The Management Services Agreement

If the two-entity structure is the skeleton, the management services agreement (MSA) is the spine. It is the contract that defines the entire relationship between the MSO and the PC—what services the MSO provides, how it is paid, and, just as importantly, what it is forbidden from doing. Regulators reviewing an MSO arrangement read the MSA first.

Compensation Must Track Fair Market Value

How the MSO is paid is where many otherwise sound structures fail. California's fee-splitting prohibition (Business and Professions Code section 650) and federal anti-kickback principles require that the management fee reflect the fair market value of the services actually provided. Compliant approaches include:

• Flat fee. A fixed, periodic amount for a defined scope of services. The cleanest and most defensible option.

• Cost-plus. The MSO's documented costs plus a reasonable, fixed margin.

Percentage-of-revenue compensation is permissible only where it can be shown to be commensurate with the value of the services and not a vehicle for splitting professional fees. Because it invites scrutiny, it should be adopted only with a supporting fair market value analysis and a clear understanding of the risk. A management fee that floats with clinical revenue, without that support, is the single most common red flag in an MSO arrangement.

The Agreement Must Reserve Clinical Authority to the PC

The MSA must state plainly that the PC retains exclusive authority over all clinical matters. At a minimum, the contract should reserve to the PC and its physicians:

• Diagnosis, treatment planning, and all patient-care decisions;

• The selection, supervision, and clinical evaluation of physicians and other licensed personnel;

• Decisions about which patients to accept and the appropriate level of care;

• Clinical protocols, utilization decisions, and the ordering of diagnostic testing.

If the agreement allows the MSO to direct, override, or pressure any of these, the structure collapses—because at that point the MSO is practicing medicine. The MSA is not boilerplate. It is the document that proves the firewall between business and clinical judgment actually exists.

This article is provided for general informational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. For guidance on a specific matter, contact West Coast Health Law.

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