Considerations for Negotiating Management Services Agreements
By Paul J. Welk, PT, JD
In a time when many physical therapy private practices are exploring a variety of ways to flourish and thrive, some practices are looking to management services agreements (MSAs) as a way to improve the bottom line. For those unfamiliar with MSAs, an MSA is an agreement entered into between a consultant or independent contractor and a company to provide management, consulting, or other services for a fee. An MSA helps the company to reduce its operational costs and to increase its efficiency.1 In private practice physical therapy, an MSA is a common component of an acquisition, a strategic alliance, a hospital or health system joint venture, or other similar arrangement. In negotiating MSAs, a number of key contractual terms need to be considered. This article will highlight four areas of consideration during the negotiation of an MSA. For purposes of consistency, the provider of the management services will be referred to as the “service provider” and the recipient of the management services as the “service recipient.” In reviewing the following negotiation points, it is important to keep in mind that a physical therapy practice can function as a service provider or a service recipient depending on the circumstances.
Initially, it is important for both the service provider and the service recipient to have a mutual understanding of the services being provided under the MSA. The author has seen a wide variety of combinations of products, services, and personnel included in MSAs. For example, an MSA may require the service provider to provide (1) financial services such as accounting, benefits, and payroll administration; tax filing assistance; and purchasing of supplies, equipment, and insurance; (2) management services such as human resources and benefits management, managing the establishment of new clinic locations, and contract management services; and (3) consulting in the areas of equipment purchasing, policy and procedure development, credentialing, IT support, compliance, quality assurance, and policy and procedure development. Understanding the specific services provided under the MSA serves multiple purposes for the service recipient. Initially, it allows the service recipient to complete appropriate due diligence to confirm that the service provider is qualified to perform the services contracted for under the MSA. Additionally, by clearly defining the services provided under the MSA, the service recipient can assess the proposed cost savings and operational efficiencies to determine whether the management arrangement provides the perceived benefits.
Second, the parties to the MSA must negotiate mutually acceptable financial terms that satisfy applicable compliance requirements. From a compliance perspective, the Office of Inspector General (OIG) has long expressed concerns over certain management arrangements and the fees paid to a management company. The OIG’s concern is in large part due to potential violations of the anti-kickback statute, which essentially prohibits payments made purposefully to induce referrals of business payable by a federal health care program.2 As a point of reference, in a previous advisory opinion, the OIG concluded that the proposed management arrangement may involve prohibited payments where the management company was paid for its costs and a percentage of net practice revenues. In reaching its conclusion, the OIG noted that the proposed arrangement (1) may include financial incentives to increase patient referrals due to the compensation for services being based on the practice’s net revenues and (2) may include financial incentives that increase the risk of abusive billing practices.2 Under an MSA the compensation payable to the service provider can take a variety of forms, including payment based on a percentage of revenues, the achievement of certain performance targets, a “cost-plus” model, a per visit fee, or a fixed fee. Regardless of the payment methodology utilized, it is very important to ensure that the established fee is in compliance with both federal and state laws applicable to the services provided and reflects fair market value for the services being provided. The determination of an appropriate compliant fee arrangement under an MSA is a fact-specific exercise that is outside the scope of this article and best done by considering all available guidance and consulting as needed with a professional familiar with MSA arrangements.
Third, the parties to the MSA need to consider what aspects of the relationship require contractual protection. For example, the service recipient should consider appropriate confidentiality provisions that govern the use of confidential information that is shared with the service provider in connection with the services. The service provider, on the other hand, should consider what intellectual property it brings to the management relationship. For example, if the service provider utilizes proprietary software or processes in connection with the management services, it should give consideration to how best to protect these valuable assets. Additionally, both parties to an MSA could be adversely affected by the solicitation or hiring of its employees or contractors by the other party and should therefore consider contractual provisions to mitigate this risk. For example, if an MSA is terminated and the service provider is free to hire the service recipient’s office manager, such a loss of a key staff member would be detrimental to the service recipient’s business.
Fourth and finally, in addition to the compliance issues associated with the management fee discussed previously, an MSA touches on a number of other legal and compliance areas that must be considered at both the federal and state levels. For example, in the majority of cases the management company is a business associate under the Health Insurance and Portability and Accountability Act (HIPAA), and therefore a business associate agreement is required. In addition, a number of states have fee-splitting laws or regulations that limit the ability of a health care provider to split professional fees with a non–health care provider. In a state with strong fee-splitting regulations, this issue must be considered in determining the management fee and structuring the MSA. As a final example of state regulation, the MSA should give consideration to a state’s corporate practice of medicine (CPM) laws. In general, the CPM doctrine may prohibit a business corporation from practicing physical therapy or employing a physical therapist to provide such services. In states where the CPM doctrine remains viable, this issue is a material concern in structuring a compliant MSA.
In summary, while MSAs are a viable option to consider in a variety of business arrangements involving private practice physical therapy, it is important when entering into such an arrangement to consider the associated compliance and legal issues.
Please note that this article is not intended to, and does not, serve as legal advice to the reader but is for general information purposes only.
1. See Management Services Agreement Law and Legal Definition available at https://definitions.uslegal.com/m/management-services-agreement. Accessed November 16, 2017.
2. See Office of Inspector General Advisory Opinion No. 98-4 available at https://oig.hhs.gov/fraud/docs/advisoryopinions/1998/ao98_4.pdf. Accessed November 14, 2017.
Paul J. Welk, PT, JD, is a Private Practice Section member and an attorney with Tucker Arensberg where he frequently advises physical therapy private practices in the areas of corporate and health care law. He can be reached at firstname.lastname@example.org.