caveats may include an allowance for adjustments, i.e., increases, as warranted. For example, increases in the client’s number of providers, additional services provided, or other similar scenarios would trigger a review and likely a change (addition) to the fixed fee total.
- Percentage-of-Revenue Method: The MSO charges a percentage of net patient revenues for the specific services provided. These charges may be separated into various service areas, e.g., 4% for revenue cycle, 2% for HR, etc.
It’s important to verify the regulatory constraints regarding MSO fee structures, as laws and regulations can vary significantly by state. For instance, in some jurisdictions, such as New York, certain fee structures such as percentage-of-revenue are generally prohibited due to fee-splitting laws.
It’s essential for healthcare organizations to research and consult with healthcare legal experts or regulatory bodies to help ensure compliance with local laws and regulations. This helps in the successful and lawful operation of an MSO.
Conclusion
Establishing and running an MSO involves navigating a complex array of tax and regulatory implications. From choosing the right entity structure to understanding the tax ramifications of operating in a specific state, it is imperative for MSO owners to stay informed and compliant with the tax jurisdictions and various regulatory bodies. Consulting with tax and healthcare professionals who specialize in healthcare and MSOs can help ensure proper structuring and operations. This will enable MSOs to focus on their core mission of supporting healthcare providers and improving patient care.
At Forvis Mazars, we are experienced in navigating the complexities of forming, joining, or vetting MSO opportunities. Our dedicated team of healthcare consultants is here to provide you with the insights and strategies needed to help you succeed in this dynamic field. Whether it’s compliance, financial management, or operational efficiency, we offer services tailored to your specific needs. If you would like to learn more about how we can help guide you through the intricate landscape of MSOs, helping your organization thrive and deliver exceptional care to patients, please reach out to our professionals today.