Legal Issues: Understanding MSOs

Management Service Organizations offer a path to nonphysician medspa ownership.
MedEsthetics May/June 2017 Legal Issues

DUE TO CORPORATE practice of medicine doctrines, in most states the owners of facilities that perform medical procedures must be either physicians or physician-owned corporations. However, there is a path to medspa ownership by which nonphysicians can manage medspas. It is called a management service organization (MSO) and, while it still relies on the participation of a physician, it allows nonphysicians to take on a very significant role in the day-to-day operations of a medical aesthetic business.

Understanding the Law

In the U.S., most states observe a doctrine known as the corporate practice of medicine, which dictates that only a physician or physician-owned corporation can receive payment for medical services. Because many of the treatments offered at medspas are medical in nature, ownership of such facilities is governed by this doctrine.

However, if you are an entrepreneur who wants to become a part of the medical aesthetic industry on an ownership level—and you live in a state in which the corporate practice of medicine doctrine is observed—you may be able to set up an MSO. As its name suggests, an MSO provides management services. The organization partners with a physician for whom a separate company is created. The two entities then create a management services agreement (MSA), which allows the nonphysician-owned MSO to supervise several aspects of the medspa business. These may include branding, marketing, real estate ownership or leases, payroll, human resources, accounting and billing—everything except the actual administration of medical services.

“Once an MSO is formed, you will need to enter into an MSA between the MSO and the medspa,” explains Bradford Adatto, partner at Dallas-based healthcare law firm ByrdAdatto. “The MSA contains the terms and conditions that detail the services rendered between the parties, and the compensation for such services. To have a valid MSO, whatever services are agreed upon in the contract must be carried out in both form and substance.”

Essentially, you should think of this as a lessor/lessee situation. The MSO typically owns and maintains the facility; the physician occupies the space. The physician pays the MSO “rent” for the right to occupy the space, and the MSO functions in much the same way as a landlord, maintaining the facility and keeping the physician as comfortable as possible. However, the MSO can invoice the doctor for more than just rent. Services such as patient coordination, marketing, record keeping, equipment rental, branding and design, accounting and other services can also be managed by the MSO and charged to the doctor. Additionally, unlike an apartment rental, the MSO’s management fee can be renegotiated throughout the year to allow for fluctuations in business. This helps to create a strong bond between the medical side of the business and the MSO—if one succeeds, they both succeed.

“Clearly, the MSO is structured to assist nonphysician owners to work with physician-owned entities. However, some less obvious advantages have to do with separation of risk between two different entities, as well as the clear separation of medical services and business services,” says Adatto. “This is crucial in several states that have strict rules on the corporate practice of medicine.”

For example, the physician incurs very little risk when it comes to setting up the business. If the practice fails, he or she is probably going to be fine—after all, the physician is not on the hook for the facility, its contents or the land on which it is located. That’s on the MSO. Additionally, the creation of a separate company for the physician helps prevent any liability issues incurred at the medspa from bleeding over into any of the physician’s other medical pursuits. Conversely, should the physician incur any sort of liability claim, the MSO side of the business is protected. The MSO also typically pays for the physician’s liability insurance. This arrangement might seem to be heavily weighted in the physician’s favor, but that is why the physician pays the MSO.

Of course, all this is predicated on the assumption that the MSA is set up and executed properly. If so, everyone stands to benefit; if not, both sides open themselves up to significant consequences.

Danger Zones

When entering into these types of contracts, there are a few pitfalls that you must be certain to avoid. Foremost, the doctor must be in control of all medical decisions, including the hiring of medical personnel. Second, all payment for medical services must be made directly to the physician or physician-owned corporation. The MSO submits an invoice to the physician or physician-owned corporation for management services and is typically paid from that company’s account at the end of each pay period.

It is important to note that, although it may seem that a properly set up MSO is in charge of the medspa or practice, the doctor must be in charge of all medical and clinical decisions. This is necessary for both legal compliance and patient safety. He or she cannot be an absentee medical director.

The easiest way for an MSO to get in trouble is for it to not actually treat the aesthetic practice as a medical company. If the doctor is not managing the medical aspects of the medspa, he or she may be subject to severe punishments—including license forfeiture and large fines—and the MSO would be subject to repercussions for practicing medicine without a license. Therefore, it is vital that all parties understand their roles and obligations.

MSOs have been around for a long time. They have been used by entrepreneurs to form management companies for medical organizations as large as hospitals and managed care facilities, so it stands to reason that creating an MSO for a medspa would be comparatively simple. However, this is not the sort of thing that can be properly executed using forms downloaded off the internet. If you are considering entering into this sort of arrangement, you need to consult a healthcare attorney who has experience in successfully setting up MSOs to ensure compliance and patient safety.

Alex R. Thiersch, JD, is a Chicago-based healthcare attorney who represents medspas, plastic surgeons and other aesthetic medical professionals. He is a partner at ByrdAdatto Law Firm and the founder and director of the American Med Spa Association (AmSpa). Contact him at alex@americanmedspa.org.

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