Management Fee Structures and the Corporate Practice of Medicine

Medical practices commonly contract with management services organizations (MSOs) to provide non-clinical, administrative services, especially in the context of practices which are affiliated with, and/or whose non-clinical assets have been acquired by private equity firms or other strategic investors. Management fee arrangements with MSOs can take several forms depending on a specific state’s corporate practice of medicine compliance.

MSO arrangements allow health care practitioners to focus on providing high-quality clinical care and delegate to the MSO the non-clinical functions, such as human resources, marketing, IT, bookkeeping, and billing and collection, to help the practice operate more efficiently.  MSO arrangements are typically set forth in a written management services agreement that includes important terms, such as the service structure and management fee.  In states that prohibit the corporate practice of medicine – generally defined as the ownership and/or control of a health care practice by a person or entity that is not a licensed health care professional – and enforce such prohibition, the management fee structure can heavily influence, or even determine, whether the MSO structure is compliant with state law.

Management fees can be structured in multiple fashions, which fall along a spectrum of compliance for states that regulate the corporate practice of medicine.  Especially in a state that prohibits the corporate practice of medicine, the management fee paid by the practice to the MSO must (i) be justified by the services the MSO provides, (ii) be consistent with fair market value and (iii) be commercially reasonable.  Fraud and abuse laws should also be considered when structuring management fees. 

• Automated Monthly Payments. Some states allow MSOs to perform a monthly “bank sweep” from the practice’s operating account after all professional expenses, including clinical personnel compensation and professional liability insurance, are paid and an appropriate amount of working capital is left for the practice’s day-to-day operations.  Practices should exercise caution prior to agreeing to this type of structure because a number of states that strictly enforce the corporate practice of medicine prohibition also prohibit fee-splitting, which is the sharing of patient fees between a medical practice and a third party. These states may interpret this fee structure as a violation of the corporate practice of medicine prohibition and/or fee-splitting prohibition.  This structure is often most attractive to MSOs because it maximizes the amount the MSOs receive for its services, giving the MSO an indirect economic stake in the overall financial performance of the practice.
• Percentage of Revenue. Management fees can also be based on a predetermined percentage of revenue. However, this structure is also prohibited in a number of states that enforce the corporate practice of medicine prohibition.  If not directly prohibited, a state may still regulate percentage-based management fees by prohibiting fee-splitting or by restricting percentage-based payments for patient referrals, which has been interpreted in some states to apply to marketing services performed by MSOs.  The state may also regulate percentage-based management fees by determining that fees that constitute a relatively large percentage of revenue are definitive evidence of unlawful corporate practice of medicine. 
• Markup Structure. MSOs can agree to accept reimbursement for monthly expenses, plus a predetermined percentage of those expenses, or a “markup.”  Markup structures tend to be compliant in more states than the two methods listed above and allow the MSO to mitigate financial risk by being fully reimbursed for all expenses each month.  However, practices may resist agreeing to this structure because MSO expenses can vary from month to month, creating uncertainty as to how much the practice will pay the MSO.
• Hybrid Structure. Some management fees are structured as a hybrid of the methods listed above.  For example, an MSO may be reimbursed for its monthly expenses and receive a set percentage of revenue.  This structure can mitigate, but may not eliminate, the compliance risks associated with the payment methods discussed above.
• Flat Fee Structure. A flat fee, determined in advance and paid to the MSO each month, is the most conservative, risk-averse, management fee structure.  The MSO should ensure that the fee covers its expenses, and the practice and MSO can include a provision in the management services agreement to revisit the fee amount periodically to adjust for inflation, operational growth and other relevant factors.  

Management fees can be structured in a variety of ways that present differing levels of compliance risk in corporate practice of medicine states that prohibit fee-splitting or percentage-based payments to MSOs. Consulting with a health law attorney can reduce the likelihood of implementing a noncompliant management fee structure or facing penalties stemming from a regulatory audit or investigation. Strategic counsel can help practices avoid costly compliance issues. Interpretation, application and enforcement of the corporate practice of medicine are dynamic – states periodically adopt or update laws that that affect the doctrine, as well as courts rendering decisions on MSO compliance matters.