Working through the complexities of a management service organization (MSO) can be overwhelming. And it’s especially tricky when it comes to the management fee—a payment arrangement between a healthcare entity and an MSO.
There are many reasons a medical spa may choose to form an MSO. It might be because of a requirement to be legally compliant, a desire to centralize operations, or both. Regardless, most med spa owners considering forming an MSO have questions about how the finances would work.
Before we jump into calculating the MSO management fee, let’s break down the operational and financial complexities of an MSO.
(A version of this blog was originally written by our founder, Jessica Nunn, and published on ByrdAdatto.)
What Is an MSO?
An MSO is an entity that manages a medical practice. Typically, practice owners form an MSO when their practice is legally required to operate as a medical entity owned by someone other than themselves. For example, a nurse practitioner might want to open a med spa in a state that requires a physician to be the owner.
An MSO provides an opportunity to share the profits without having to own the medical practice. Often, the practice provides medical services while the MSO provides administration services. And since the medical services are the business’s source of revenue, the practice pays an MSO management fee for administrative services.
Running your organization with an MSO results in several financial complexities:
If you form an MSO to manage your medical practice, you’ll now have two entities. This means you’ll need two tax IDs, at least two bank accounts, two Quickbooks files or other accounting software, potentially two credit card processors, and more. You might even need two payroll setups. Double the fun!
Flow of Funds
You’ll have to create financial processes to manage the flow of funds between both entities. In a typical MSO arrangement, the medical entity charges patients and pays medical providers. The medical entity might also pay malpractice insurance. And it might cover accounting fees, credit card processing fees, supplies, and other expenses.
The MSO will typically pay the non-clinical costs of running the business. This might include real estate or equipment leases, marketing costs, non-medical staff payroll, and other business and operational expenses.
Ultimately, accounting and financial processes will allow for the income and costs to be paid from each specific entity.
Payment of MSO Management Fee
The management fee is the mechanism by which the cash flow moves from its original collection to the MSO. This fee reimburses the MSO for costs and can shift profit from the medical entity to the MSO. The fee is usually a flat fee, paid monthly.
Calculation of the MSO Management Fee
The management fee is a calculation based on the estimated profit of the medical entity and the value of the services rendered by the MSO. The best place to start is by projecting the income and expenses of both the medical entity and the MSO. This allows for thoughtful planning with regards to flow of funds (which entity will pay which costs), separation of operations (what services the MSO will provide), and an estimate of cash flow.
Understanding what the practice can afford to pay the MSO—and what the MSO will need to be paid to cover the costs of operations—will help estimate a management fee that makes sense for both entities.
Finally, the calculated management fee is a monthly payment that becomes a legally defined part of the Management Services Agreement. It’s important to revisit the calculation, perhaps annually, as the business grows to ensure it remains compliant and fair.
For more information about calculating or updating your MSO management fee or projecting your med spa’s income and expenses, contact Maven Financial Partners!