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The U.S. Department of Justice (DOJ) has recently taken a renewed interest in management services organizations (MSOs), including physician-syndicated MSOs in which physician-owners provide medical services in exchange for compensation. MSOs are administrative and management entities that develop relationships with physicians and other healthcare providers to provide a broad range of non-clinical services. While MSOs are not inherently unlawful, they implicate several federal healthcare laws and regulations; and, if not structured and managed appropriately, MSOs can present significant enforcement risks for their physician-owners. That is why the majority of states in the US adhere to the corporate practice of medicine doctrine, which stipulates that only medical practice by licensed physicians or physician-owned firms are permitted to accept payment for medical services.

Unfortunately, many physicians do not discover this risk until it is too late. Oftentimes, the first time a physician learns that his or her management services organization (MSO) violates federal law is during a federal investigation. With this in mind—and given the DOJ’s renewed focus in this area—physicians who own interests in MSOs would be well-served to reassess their management services organization’s compliance, and those who are currently facing scrutiny should engage an experienced management service organization (MSO) investigation lawyer promptly.

“While MSOs can present unique business opportunities for physicians, owning an MSO can be risky if the organization is not structured and managed appropriately. The DOJ has recently targeted several MSOs and their owners with a variety of federal allegations, and in some of these cases the MSO owners are facing serious criminal charges.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Key Elements of MSO Compliance

To establish an MSO capable of withstanding DOJ scrutiny, physicians and their business partners need to address numerous legal and regulatory compliance concerns. Laws such as the federal Anti-Kickback Statute establish broad prohibitions, and then regulations adopted under these laws carve out exceptions and “safe harbors” that allow specific transactions under specific circumstances. In most cases, physicians must structure their MSOs with one or more of these exceptions or safe harbors in mind, and they must use their MSOs’ governing documents to demonstrate that they made affirmative decisions focused on establishing and maintaining compliance.

For example, to establish a legally compliant organization capable of withstanding DOJ scrutiny during an MSO investigation, physician-owners must generally address issues such as:

• Development of an MSO Compliance Program – In addition to drafting, negotiating, and executing the management services agreement, bylaws, and other governing documents needed to formally establish an MSO, physician-owners should also ensure that their management services organizations have comprehensive written MSO compliance programs.
• Appointment of MSO Compliance Personnel and Advisors – Physician-owners of MSOs should ensure that their organizations have compliance personnel and advisors with an adequate understanding of all pertinent laws and regulations. While management services organizations do not necessarily need a stand-alone MSO compliance officer position, they need to ensure that they have adequate internal oversight and that they can call upon their outside advisors as necessary.
• Calculation of Physician-Owners’ Distributions and Fees – Improper calculation of management fees and service fees is perhaps the single most common issue that gets physician-owners of MSOs into trouble. To be legally compliant, fees paid to physician-owners generally cannot take into account the value or volume of business physician-owners generate for the organization. Ideally, MSOs and their physician-owners will each engage independent accountants to assess the fair market value of the physician-owners contributions, and then the parties will engage in true arm’s length contract negotiations.
• Marketing, Referrals, and Contracts with Other Physician-Owned Health Care Entities – Improper volume-based marketing and referral relationships are also common sources of legal exposure for MSOs and their owners. MSOs need to have appropriate and documented relationships with their marketers (which, in most cases, means entering into employment contracts with marketers who are W-2 employees), and they need to ensure that all referral relationships comply with the Anti-Kickback Statute, Eliminating Kickbacks in Recovery Act, Stark Law, and other applicable laws.
• Independent Determinations of Medical Necessity – When doing business with affiliated pharmacies and laboratories, MSOs should ensure that these facilities retain independence when it comes to making decisions regarding medical necessity. If physician-owners get involved in affiliated entities’ medical necessity decision-making (or if it appears that they may be involved in affiliated entities' decision-making), this can also trigger an MSO investigation.

These are just a handful of overarching areas of concern for physician-owners of MSOs. This list is by no means exhaustive but rather is meant to illustrate the breadth of issues that can trigger (and lead to trouble during) MSO investigations. Physicians should work with legal counsel when setting up their MSOs when possible; and, if it is already too late to do so, physician-owners of MSOs should strongly consider conducting a comprehensive compliance assessment with the help of an experienced MSO investigation attorney who can identify any areas of potential legal exposure.

Common Issues in MSO Investigations

Within these and other areas, numerous specific issues can lead to trouble for physician-owners during MSO investigations. For example, in one recent case, the DOJ alleged that “recruiters allegedly set up companies known as management service organizations (MSOs) to make payments to referring doctors that were disguised as investment returns but were based on, and offered in exchange for, the doctors’ referrals.” In another, the DOJ is pursuing criminal charges against a pharmacist accused of “receiv[ing] hundreds of thousands of dollars in kickbacks while helping a health care company cover up their processing of fraudulent claims totaling more than $30 million.” In a third case filed this April, the DOJ alleges that the parties operated an informal “partnership” effectively as an MSO to collect “unlawful kickbacks, disguised through a sophisticated business integration” in violation of the Anti-Kickback Statute and other laws.

Additional examples of issues that can lead to civil or criminal prosecution for physician-owners during federal MSO investigations include:

• Failure to Implement the CMO’s Compliance Program – Simply having a CMO compliance program is not enough. During a CMO investigation, the DOJ will be looking to see whether the organization has effectively implemented policies and procedures designed to prevent kickback payments and other violations.
• Use of Template Corporate Forms, Policies, and Agreements – Due to the intricacies of anti-kickback and healthcare fraud compliance, MSOs cannot rely on template documents. Instead, owners must work with experienced counsel to craft custom-tailored documents that reflect the MSO’s unique structure, relationships, business activities, and compliance risks.
• Disproportionate or Unspecified Management or Service Fees – Even if a physician-owners management or service fees are not explicitly tied to referrals, disproportionate or unspecified fees are likely to raise questions about whether the physician is receiving compensation linked to the volume of business he or she generates for the organization.
• No Actual Arm’s Length Negotiations – Similarly, even if an MSO’s governing documents state that a physician-owners compensation is based on arm’s length negotiations, if no such negotiations took place (and the DOJ uncovers this during its investigation), this can trigger further scrutiny.
• No Actual Determination of Fair Market Value – Likewise, if an MSO and physician-owner agree that the physician’s compensation represents “fair market value” for the physician’s services but neither party obtained a fair market valuation, this will raise red flags at the DOJ as well.
• An Implicit or Explicit Expectation for the Physician-Owner to Generate Business – Regardless of how a physician-owners compensation is structured and documented, if there is any implicit or explicit expectation for the physician to generate business for the MSO or any affiliated healthcare entities, this expectation can be enough for the relationship to run afoul of federal law.
• Identical Ownership of the MSO and Affiliated Healthcare Entities – If an MSO shares identical ownership with an affiliated pharmacy, laboratory, or other healthcare providers, the DOJ is also likely to view this as a sign that the MSO has been established for unlawful purposes—whether the owners realized it or not.
• Recruitment of Additional Physicians, Providers, or Marketers – Any time a physician, healthcare provider, or marketer is recruited to join or provide services to an MSO, this will raise questions as to whether there is some sort of volume-based compensation arrangement involved.
• Involvement or Interference in Other Providers’ Medical Necessity Determinations – For legal and regulatory compliance purposes (and as a matter of ethical compliance for physician-owners), MSOs must avoid having any involvement in, or interfering with, other providers’ medical necessity determinations.
• Any Other Implications of a Conflict of Interest – Along with the issues discussed above, any other implication of a conflict between an MSO’s financial interests and the interests of patients or payors can spell trouble for the organization and its owners. During MSO investigations, the DOJ scrutinizes all aspects of these organizations’ business relationships and activities, and any perceived conflict has the potential to lead to civil or criminal charges.

As you can see, numerous issues can raise questions about the legitimacy of physician-owners compensation from an MSO, or even the MSO itself. Crucially, under the Anti-Kickback Statute and other applicable laws, knowledge of illegality or intent to violate the law is not a necessary element of a civil offense. Knowledge and intent are not even required to substantiate criminal charges in some cases. As a result, physician-owners of MSOs need to be extremely careful to protect themselves—proactively whenever possible, and during federal investigations when necessary.