The Basics of Management Services Organization Agreements
Management Services Organization (MSO) agreements are an increasingly common vehicle for physician groups to achieve their operational and strategic goals. In general, a Management Services Organization is a legal entity that is formed to provide administrative services and other non-clinical services to licensed healthcare providers or practices. MSOs typically provide services such as human resources, information technology, billing and collections, facilities management, contract negotiation, network depository, data management, education and training, practice administration, marketing, financial management, statistical reports, and financial bookkeeping. MSOs typically perform many of the functions of a practice management company; however , they tend to be more closely aligned with the physicians and may utilize the same or similar employees. They may be owned by existing physician groups, hospitals, or other types of entities.
Management Services Organization agreements are typically entered into between an MSO and a physician group or an individual physician. They will generally include provisions outlining the scope of the services to be provided to the physician group, as well as provisions related to the management fees to be paid by the physician group to the MSO for those services. If an MSO is owned by a hospital or other entity, the agreement may also address hospital directives (or borrow from those directives when the MSO and hospital are one in the same).
Notable Parties to Management Services Organization Agreements
As with other types of healthcare agreements, MSO agreements must identify the parties to the agreement and address their responsibilities under the agreement.
Healthcare providers typically include:
• Individual Practitioners (physicians, podiatrists, chiropractors, etc.);
• Group Practitioners (physician or dentist practicing in partnership or professional corporation);
• Physician Organizations (MSOs, IPAs, PHOs, etc.);
• Facilities (hospitals, nursing home facilities, diagnostic centers, etc.);
• Ancillary Facilities (labs, medical supply companies, rehab facilities, etc.);
• Others (vendors, third party payers, insurers, Managed Care Organizations (MCOs), pharmacy providers, etc.)
MSOs may have any structural arrangement (whether for profit or not for profit and whether existing solely to provide administrative support or for other purposes), as third party administrators for public and private MH/MR providers or as freestanding operations. MSOs, as indirect providers, may be separately licensed (so-called "MSO licenses") in some states. Because of these complexities, many MSOs are organized without legal entity status, by contract, and are referred to as "contract management organizations" or "CMOs".
Other parties that may be involved in the operation of an MSO include:
• Physicians and allied professionals
• Non Physician Owners (NPOs) including investors, nurses, marketers and executives
• Manager Organizations
• Preferred Provider Organizations
• Payors/Reimbursement Sources
• Vendors/Insurance Companies
Physicians, in many instances, will be the exclusive owners of a single MSO or shares within a multi-entity ownership structure. Depending on the jurisdiction and the type of MSO, physicians or NPOs may be interested in purchasing an ownership interest in the MSO. In some states, physician ownership of an MSO is expressly permitted or prohibited by state statute. In other jurisdictions, physician ownership is statutorily or presumptively prohibited under the prohibition against the corporate practice of medicine.
In many jurisdictions, the physicians and/or the NPOs will also be players in the MSO agreement (with certain exceptions (i.e., in Illinois and California, limits apply to the extent the MSO agreement requires members to refer to a particular provider thereby giving rise to allegedly illegal fee splitting). In other jurisdictions, physician contracts may include the provision of MSO services. In states where the corporate practice of medicine is strictly forbidden, physicians may not be listed as parties to the MSO agreement at all. NPOs may enter into direct agreements with MSOs or other providers.
While the parties to an MSO arrangement will vary based on local law and the design of the MSO, the essential components of an MSO arrangement are: contract management, the delivery of healthcare, marketing, finance, planning, facilities, equipment, information systems, clinical, human resources and legal. Contracts for MSO services may include provisions for more than one service, such as including the delivery of qualified transportation services or laboratory services.
Although the level of financial participation between the parties may vary by agreement and with the level of services designated, the MSO traditionally receives fees for services. Fees are generally calculated on a fee for service basis, based on a fixed per capita, or based on both a fee for service and fixed per capita basis.
Advantages of Management Services Organizations
Benefits of MSOs
Indeed, the services offered by MSOs are designed to help small to medium health care providers and physician practices operate more efficiently, allowing them to focus more energy on their core functions, such as patient care, rather than on administrative, infrastructural and marketing aspects of their businesses.
With the proper structure, MSOs can also significantly reduce costs for member clients. By operating as a single entity in procuring the employees and services needed to run or grow a medical practice or health systems, an MSO typically can lower the unit cost of those services and pass significant savings on to the MSO client group.
MSOs also are in a unique position to assist member clients in capturing new avenues of revenue. Many MSOs are actively participating in the trend of offering consulting services to provider clients that are exploring various new methods of reimbursement. For example, the movement towards outcome-oriented care is driving down the traditional volume-based coding models. MSOs can help medical practices and other providers evaluate and develop strategic responses to this new reality and, in addition, can assist in the development of new fiscal monitoring and accounting systems that will allow medical practices to track scores associated with new ways of measuring quality of care.
Frequently Used Terms and Provisions in Management Services Organization Agreements
To ensure a mutual understanding of the expectations and obligations of each party, MSOs and medical groups typically devote a section of the MSO Agreement to defining the services to be provided, the compensation arrangements, and agreed performance metrics. Most MSO Agreements will include such standard terms as the Scope of Services, Fees, Compensation Methodology, Performance Reporting, Indemnification, and Term and Termination.
Scope of Services. MSOs and physicians will often spend a good amount of time agreeing to the specific services that the MSO will provide to the medical group. While scope of services sections can be quite broad, most MSOs will include among the services provided: (i) administrative functions (human resources, billing, etc.), (ii) operational functions (practice management, business planning, etc.), (iii) management services (insurance, finance, quality assurance, etc.), and (iv) the acquisition of future facilities and practices. Medical groups may be able to negotiate amendments to typically broad scope of service sections, and spelling out certain functions the MSO is expected to develop for the medical group may make the transition to MSO management smoother in the future.
Compensation Methodology. A significant component of most MSO Agreements is the MSO’s compensation methodology. The methodology must comply with any applicable state insurance, compensation, or fee-splitting regulations. Many MSOs will base their fees on a percentage of revenue collected, often ranging from 7-10%. Others may propose a flat dollar plus percentage of net collections. The amount an MSO charges a medical group will vary based on the location of the group and the services the MSO is providing.
Performance Reporting. MSOs usually are required to submit regular performance reports to the medical group, which often include financial summaries, documentation of the services the MSO has provided, and information relating to the clinical performance of the group (such as patient volume). Reports are often quarterly, but the frequency and content of the reports are subject to negotiation.
Indemnification. Because MSOs often engage professionals to perform the majority of their services, it is important that MSOs indemnify the medical group against any financial harm resulting from the MSO’s acts or omissions.
Term and Termination. Few if any MSOs will enter into an indefinite MSO Agreement. As a result, term and termination provisions are common in MSO Agreements. Most MSOs will include a standard 3-year term. In addition, MSO’s will usually require that a medical group provide at least 120 days’ notice of the date on which it intends to terminate the Agreement. A termination for cause provision is often included as well, which would allow the medical group to terminate the Agreement for non-performance by the MSO.
Regulatory Issues Related to Management Services Organization Agreements
As with all healthcare arrangements, MSO agreements must comply with all applicable federal or state healthcare laws and regulations. MSOs must ensure that their arrangements do not violate any anti-fraud laws, such as the federal Stark Law and Anti-Kickback Statute or their state equivalents.
Stark Law
The Stark Law prohibits physicians from making referrals to an entity for certain kinds of healthcare services if the physician (or a member of his or her immediate family) has an ownership or compensation arrangement with that entity. If an arrangement does not comply with one of the Stark exceptions and involves a designated health service, then the entity rendering the service cannot bill for the service and the payments received must be refunded. A referral under the Stark Law, is simply a request for a service or the request by a physician that a service be provided. There are no exceptions, safe harbors or other defenses if it is determined that a referral was made by a physician to an entity with which that physician has a disallowed ownership or compensation arrangement. Given this strict liability standard, the Stark Law is a potent weapon against MSOs who have not made competent analyses of whether their arrangements satisfy one of the exceptions to the law. Plaintiff attorneys also frequently use the Stark Law as leverage in lawsuits , even when it is not implicated.
Anti-Kickback Statute
The Anti-Kickback Statute makes it a felony to knowingly and willingly offer or pay, solicit or receive, any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in violation of the law. The term "remuneration" means any remuneration, directly or indirectly, overtly or covertly in cash or in kind. Notwithstanding the fact that some state laws permit such financial relationships, the Office of Inspector General ("OIG") has ruled numerously that any financial relationship that resembles a kickback arrangement violates the Anti-Kickback Statute. Moreover, the intent to violate the Anti-Kickback Statute is what makes a payment illegal under the law – there is no issue relating to the legality of a particular financial relationship based upon whether it is commercially reasonable.
Criminal penalties for violation of the Anti-Kickback Statute include:
• fines up to $25,000 per violation;
• imprisonment up to five years;
• exclusion from participation in federal healthcare programs under the OIG’s authority; and
• up to triple damages under the civil monetary penalties laws.
Management Services Organization Agreements – Pitfalls and Potential Liabilities
The challenges and risks associated with MSO agreements include antitrust issues, self-referral and kickback statute considerations. Antitrust issues can arise when a physician practice is attempting to jointly negotiate with payors because this essentially eliminates competitor negotiation strategies. The safety zone exemptions under the Department of Justice have allowed for physician groups to engage in these types of negotiations under certain conditions. There are also risk of anti-kickback violations due to the shared savings model of payment. Since the MSO is negotiating higher reimbursement rates with the payor and then dividing these proceeds with the provider, there is an inherent risk that the amounts paid to the provider could potentially be considered payments to induce referrals to the MSO. In order to mitigate this risk, the MSO could elect to be an IPA as well as an MSO, thus centralizing the negotiating process in one entity so the MSO cannot determine allocations amongst themselves.
The self-referral or Stark law can also trigger liability. Under Stark, there is a "unit" of services test which means that each item or service provided constitutes a separate "unit" that must be individually evaluated for compliance with all of the relevant exceptions. If the MSO is doing any billing for MSO services, it may be deemed to constitute compensation from the provider under Stark and thus be subject to this law.
MSO agreements can create conflicts of interest if the MSO has exclusive provider agreements with individual providers. The MSO may market itself as the provider of an entire bundle of services to payors, but if there are competing arrangements with different groups of providers, then there could be a risk that the MSO cannot fulfill its obligations to both groups of providers. Therefore, if the MSO has multiple contracts with payors that include overlapping provider groups in its provider networks, then the MSO should also consider how to distinguish its obligations to the payors from its obligations to the providers.
Negotiation & Drafting Considerations – Guidance for Successful Management Services Organization Agreements
The drafting and negotiation of MSO Agreements is one of the most important parts of this dynamic in managing physicians. The points of negotiation will typically vary with regard to the respective parties as well as other circumstances applicable to a particular deal. However, we have found that it is generally effective to organize the issues based on the sections of the Agreement, and then focus the parties on how their respective concerns apply to those issues. Although most of the issues created by patients, payors, or changes in the law are not generally the responsibility of either party, it is important that these issues be addressed in terms of the parties’ ultimate responsibilities to each other as well as to third parties.
Not infrequently, a management services organization will attempt to involve a vendor in the negotiation of its agreement with physicians. While thoughtful vendors will approach the negotiation from the perspective of appropriate safeguards for their particular services, the assumptions they make about the risks of the transaction and its impact on the potential liability of the parties may be markedly different from those which are central to the parties in their negotiations.
Another factor that can influence terms is the market for MSO transactions at the time the parties are negotiating. If the parties set an arrangement apart as a competitive transaction, often other parties who might want to enter that market will be more inclined to seek differentiating features to help establish their own competitive advantages.
Emerging Trends in Management Services Organization Agreements
Emerging technological enhancements and strategically developed healthcare policies are expected to impact the HealthCare industry. These forces will in turn influence the evolution of MSO agreements.
One trend is the transformation of the delivery of healthcare services. Accountable Care Organizations ("ACOs") empowered by new technology should have a significant influence on the future development of MSO agreements. Beyond the traditional limit of independently owned hospitals, large and small entities equally can form these legal entities. Instead of a focus on traditional payment events, MSOs should make a significant shift to direct their attention to risk sharing contracts. Furthermore, as a result of increased usage of Electronic Medical Records, software companies not only have the potential to develop software for ACOs, but also historically have. Prior to the uptick of software for ACOs, these companies provided software services in connection with the delivery side of creating medical records for office patients. As ACOs increase in popularity, there may be an abundance of medical records already produced. For those records that do not currently share information electronically, once in an ACO, many of these records would be so integrated into the ACO MSO that it could be attractive to group them into an abstract that could function as an electronic medical record for hospital patients. Therefore, the software companies and healthcare consultants working with ACOs and EMRs could transform the managed services portion of an MSO into a more sophisticated service arrangement for producing electronic medical records, tracking data for the purposes of risk sharing, and billing purposes.
Another trend comes from risk sharing arrangements. These opening additional revenue sources will foster the need for strategic partnerships between physicians, hospitals, and service providers. As hospitals manage physician practices and engaged in joint ventures to expand their reach into professional services, it is expected that these services will evolve into group practices. Moreover, out of necessity , physicians will have to form groups to meet the growing demands of patient care and reimbursement. A result of these physician groups are the likely growth and success of MSOs. A more diverse MSO will appeal to a mix of entrepreneurs who will create a market niche. Similarly, the merger of physician and hospital groups will produce a more competitive market. Although regulation will have a role, more aesthetic factors will influence the way in which these groups will merge.
Based on a growing presence of MSOs in recent years, as discussed previously, a natural evolution is the proliferation of services by MSOs to manage risk sharing. ACOs produce a larger body of patients than traditional volume-based contracting, and therefore have a greater need to manage them. As this expanding population of patients incorporates regulatory and non-regulatory managed care contracts, new standards will arise and insurance companies will have to stay abreast of the relationship between CMS and commercial payers. Ultimately, the most successful MSOs will be those that are able to navigate the regulatory guidelines for their clients and provide a seamless experience for managed care patients. This could be achieved through joint ventures or ‘odds and ends’ agreements. For example, once an MSO identifies the types of managed care contracts that it intends on managing, the types of managed care patients that that will attract and manage will be determined. Then the MSO will have to determine whether to enter into a single or a joint venture with an insurance company. In these joint venture agreements, MSOs will have to identify specific goals relating to the number of patients managed. Influential in this decision will be the scope of service, the number of contracts, the types of patients, the geographic region of contracts, and whether the managed care contract is primary, secondary, or tertiary. Thus, an MSO’s business strategy in a joint venture could lead to the creation of a new enterprise.
The dynamic evolution of MSOs has only begun. The coming years will see the development of numerous variations that rethink even the most basic functions of MSO. We are on the cusp of a new era of sophistication and options where MSOs can provide expanded and unique services to both payers and providers throughout the spectrum of the healthcare industry.