Management services organizations and physician practice management platforms depend on the management fee paid by the clinical practice to the MSO, but an unvalidated or inflated fee is drawing intensifying federal and state fraud scrutiny, according to a Sept. 15 blog post from David Holt of Holt Law.
Here are 10 things to know.
1. The management fee is the financial engine of the MSO model. Non-physician investors deploy capital into the management services organization to fund real estate, technology and administrative infrastructure, and the clinical practice’s fee payments generate the earnings that drive platform valuation, according to the post. .
2. Unlike an ordinary commercial contract, MSO management fees are bound by federal fraud statutes because the MSO and the clinical practice operate in an interdependent financial relationship that touches patient referrals.
3. To fit the Anti-Kickback Statute’s personal services and management contracts safe harbor, the agreement must be in writing, run at least one year and set aggregate compensation in advance at fair market value, independent of referral volume.
4. Stark law requires that compensation for MSO services be consistent with fair market value and commercially reasonable, without regard to the volume or value of physician referrals, to qualify for an exception.
5. The HHS Office of Inspector General has clarified that satisfying a Stark law exception or citing an internal valuation estimate does not by itself shield a fee from Anti-Kickback Statute liability, which also turns on whether the pricing was intended to reward referrals.
6. In states with strict corporate practice of medicine and fee-splitting rules, including California, New York, Texas and Illinois, an inflated, unvalidated fee can be treated as a constructive fee split, putting the management agreement and the physician’s license at risk.
7. Of the three standard valuation methods, the cost-plus approach, totaling the MSO’s actual payroll, real estate, technology, revenue cycle and marketing costs, then adding a market-consistent margin, is considered the most defensible because every dollar of the fee traces to a specific expense.
8. The market approach carries a “circular benchmarking” risk: comparing a fee to what other platforms charge only holds up if those comparison fees were themselves set at arm’s length rather than inflated to capture referral value.
9. Percentage-of-revenue and percentage-of-collections fee models draw heightened scrutiny because MSO compensation rises automatically as a physician performs more clinical work, regardless of whether the MSO did more administrative work.
10. Buy-side due diligence teams are increasingly writing down EBITDA when a historical fee exceeds fair market value. Mr. Holt cited an example in which a $2 million adjustment at a 10-times multiple cut $20 million from a platform’s purchase price.
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