Navigating MSO Compliance: Key Considerations for Healthcare Businesses

Management Services Organizations (MSOs) have become an essential tool for structuring healthcare businesses, particularly in states with strict corporate practice of medicine (CPOM) laws. By providing administrative and management services to healthcare providers, MSOs allow physicians and other healthcare professionals to focus on patient care while separately managing business operations.

However, MSO structures must be carefully designed to mitigate legal risks, including CPOM restrictions, fee-splitting prohibitions, and—when government healthcare programs are involved—compliance with the Anti-Kickback Statute and Stark Law. Below, we outline key legal considerations and best practices for structuring an MSO in compliance with federal and state regulations.

Understanding CPOM Laws and Ownership Restrictions

Many states prohibit non-physicians or corporate entities from owning or controlling medical practices under CPOM laws, ensuring that clinical decisions remain in the hands of licensed professionals rather than business entities.

To comply with these restrictions, healthcare organizations often utilize an MSO model, in which the MSO—a non-clinical entity—provides management services to a physician-owned Professional Corporation (PC), which retains control over patient care.

The level of control an MSO may exert over business operations varies by state. Some states permit MSOs to select and replace the physician PC owner, while others impose stricter separation requirements. A poorly structured MSO arrangement can trigger regulatory scrutiny, fines, or even require restructuring of the business. Ensuring that the physician maintains substantive—not merely nominal—control over clinical operations is critical to compliance.

Key Regulatory Pitfalls and How to Avoid Them

Fee-Splitting Prohibitions

Many states prohibit physicians from sharing professional fees with non-physicians. An MSO arrangement that ties compensation to a percentage of practice revenue may be considered impermissible fee-splitting, exposing both the practice and MSO to regulatory enforcement.

• Best Practice: Structure MSO compensation as a fixed fee based on fair market value (FMV) for specific services rendered, rather than a revenue-based percentage.

Anti-Kickback and Stark Law Compliance

If the physician practice bills Medicare, Medicaid, or other government healthcare programs, the MSO arrangement must comply with federal and state anti-kickback laws, which prohibit financial incentives for patient referrals.

The Stark Law further restricts physician self-referrals for designated health services covered by federal healthcare programs. Violations can lead to severe penalties, including fines, recoupments, and exclusion from government programs.

• Best Practice: MSO fees must be FMV-based and independent of patient volume or referrals to avoid implicating these regulations.

Governance and Control Structures

To maintain CPOM compliance, physicians must retain exclusive authority over clinical decision-making, while the MSO handles only non-clinical business functions such as billing, human resources, and facility management.

• Best Practice: Clearly define governance roles and decision-making authority in the MSO agreement to prevent regulatory concerns.

Exit Strategies and Non-Compete Agreements

A well-structured MSO arrangement should anticipate the eventual exit or transition of the physician-owner and define the process for unwinding the relationship. Poorly drafted agreements may result in disputes, business disruption, or regulatory risk.

Additionally, non-compete clauses must comply with state law, as restrictions on a physician’s ability to practice may be unenforceable in certain jurisdictions.

• Best Practice: MSO agreements should include buyout provisions, successor planning, and termination clauses that clearly outline financial and operational responsibilities in the event of dissolution.

Five Essential Compliance Considerations for MSOs

1. Conduct jurisdiction-specific due diligence on CPOM laws and regulatory requirements.

2. Ensure MSO management fees align with fair market value and avoid revenue-based structures.

3. Maintain clear governance structures that separate clinical and business decision-making.

4. Address compliance obligations, exit strategies, and dispute resolution.

5. Structure agreements to withstand regulatory scrutiny and potential legal challenges.

Conclusion: Structuring a Compliant and Effective MSO

MSOs can provide significant operational and financial advantages when properly structured, allowing healthcare businesses to grow while maintaining compliance with CPOM and other regulatory frameworks. However, failure to align with state and federal laws can expose businesses to liability, fines, and enforcement actions.

At Mooradian Law, we provide strategic legal guidance for structuring MSOs that are both compliant and optimized for business success. Contact us to ensure your MSO is built to withstand regulatory scrutiny while achieving its intended operational goals.

info@mooradian.law

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