Medical professionals often rely on Management Services Organizations (MSOs) to handle administrative and operational functions, allowing physicians to focus on patient care. However, to ensure compliance with California’s Corporate Practice of Medicine (CPOM) laws, the relationship between a medical practice and an MSO must be structured carefully through a Management Services Agreement (MSA).
An MSA defines the roles, responsibilities, and financial arrangements between a medical practice and an MSO. If structured incorrectly, an MSA can violate state and federal healthcare regulations, leading to legal penalties and loss of medical licenses.
This guide explains how to structure an MSA for a medical practice, ensuring compliance, financial stability, and operational efficiency.
1. What Is a Management Services Agreement (MSA)?
A Management Services Agreement (MSA) is a legal contract between a medical practice (owned by licensed physicians) and a Management Services Organization (MSO) (which provides business support services).
Since California prohibits non-physicians from owning or controlling medical practices, an MSA allows an MSO to manage non-clinical functions while ensuring that physicians retain control over all medical decisions.
Key Functions of an MSA
- Clearly defines the division between medical and business operations.
- Ensures compliance with Corporate Practice of Medicine (CPOM) laws.
- Establishes financial terms between the medical practice and MSO.
- Reduces liability risks for both parties.
A properly structured MSA ensures that physicians remain in control of medical care while benefiting from business management support.
2. Key Elements of a Well-Structured MSA
A. Scope of Services
The MSA should clearly define which services the MSO will provide. These may include:
- Revenue Cycle Management (Billing & Collections) – Ensuring efficient claims processing and payment collection.
- Human Resources (HR) and Payroll – Hiring and managing administrative staff while ensuring compliance with labor laws.
- Marketing and Branding – Advertising, patient outreach, and website management.
- IT and Technology Support – Maintaining electronic health records (EHR), cybersecurity, and data storage.
- Facility and Equipment Management – Leasing office space, purchasing medical supplies, and handling maintenance.
The MSO must not be involved in patient care or clinical decision-making to remain compliant with CPOM laws.
B. Payment Structure & Compensation
To avoid illegal fee-splitting or revenue-sharing arrangements, an MSA must establish a fair market value (FMV) payment model.
Acceptable compensation structures include:
- Flat Fee Model – The MSO receives a fixed monthly or annual fee for services.
- Cost-Plus Model – The MSO is reimbursed for expenses plus a pre-determined profit margin.
- Performance-Based Model – MSO compensation is tied to non-clinical performance metrics (e.g., reduced operational costs).
C. Compliance with CPOM and Stark Law
To prevent legal violations, the MSA must:
- Ensure that medical decisions are solely made by licensed physicians.
- Clearly separate clinical and administrative roles.
- Avoid revenue-sharing models that could violate Stark Law and Anti-Kickback Statutes.
Failing to comply with these laws can lead to severe legal consequences, including fines and loss of medical licenses.
D. Governance & Control
The MSA must define:
- The medical practice’s authority over patient care, hiring of medical staff, and treatment decisions.
- The MSO’s authority over business operations, staffing of non-medical employees, and financial management.
- How disputes between the medical practice and MSO will be resolved (e.g., mediation, arbitration, or litigation).
Physicians must retain 100% clinical control to comply with CPOM regulations.
E. Term and Termination Clause
The MSA should outline:
- The duration of the agreement (e.g., five years, renewable).
- Circumstances for early termination, including:
- Breach of contract.
- Regulatory violations.
- Failure to meet performance metrics.
- Notice periods and financial obligations if the contract is terminated early.
Properly defining termination clauses reduces legal disputes and ensures a smooth transition if the agreement ends.
F. Indemnification and Liability Protection
The MSA must protect both parties by:
- Clearly outlining liability for administrative errors.
- Ensuring MSOs are not liable for malpractice claims (since they do not provide medical services).
- Requiring both parties to maintain adequate insurance coverage.
This section helps prevent lawsuits and protects the financial interests of both entities.
3. Common Legal Pitfalls to Avoid in MSAs
Many MSAs fail due to legal errors that violate healthcare regulations. Common mistakes include:
- Improper Revenue Sharing – An MSA cannot allow MSOs to receive a percentage of medical revenue, as this may violate Stark Law and Anti-Kickback Statutes.
- Insufficient Separation of Medical and Business Functions – If an MSO is involved in hiring/firing medical staff or influencing treatment decisions, it may violate CPOM laws.
- Lack of Fair Market Value (FMV) Compensation – Over- or underpaying the MSO can raise compliance red flags and trigger regulatory audits.
- Failing to Define Roles Clearly – A poorly written MSA can lead to disputes and regulatory penalties.
Avoiding these mistakes ensures the legal integrity of the MSA.
4. Best Practices for Drafting a Compliant MSA
To create a legally sound and enforceable MSA, follow these best practices:
- Work with healthcare attorneys to ensure compliance with federal and state regulations.
- Define roles explicitly to avoid confusion between clinical and administrative duties.
- Use an independent valuation expert to determine fair market value compensation.
- Include dispute resolution mechanisms to handle conflicts efficiently.
- Regularly review and update the MSA to reflect changes in healthcare laws and business operations.
Proper planning and legal oversight will prevent regulatory violations and enhance business efficiency.
How We Can Help
At KMSD Law, we specialize in structuring legally compliant MSAs for medical practices and MSOs. Our legal team provides:
- Customized MSA drafting tailored to your practice’s needs.
- Regulatory compliance guidance to prevent CPOM, Stark Law, and Anti-Kickback violations.
- Fair market value analysis to ensure proper MSO compensation.
- Ongoing legal support to update agreements based on changing healthcare laws.
We offer free case consultations and work with medical professionals, MSOs, and investors to create legally sound agreements.
Contact KMSD Law today to protect your medical practice and ensure compliance with California healthcare laws.