Watching Your Back: Protections for Physicians in MSO Transactions

Management Services Organizations (MSOs) have established themselves as a commonplace structure in health care transactions, promising to streamline administrative functions in medical practices, such as billing, human resources and compliance. In turn, these efficiencies afford physicians the time to focus on clinical matters and improve patient care and outcomes (while allowing outside investment and expertise to be lent to the practice’s non-clinical functions).  

However, the potential for a dispute exists when physicians enter into MSO arrangements as part of a larger oversight, acquisition and investment structure, such as private equity purchasers or joint venture arrangements. Physicians need to carefully scrutinize the documentation and framework surrounding a potential MSO arrangement to limit risks. We explore a few key safeguards for physicians to keep in mind when considering how to protect their professional and financial interests.

Ensuring all Compensation Terms Are Documented

Typically, provider compensation is one of the first items discussed in a proposed MSO arrangement. Physicians dedicate substantial time and effort when building a practice and need to ensure that the compensation promised for their efforts (both past and future) is documented and properly aligned. This involves:

• Sufficiently detailing all forms of compensation, including salary, management fees, bonuses, equity and associated distribution rights, and reimbursements for expenses; these rights can be covered, collectively, in several documents, so it is vital that each expected aspect of compensation is addressed in writing.  Handshake deals are difficult to enforce.
• Clearly defining expected hours; understanding expectations in an MSO arrangement is critical, as physicians can be expected to render both administrative and clinical services, which can entail a great deal of time, so physicians would be well-served to negotiate specific time commitments.
• Negotiating specific limits to enforcement of restrictive covenants, to the extent necessary; restrictive covenants included in MSO documentation may affect existing activities or engagements outside of the physician’s practice that the physician expects to continue once the MSO is operational, so careful negotiation is required to avoid a potential dispute concerning compliance with the restrictive covenant.

In addition, all agreements contemplating compensation and other exchanges of value must protect the physician’s professional autonomy and medical decision-making authority, and comply with fraud and abuse laws.

Negotiating Termination Rights

Termination provisions are critical to determining how secure a physician’s position truly is in an MSO arrangement. A physician needs to ensure that he or she cannot be involuntarily ousted without recourse. Key considerations include:

• Eliminating or significantly restricting no-cause termination and clearly defining termination “for cause;” if an MSO insists upon retaining a no-cause termination right, the physician should consider insisting on lengthy notice periods and attempt to negotiate strong severance compensation and releases from restrictive covenants; physicians should also establish a defined list of events that warrant “for cause” termination and negotiate mutually agreeable cure periods for these “for cause” events.
• Understanding the relationship between multiple operative agreements, including operating agreements, employment agreements, and related contracts; oftentimes, termination rights under one agreement trigger termination rights under another agreement, so physicians need to ensure that all documents are congruent and eliminate any inconsistencies in termination triggers or rights in different agreements.

While MSOs have cemented themselves in the health care industry, prevalence does not equal simplicity. Physicians face a complex puzzle of compensation structures, hour requirements, restrictive covenants and treacherous termination scenarios that require attention to mitigate risks. Our attorneys are experienced in guiding physicians through these nuances and protecting their interests.