-By Glenn H. Truitt, Esq., & Malvika Rawal, Ph.D, JD

Chances are, if you’re in private practice, you’ve heard of Management (or Dental) Services Organizations, or MSOs. MSOs have most likely been posited to you as a component of a business structure involving your practice. You’ve probably heard a strong response one way or another. The MSO is as routinely celebrated as it is vilified.

The MSO is neither inherently good nor bad on its own. It is compliance agnostic. Like most tools, it’s how it’s used that makes the difference. A chainsaw is a useful implement for cutting down the trees used to build your house. It’s not such a friendly tool in the hands of Leatherface.

MSOs, like the medical practices they serve, come in all varieties. Some are specialized, performing only one specific function, like billing. Others are more comprehensive, fulfilling virtually all the non-clinical needs of a medical practice. The main goal, however, remains constant throughout: to bring efficiencies to the medical practice without violating the complex laws that govern both the practice of medicine and the business of medicine.

The most important takeaway here is how nuanced and challenging compliant MSO structures are, and why you absolutely shouldn’t attempt to set up or operate one without the assistance of an experienced healthcare attorney. Like any tool, it’s far more dangerous and risky in the hands of someone who doesn’t know how to use it properly.

There are some common myths that surround MSOs: that they’re a scam, or they’re all the same, or they only need to provide marketing. None of them are remotely close to true, and some of them are outright dangerous.

There have been scams that used MSOs, but that doesn’t taint the structure as a whole. As long as an experienced healthcare attorney reviews the structure and its compliance, your practice will be on solid footing. All MSOs are not created equal. Any MSO should absolutely be customized for the practice that it serves.

The most pernicious is the final myth listed here, that MSOs should provide only marketing. The most common improper use of the MSO structure is where the only substantive service it provides is marketing, i.e. directing patient traffic to the underlying practice. This explicitly violates the Anti-Kickback Statute, and is the clearest example of an illusory structure.

What Is an MSO?

In general, an MSO is perhaps easiest to define by understanding what it is not. Though you, like us, have probably heard someone say they’ve set up an MSO to provide healthcare services, that’s precisely the one thing an MSO cannot legally do. An MSO specifically does not, and cannot, engage in the practice of medicine because an MSO is, by definition, not a medical practice. MSOs, on the contrary, provide non-professional services to professional practices (medical, dental or otherwise). An entity that engages in professional practice, according to the law, is defined by its core function. Physicians are professionals because they’re licensed as such, in other words.

This definition is important because it helps us define how a business can avoid practicing medicine — primarily by not employing, or otherwise paying, licensed physicians to practice medicine.

So what does that leave? Literally, everything else. Think for a moment of all the things that a medical practice does besides provide medical services: leasing/buying space and equipment; paying non-clinical staff; bookkeeping and accounting; billing and collecting; record-keeping and storage; patient and general administration; and on and on. An MSO has no affirmative duties, only proscribed activities. An MSO can be a single-source provider to a medical practice for all of its non-medical services.

That proscription, in turn, is derived from the Corporate Practice of Medicine Doctrine, designed to ensure only licensed professionals could practice medicine. The modern interpretation of CPOM is structured to prevent any encumbrances, especially economic, on a physician’s independent medical judgment.

If you’re new to MSOs, you’re probably thinking, “this is a lot of trouble to go to just to get all your administrative services from the same company.” You wouldn’t be wrong.  However, MSOs exist as a tool to move money in a compliant manner to parties that can’t get it directly from the practice. Non-licensed individuals are prohibited by the CPOM doctrine from sharing in earnings of the practice, but a non-licensed individual may share in the earnings of the MSO.

CPOM exists to ensure that there aren’t circumstances where there is lay control over a physician’s medical judgment, or a doctor’s loyalty is divided between an employer and a patient. Yet there are many circumstances where a lay, or non-licensed party, contributes material economic value to a professional medical practice, and might rightfully, then, expect some measure of participation in that entity’s profitability. MSOs are designed to provide a legally compliant structure which addresses this economic inequity in a way that is consistent with the associated public policy concerns.

The MSO structure avoids “lay control over the physician’s medical judgment” by separating the clinical functions of a practice from its administrative and business functions. There are many non-clinical factors in a professional medical practice which directly affect that practice’s revenue and profitability. The money that the physicians received in consideration of his/her practice of medicine stays within the purview of an entity wholly owned or controlled by licensed physicians. Thus, there is no divided loyalty between the MSO (or its owners) and the patients the physician serves with respect to clinical judgment.

The MSO allows the medical profession to reap the benefits of advancements and efficiencies in patient administration and other key business functions, without violating the spirit or the letter of the CPOM laws. Instead of focusing on administrative duties, MSOs allow doctors to spend their time treating patients.

But the million-dollar question is: Are MSOs compliant?

MSO Regulations and Pitfalls

Both federal and state Stark laws deal with physicians receiving compensation for referring patients to specific medical facilities where the physician (or a close family member) has a financial interest. Both Federal and State Anti-Kickback Statues deal with referrals of patients to facilities which provide the physician with a payment directly related thereto. Self-referral, clearly, is an economic incentive for the physician, which may interfere with independent medical judgment. Similarly, if a physician receives some type of economic incentive (or kickback) for referring patient to a healthcare facility, this incentive will interfere with the physician’s objectivity. These laws were passed to strictly control the physician’s referrals in a way such that their effect on a physician’s independent medical judgment is minimal.

It becomes imperative that when a physician uses an MSO, the relationship MUST be vetted by an experienced healthcare attorney so that it in no way violates these Stark and Anti-Kickback Statutes. Both the aforementioned laws have safe harbors and exceptions for certain specific types of financial relationships. However, ALL conditions imposed by the respective safe harbor or exception must be met for the specific relationship to be complaint.

How to Structure an MSO

In its original configuration, the MSO model was used only to mitigate costs of administrative and management functions to private practices that could not otherwise afford them. In this original model, none of the owners of the practice (or contributors thereto) were owners of the MSO.

The market value of the catalog of services provided was a function of the practice’s expected savings and gains based on outsourcing these services, because the MSO would be competing for the practices’ business with other service-only MSOs.

Instead of focusing solely on creating economies of scale that provide affordable services, the modern MSO is used to develop legally compliant structures that accommodate economic contributions to the practice that cannot legally be directed. However, there are unlimited scenarios where a non-licensed party contributes materially to that practice, and for which remuneration is equitable.

The modern MSO structure includes non-licensed parties as equity members of the MSO entity. A Management Service Agreement between the MSO and physician provides the MSO revenue from the services it provides to the practice, so that the members of the MSO (both licensed and unlicensed) may share in the MSO’s profits. The primary obligation that the practice retains is to pay the licensed staff ’s salary (doctor, dentist, nurse, etc.).

The primary value driver for this MSO structure is its ability to provide enough services to move sufficient cash flow to the MSO to be split amongst the MSO’s putative partners.

The Ninth Circuit court, in The Hanlester Network v. Shalala, laid out a framework for physician’s ownership interests that would not violate the Anti-Kickback Statutes, as long as some specific criteria were met, including that return on investment and participation weren’t based on referrals.

By serving the public policies surrounding healthcare regulation in developing compliant business structures, participants are ensured of not only meeting the letter of the law when using an MSO, but also the spirit of such laws. It can make all the difference in an audit scenario.

Just like the introduction of the limited liability company to corporate structures in 1977, the introduction of the MSO to healthcare structures has opened the door to an unlimited variety of formal business relationships for medical businesses — limited only by their imaginations, and the skills of their legal professionals.

Glenn H. Truitt, Esq. is a managing partner at Ideal Business Partners (www. idealbusinesspartners.com), a multidisciplinary professional services firm serving healthcare professionals with state-of-the-art legal, financial compliance and strategic advice, working together to lift up their practices. IBP consults with ComplyPro (www. mycomplypro.com), a HIPAA compliance services company, serving Nevada and southern California, and employing both traditional and digital compliance tools to develop comprehensive, customized compliance soultion for any size practice.

Malvika Rawal, Ph.D., J.D., is a law clerk at Ideal Business Partners. She received her Master of Science at the University of Delhi in Biomedical Sciences and her doctorate degree in Free Radical and Radiation Biology at the University of Iowa. She then received her Juris Doctor at the University of Iowa College of Law in May 2016. Rawal is deeply involved with ComplyPro, a HIPAA compliances services company.

The Firm, P.C. is a boutique Las Vegas law firm founded by Preston Rezaee, Esq. Preston Rezaee is also the founder and Editor in Chief of Vegas Legal Magazine.