Managed Services Organizations - What are they, how to structure them, and why do they matter?

Management Services and Regulation Nightmares 

One of the most difficult parts of the job in being a business attorney is hearing an outstanding entrepreneurial idea, and then having to discuss with the client the rules and regulations that will apply to their ‘next big thing.’ Attorneys have a reputation for being fun-suckers, and explaining to a client all of the different securities, healthcare, or other industry specific rules that they will need to obey certainly does nothing to improve that image. This is especially true for healthcare clients.

Being an innovative small business in the healthcare sector can sometimes feel like sailing a ship into a looming wave ready to engulf your vessel.

Staring down the gauntlet of Stark Law, HIPAA, anti-kickback, licensing and credentialing rules, and all of the other regulatory stress truly is nightmare fuel for medical professionals just trying to navigate their way. Today, we will tackle a type of business style that is becoming increasingly popular in the healthcare business world, with different iterations of it popping up everywhere: management services.

The idea behind a management services organization in the context of healthcare is that a management services organization (“MSO”) of some sort will take care of the business decisions for a medical group or practice, and thus allow the medical professionals to focus their time and energy on their patients. It is easy to see why this idea is gaining popularity. Under these arrangements, medical professionals have to worry much less about payroll, training staff, billing and collections, budgeting, equipment and office space, regulatory compliance, and many other things. However, these management services arrangements can get into the weeds of healthcare regulations in a hurry.

The trouble is that while these MSOs are not illegal in and of themselves, depending on the specific situation (more on that in a minute), they can very easily look like a violation of some of our “favorite” healthcare regulations.

Let’s take Stark law and the anti-kickback statute (“AKS”) as an example. The federal Stark law states simply that a physician cannot refer a patient to themselves or to a healthcare entity in which they have a financial interest. The AKS states that it is illegal for anybody to receive kickbacks for patients provided, or payment based on volume or number of patient referrals.[1] As with all regulations, these rules are complex, have various exceptions, and it is impossible to accurately predict outcomes 100% of the time.

These rules apply to management services organizations because the arrangements can create implied violations of Stark law or AKS. A couple of examples:

 1-     If a doctor is both a provider in a clinic and an owner in the MSO which works with the clinic, then she could have the appearance of sending referrals to herself, in violation of Stark law. If she, as a function of her ownership in the MSO, send referrals for patients to the clinic at which she provides medical care, then that could very easily be a violation.

2-     If the an MSO is providing marketing services to a clinic or practice, and they are compensated based on a percentage of the clinic or practice’s income, then it starts to look like the MSO is receiving direct compensation for referrals, in violation of AKS. [2]

There are a myriad of other examples we could give here. The point is this: A healthcare management service business idea of some sort will almost always, by definition, implicate one of these regulations. And that is fine! It does not mean that the business idea is bad. It just means that entrepreneurs have to have their ducks in a row before they open the doors to their new businesses.

So, if you have a new idea for a healthcare service business model, what does all of this mean for you? First (and most self-serving), please talk with a healthcare attorney before setting up a medical business of some sort. As the old cliché goes, an ounce of prevention is worth…. A lot more in the future.

Second, here are some tips and thoughts for medical business arrangement for entrepreneurs to think about:

 1-     If you are going to bill insurance, of any sort, just assume that AKS and Stark law will be implicated to some degree.

2-     If you are going to provide management services, or partner with an MSO, be very careful and intentional about your compensation arrangement. Whatever compensation is given, the agreement: (a) must be in writing, (b) must be for fair market value (anything more or less is assumed to be a violation of some sort), (c) must be longer than one year, and (d) must be reasonable and necessary. There are several more requirements, but they will vary depending on the specific situation.

3-     If the MSO is going to provide marketing services, then the payment arrangement should be for a flat fee, rather than for a percentage of revenue, or a cost plus compensation of some sort. As alluded to earlier, marketing arrangements are especially scrutinized.

Lastly, a parting thought for the road. When entrepreneurs or business owners have a new idea for a business model, especially in the healthcare world, more than likely there just will not be good or easy answers to the questions related to regulations. With new business models and new ideas come new potential legal problems. As such, bear in mind that the legal analysis for your new business model will contain analyses of risks vs rewards, potential pitfalls, and descriptions of trouble areas, rather than black and white yes or no answers. This is because in the legal world in general, but especially in healthcare, the cases and accompanying nuances are extremely dependent on individual situations, and most of the time operate in the realm of gray areas, where it is nearly impossible to accurately predict an exact outcome.[3]

Not to fear though! An experienced attorney can help you navigate the treacherous waters to land your new business on the shore of a successful startup. Irvine Legal attorneys have traversed the stormy seas of healthcare compliance and have the necessary experience and know-how to guide you and your business safely.

[1] This article provides some more in depth analysis of Stark and AKS themselves: https://www.hollandhart.com/health-care-transactions-beware-stark-kickbacks-and-more

[2]  “OIG Advisory Opinion No. 98-4” Office of the Inspector General, April 15, 1998, https://oig.hhs.gov/fraud/docs/advisoryopinions/1998/ao98_4.pdf; the state of New York has also expressly stated that they do not like those kinds of arrangements: 8 NYCRR § 29.1(b)(4)

[3] This article describes it nicely. We are not looking to be failproof, just ways to mitigate the risk as much as possible: https://cohenhealthcarelaw.com/2018/09/how-to-handle-stark-and-anti-kickback-legal-barriers-when-physicians-invest-in-an-mso/