Master Service Organizations (MSOs): A Strategic Approach to Management that Helps Healthcare Stay Human

One model that has gained traction is the Master Service Organization (MSO), which performs non-clinical administrative, regulatory, and management tasks, freeing up physicians to focus on what they do best: patient care.

What is a Healthcare MSO?

A Management Services Organization (MSO) handles all non-clinical aspects of a healthcare practice. These include unavoidable administrative duties such as:

• Revenue cycle management (billing, collections, and credentialing)
• IT infrastructure (electronic health records, cybersecurity, and telehealth platforms)
• HR and payroll services
• Compliance and risk management
• Marketing and patient engagement
• Financial management and tax strategy

By outsourcing these to an MSO, high-quality healthcare stays in the hands of providers.  MSOs comply with regulatory frameworks such as the Corporate Practice of Medicine (CPOM) doctrine, which, among other things, restricts non-physicians from owning or directly profiting from medical services. Again, making sure that patient care is paramount.

What’s the Difference Between MSOs, PCs, and MSAs?

When implementing an MSO model, it’s necessary to understand the financial and legal nuances of the MSO and the Professional Corporation (PC), as well as the Management Service Agreement (MSA) that establishes the interdependent relationship between them.

Professional Corporation (PC)

PCs are physician-owned entities that employ licensed medical professionals to deliver direct patient care. They must comply with federal and state healthcare regulations, ensuring that medical decisions remain rightfully within the purview of licensed professionals. The PC pays a management fee to the MSO under the MSA.

Management Services Agreement (MSA)

An MSA is the contract that separates clinical care from business operations, establishing the relationship between the MSO and the PC. This contract outlines the services the MSO will provide and sets the financial terms, ensuring that all fees, whether fixed or cost-plus fees, align with Fair Market Value (FMV) to comply with regulatory standards. The MSA also ensures adherence to CPOM laws.

MSO vs. PC

The clear separation illustrated here between business administration (MSO) and clinical operations (PC) shows how an MSO enables compliance and efficiency so that healthcare providers can scale their services across multiple states while obeying local laws.

What Do I Need to Consider when it comes to MSOs?

MSA Fees

MSA fees are based on FMV, and though payment terms can vary, all financial transactions between the MSO and the PC need to be clearly recorded.

Therefore, for compliance and auditing, the MSO and the PC should each maintain their own separate books and financial statements.

Line of Credit Agreements

A Line of Credit (LOC) can be issued by the MSO to the PC to alleviate cash flow issues. This agreement should:

• Include, at least, a minimum IRS interest rate to remain compliant
• Establish a sufficient credit limit to cover MSA fees and accrued interest
• Be properly documented to withstand regulatory scrutiny

Tax Implications and Compliance Risks

Since an MSO does not provide medical services, it is taxed differently from a PC. Since this affects income tax filings, deductions, and profit distributions, for best practice, healthcare operators should:

• Conduct annual FMV assessments to ensure it accurately reflects the services provided and is inline with the operations of the business
• Confirm the MSA fees meet regulations
• Maintain separate financial statements for each entity
• Ensure compliance with federal and state tax laws

What Should I Consider Before Establishing an MSO?

Legal & Structural Questions

• Will the MSO follow state CPOM laws?
• Will all PCs be physician-owned and operated?
• Will the MSA fee structure align with FMV and regulatory requirements?

Financial & Operational Questions

• How will MSA fees be documented in financial statements?
• How will costs be allocated between the MSO and PC?
• Is a line of credit necessary to support cash flow?

Final Thoughts

The MSO model is a pragmatic strategy for healthcare providers looking to scale operations while complying with laws and regulations. MSOs partner with PCs by delineating responsibilities in a thorough MSA, ensuring healthcare organizations’ operational efficiency, regulatory compliance, and financial stability. Best of all, the MSO model takes the burden off physicians, empowering them to keep healthcare human by focusing on what matters—their patients. 

If you have questions about implementing an MSO, or the financial logistics associated with doing so, please reach out. 

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