Last year, private equity deals in healthcare totaled approximately $90 billion, highlighting a growing trend of non-medical professionals purchasing and operating medical-based businesses. However, New York State has Corporate Practice of Medicine (CPOM) laws preventing an entity or individual that is not licensed to practice medicine to own or operate a medical practice. In order to be compliant with the CPOM, private equity and private investors operate through a Management Service Organization (MSO). These entities then enter into a management services agreement (MSA), where they exclusively provide management services to the medical practice, but do not actually operate or own the medical practice.

Administrative Responsibilities
There are a few points to keep in mind regarding the responsibilities of an MSO:

• MSOs do not have authority to make medical decisions. All medical decisions, and decisions concerning patient health, are made exclusively by physicians.
• Only the medical practice has the authority to hire or fire physicians or medical staff.
• Only the medical practice can determine pricing for medical services.

In exchange for the services agreed to in the MSA, the medical practice pays a flat monthly fee. However, the administrative operations of the practice are then performed by the MSO, which in turn is controlled by the non-medical professional entity.

Benefits
The benefits of these transactions are two-sided. On the one side, the medical practice gets an influx of cash to upgrade equipment, office space, and hire more medical staff to treat an increasing patient base.

On the other side, private equity groups are able to participate in the ever-expanding healthcare industry.

Risks
Of course, both sides operate under increased risk. From the investor’s side, the medical practice can terminate the agreement or cease to operate.

On the provider side, the private investor may be more focused on profitability and implement administrative changes that hinder patient care.

Overall, the trend of private equity investment in medical practices is likely to continue in the years to come. However, it is important to be aware of the benefits and risks of this type of investment before making a decision about whether or not to sell or buy a medical practice.

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