Understanding the MSO-PC model is essential for any medical practice, whether independent or considering private equity partnership. At LBMC W Squared, we aim to demystify this complex healthcare model for you.

Key Takeaways:

  • Define MSO and PC: Understand the roles of Managed Service Organizations (MSO) and Professional Corporations (PC).
  • Importance of Separation: Learn why separating clinical and non-clinical ownership matters.
  • Best Practices: Discover financial and operational best practices for a successful MSO-PC partnership.

What is an MSO vs. a PC in healthcare?

In healthcare, a Managed Service Organization (MSO) is a separate legal entity that manages non-clinical functions for a Professional Corporation (PC), such as billing, IT, and procurement.

A Professional Corporation (PC) is a legal entity owned by doctors. It provides patient care, works with insurance companies, and bills under its own name.

The MSO and PC enter into a Management Services Agreement (MSA), where the MSO provides services in exchange for an equity stake or ownership in the clinic. This friendly PC model ensures that clinical and business operations are kept separate, complying with corporate practice of medicine laws.

These laws vary by state but generally ensure only licensed medical professionals control clinical decisions. By using an MSO structure, physicians can focus on patient care while the MSO handles administrative tasks. This model allows for efficient management and high-quality care while staying in compliance.

Legal Structure and Ownership in the MSO-PC Model

The separation of the PC and MSO entities establishes distinct ownership and responsibilities for clinical versus non-clinical operations. At the core of this relationship is the physician-owned PC.

As the clinical practice entity, the PC is owned and controlled by licensed physicians. These doctors maintain ownership of core medical assets like the clinic building, medical equipment, and clinical contracts. They are also responsible for direct patient care, treatment decisions, and provider hiring and credentialing.

However, managing the business operations of a practice takes time away from patient care. This is where bringing in an MSO partner can provide value. When an outside group wishes to purchase a practice, they acquire the non-clinical assets and form an MSO. This may include the purchase of assets such as medical records, intellectual property, workforce infrastructure, and administrative systems.

By creating the MSO as a separate legal entity with new ownership, investment or management firms can handle non-clinical functions while staying in compliance with medicine laws. The MSO then provides defined administrative services to the physician-owned PC through a formal Management Services Agreement. This contractual relationship is the backbone of the MSO-PC partnership and ensures a clear delineation of clinical versus business responsibilities.

How The Management Services Agreement (MSA) Works

Establishing clear expectations is critical for the long-term success of the MSO-PC relationship — this is where the Management Services Agreement comes in.

The MSA is a formal contract between the MSO and PC that defines the specific services to be provided, performance metrics, financial arrangements, and terms of the partnership. It outlines the division of responsibilities, including what functions the MSO will manage and what clinical areas remain under PC control. The MSA also stipulates service level agreements to ensure consistent performance.

Given the complex regulatory environment in healthcare, it’s crucial to have experienced legal counsel when drafting an MSA. Attorneys well-versed in healthcare transaction law can advise on areas like insurance, tax, and antitrust implications. Expert guidance is needed to ensure full compliance with all state and federal statutes.

Additional key terms to address include hiring and termination rights, financial obligations of both parties, ownership of new intellectual property, and dispute resolution processes. The MSA may also authorize the MSO to renegotiate existing practice contracts and enter into new agreements on the PC’s behalf.

Financial Management Best Practices

At the heart of any successful partnership is transparency and accountability. For an MSO-PC relationship, this starts with establishing solid financial management practices from day one.

Proper accounting requires that you clearly track both revenues and expenses at the entity and location levels. Set up your financial systems to capture revenues and expenses for each PC and MSO entity, as well as each practice site if you have multiple locations.

This level of detail is important for several reasons. For starters, it provides visibility into the performance of each business unit. It also streamlines regulatory compliance and tax reporting, which often requires that you separate this information by legal entity.

Best practice is to maintain financial records using accrual-based accounting — this records income when earned and expenses when incurred, rather than when payment is received or made. Accrual accounting is the most accurate way to measure your clinic’s financial performance as well as the value of its assets.

Offloading Back-office Tasks to the MSO

While the separation of clinical and business functions is important for regulatory reasons, one of the biggest advantages of the MSO model is the operational efficiencies it provides. By offloading non-direct patient care responsibilities, physicians can focus more on medical care.

Common responsibilities allocated to the MSO include non-clinical staffing and HR, billing and collections, IT infrastructure, marketing, compliance, facilities management, and supply chain operations. For the average primary care practice, these administrative duties can easily consume 10-20 hours per week. Partnering with an MSO relieves physicians of these behind-the-scenes tasks.

Perhaps most importantly, MSOs typically hire experienced teams with deep expertise in each of these functional areas. This means that doctors and practice managers gain access to talent and resources far beyond what any single practice could afford independently.

Successfully Transitioning to the MSO-PC Model

If you are a standalone practice considering an MSO partnership, there are several key factors to evaluate upfront. Full due diligence requires vetting the potential partner’s experience, financial stability, and cultural fit. It’s also critical to model your financial projections under various transaction scenarios.

You’ll also want to understand how their ownership stake and involvement may change post-transaction. Equally important is the quality of your practice’s financial records. This is because your prospective MSO partners will need clear financial statements, an accurate record of assets owned, and organized documentation of contracts, payors, and other operational details.

Having these financials in an accrual format that separates data by legal entity and location demonstrates financial discipline and makes valuation more straightforward. It also signals the practice’s operations are “investment-ready” and any issues can be readily identified and addressed prior to closing.

Navigate the MSO-PC Structure with W Squared

As a medical professional, you can’t be an expert at both providing high-quality patient care and navigating outside investment deals in your clinic. At LBMC W Squared, our team has experienced advisors who are ready to help you understand how to prepare for outside investment, follow financial best practices, and review your legal structure and ownership to ensure you get the most out of a potential MSO-PC relationship.

Need help navigating the MSO-PC model for your clinic? Schedule a call with our team to get started.

Content provided by Lauren Farley, Director of Growth, LBMC W Squared. Contact Lauren at lauren.farley@lbmc.com or 615-762-3193.