Why You Might Need a MSO for Your Practice

By: Christin Trujillo

When exploring the realm of practice ownership there are a few things to consider when determining how to set up your business entities. MSOs, Management Services Organizations, or Medical Services Organizations are established for different reasons, but we typically see two main factors that contribute to going the MSO route.

MSO Required for Ownership

The first of which, you may need an MSO for legal reasons depending on medical ownership compliance laws dictated by your particular state. Some states require anyone who is not a Medical Doctor or Physician to establish an MSO to own the assets and profits of the practice entity. This makes it legal for a non-doctor, or even non-clinical, individual to reap the benefits of ownership by way of establishing this entity structure. We recommend that you always check with a healthcare-specific legal firm or attorney to understand the compliance requirements for your state. 

If an MSO is required for you to own your own practice, we frequently work with business owners and their legal team to calculate what is called a Management Fee. A management fee is the way in which the MSO entity can extract or even sweep profits legally from the practice entity. Once calculated, this management fee is documented in a Management Services Agreement (MSA) that details the relationship and services rendered between the practice entity and the MSO entity. It’s important that you partner with a financial professional to calculate the management fee as it is unusual (and sometimes even unlawful) to adjust the fee more than annually. 

MSO Needed for Scale

The second scenario we generally see when speaking about the potential for an MSO is a business owner that has or eventually wants to have, multiple locations. When working with multi-location medspa or dental practices, we often recommend this course to centralize services and costs that are shared amongst multiple practices. 

Even if you are legally able to own the practice entity, this is a favorable option for those looking to scale to additional locations or even eventually sell their practices because it defines fairness in how shared costs are split up. It also makes it easy for outside buyers or investors to come in and purchase the practices, as they will want to purchase the MSO entity which already has an MSA and inadvertently maintains legal compliance for non-physician ownership. 

When we start working with multi-location practice owners who do not have an MSO set up, we generally see a variety of financial opportunities where one practice is covering certain marketing expenses, another is covering administrative costs, and another is hosting shared payroll for employees that touch or oversee multiple locations. In doing the latter, the financial profitability of each practice can look wildly different, and in some cases, cause cash flow strain depending on who or what practice gets what costs allocated to it. 

When establishing an MSO and MSA for a multi-location practice, we approach it very similarly to how we would calculate a management fee for a single-location practice. The difference is, that we usually have a lot more shared costs scattered across multiple locations so our approach starts by working with your legal team to document what costs will now be centralized and paid at the MSO level. This requires our team to reconfigure a budget for each of the practice locations, remove the shared costs to create a budget for the MSO with the newly added costs, and then calculate a management fee at each location (which then becomes the revenue at the MSO).  We want to ensure that we allocate a management fee that covers these costs and allows profits to be held at the MSO. Occasionally there are scenarios where we still want to leave some profits at the practice level to cover loans or other cash flow items, but working with a financial professional makes this a much simpler, and accurate, process when it comes to setting your entities up for future financial success.

 

If you’re interested in learning more or need help calculating your management fee, click this link to set up a call with our team of experts.