The use of management services organizations (“MSOs”) to foster alignment between healthcare providers and healthcare organizations has increased significantly in recent years. Organizations leveraging MSO strategies include publicly traded healthcare companies, private equity-backed operators, and non-profit healthcare systems. Often MSOs provide a suite of substantially more comprehensive services than traditional management arrangements which focused on back-office support and revenue cycle management services. While services provided in these comprehensive management arrangements vary, the following are commonly included:
From a business perspective, understanding the services and appropriate fees is fundamental. Also, fair market value documentation is key in arrangements between healthcare businesses and MSOs to ensure compliance with both Federal (Anti-Kickback Statute and Stark Law) and state level laws and regulations (corporate practice of medicine and fee splitting prohibitions). Key factors to understand when analyzing these arrangements often include: understanding the scope of services provided by the MSO, identifying market participants that provide comparable services, assessing the costs incurred by the MSO to provide the services, and determining an appropriate rate of return for the services provided.
VMG Health has insight into the latest trends and fee structures based on extensive experience in valuing comprehensive management services arrangements. As a result, VMG Health can rapidly assist in confirming if a comprehensive management services arrangement is consistent with fair market value.
Documentation illustrating that a comprehensive management services arrangement is set at fair market value represents best practice for compliance purposes. Based on regulatory guidance, management fees should be derived based on a sound methodology reflecting the terms of the arrangement and relevant value drivers. Four key value drivers that should be considered when analyzing a comprehensive management arrangement include: 1) breadth of services provided and by extension the costs incurred by the MSO to provide the services, 2) business risk assumed by the MSO, 3) financial feasibility of the management fee structure from the perspective of the buyer, and 4) the management fee structure. VMG Health has a keen understanding of these value drivers, and a myriad of other valuation drivers associated with comprehensive management arrangements.
Physician Practice Strategy: The Private Equity Play
Written by Holden Godat and Taylor Anderson, CVA Health systems, outpatient facilities, payors, and private equity firms (PE) are all...
Learn More
