Are your management services agreements fair market value & commercially reasonable?

The healthcare reimbursement environment’s shift towards value-based care aimed at generating cost savings and improved clinical outcomes has driven growth of management service organizations (MSOs), entities designed to provide management functions to entities in various healthcare sectors.

MSOs allow clinical personnel to focus on patients, while providing sector specific expertise related to reimbursement, quality reporting, and oversight. Often, MSOs have a referral relationship to the provider of the services, whether through physician ownership, or the MSO is a business that refers to the providing entity. As a result, it is important that fees stated in management services agreements (MSAs) between MSOs and healthcare entities are fair market value (FMV) and commercially reasonable (CR).

MSOs may include national, regional, health system, or physician-owned management service companies, and are increasingly providing specialized services through MSAs. These services vary and may include comprehensive ‘turn-key’ management services, revenue cycle management services, and other a la carte services. The goal is often to allow the healthcare entity to focus on clinical functions for improved patient outcomes. MSOs often provide management services with greater efficiency and economies of scale as a result of servicing multiple facilities such as ambulatory surgery centers (ASCs), imaging centers, physician practices, and hospitals.

More recently, there have been a growing number of highly specialized MSOs including rehabilitation, wound care, freestanding emergency departments, urgent care centers, behavioral health, and pharmacy, among others. While MSAs have been present in the healthcare sector for decades, and certain MSAs may exhibit standard fees and services (such as ASC MSAs), other growing or highly specialized segments provide more varied compensation and services. As a result, it is important to understand exactly what services are being provided by an MSO when determining whether the proposed fee is reasonable.

It is important to note, the MSOs addressed in this article reflect management services related to personnel provided to oversee and guide a business. Comprehensive MSOs, often seen in Corporate Practice of Medicine states and inclusive of operational personnel, rent, and other expenses, will be covered in a subsequent article.

Fee Structure

Compensation structures seen in the MSA market commonly include percentage of facility net revenue, monthly or annual fixed fees, as well as one-time fixed fees. Certain fee structures may be required based on the federal Anti-Kickback Statute, a set of broad prohibitions on knowing and willful payment of remuneration to induce or reward patient referrals or the generation of business involving any item or service payable by federal health care programs, and Stark Law, a set of limitations on physician referrals to entities providing federal reimbursement in which the physician has financial interest.1,2

Fixed fee structures may be preferred for MSAs between health systems receiving federal reimbursement and physicians (or physician-owned MSOs), as they do not vary based on facility referral volume. One-time fixed fees may be preferable regarding services performed within a set date, such as development services related to the construction and start-up of facilities. That said, a percentage of net revenue has historically been the most common fee structure for typical MSAs. In today’s environment, unique MSAs are becoming more common. As a result, there are varying fee structures and services, which results in challenges when trying to rely on market comparables to determine an appropriate fee.

Fair Market Value

When it comes to establishing an MSA fee, healthcare entities must rely on FMV to ensure regulatory compliance with the AKS and Stark Law. In the healthcare sector, FMV is defined as the value in arms-length transactions, consistent with general market value, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well‐informed parties to the arrangement who are not otherwise in a position to generate business for the other party, at the time of the agreement.3 Widely accepted valuation principles require one to consider a cost, market, and income approach when determining FMV. For reasons beyond the scope of this article, an income approach is typically not considered when establishing FMV for an MSA fee.

In determining the FMV of MSA fees, it is common to conduct a market approach and a cost approach. A market approach analyzes fees typically paid in the market by similar entities for similar services. This approach is often an accurate indication of FMV when the set of services and type of entity are comparable to the market data points. Therefore, market-based analyses may be preferred for established market segments such as ASCs and imaging centers, assuming the services in the MSA are typical, and comparable fees are available. With the growth in MSAs for other healthcare segments, such as wound care and behavioral health, the market approach may be less relevant. This could be due to different, non-comparable fee structures, lack of market data, and/or unique sets of services such as development, marketing, or other consulting services.

As previously mentioned, a cost approach is also typically conducted as part of an FMV analysis. The cost approach considers the cost to provide the MSA services and includes a reasonable rate of return. When there are not enough market comparables, or potentially none, the cost approach is relied upon to determine FMV. Considering both market-based and cost-based analyses of MSA fees provide essential support to ensure FMV has been established.

Commercial Reasonableness

In addition to FMV, CR is a standard transacting healthcare entities must meet to comply with federal regulatory requirements. In the Stark Phase II interim final rule, the Centers for Medicare & Medicaid Services stated that "an arrangement will be considered ‘CR’ in the absence of referrals if [it] would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or […] group practice) of similar scope and specialty, even if there were no potential designated health services referrals.”4

Therefore, for an arrangement to be CR, it must be important to the operations of the healthcare entity and of sound business purpose, absent the consideration of referrals. In determining whether an MSA is CR, healthcare entities should consider the business’s operational requirements such as facility size and patient needs, as well as the reason for the MSA, and avoid compensation for services already provided at the facility. Further, healthcare entities should consider the experience and expertise of the MSO providing the services, seeking the lowest cost for comparable services, and ensure the presence of a written agreement outlining terms of service between the parties.

Bottom Line

The growth of MSOs in response to the market for specialized management functions provides opportunity for improved financial and clinical performance, but also necessitates awareness of FMV compensation and CR guidelines. Further, the use of market-based and cost-based analyses provides support for established compensation and assists in avoidance of duplicative services to ensure the MSA makes good business sense.

1 42 U.S.C. §1320a-7b(b) (1972)
2 42 U.S.C. §1395nn (1989)
3 42 CFR §411.351
4 69 Fed. Reg. (Mar. 26, 2004), p. 16093.00

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