Understanding management services organizations (MSOs): Benefits, compliance risks, and best practices

Management services organizations (MSOs) are increasingly used to handle administrative and operational burdens for medical practices. By outsourcing non-clinical business functions, MSOs allow providers to focus on patient care while benefiting from streamlined operations. However, improper structuring of an MSO can lead to regulatory risks, financial inefficiencies, and compliance violations. Understanding the function, benefits, and legal considerations of MSOs is essential for providers or investors looking to leverage this model effectively.

What is an MSO and how does it work?

An MSO is a business entity that provides a range of administrative, operational, and financial management services to healthcare practices. These services can include billing and revenue cycle management (RCM), human resources, payroll, regulatory compliance, IT infrastructure, vendor negotiations, and marketing support. Providers contract with MSOs to delegate these responsibilities, allowing them to dedicate more time to clinical care.

In states where Corporate Practice of Medicine (CPOM) laws prohibit non-physicians from owning or controlling medical practices, MSOs offer a compliant structure that enables private investors and business professionals to participate in healthcare administration pursuant to CPOM restrictions and limitations, fee-splitting, and other federal and state statutes and regulations. However, MSOs must be carefully structured to ensure that clinical decision-making remains entirely under the control of licensed professionals while the MSO focuses solely on administrative functions.

Why healthcare practices use MSOs

For many providers, running a practice means balancing patient care with substantial administrative burdens. MSOs help alleviate this pressure by optimizing efficiency, financial performance, and compliance.

One of the key advantages of an MSO is its ability to enhance RCM. Many independent practices struggle with delayed reimbursements, denied claims, and administrative errors that hurt cash flow. An MSO, equipped with billing and coding specialists, can improve claim submission, denial management, and compliance with payer requirements, leading to faster payments and improved revenue predictability. However, some states, such as New York, restrict the way MSOs can structure RCM arrangements. For example, New York law prohibits RCM entities from being paid based on a percentage of revenue or collections.

Beyond revenue management, MSOs also provide economies of scale, allowing practices to negotiate better pricing for medical supplies, EHR systems, and vendor contracts. This gives independent practices the purchasing power of larger healthcare systems without sacrificing autonomy.

Additionally, MSOs offer human resources and staffing support, handling payroll, benefits administration, and recruitment — a crucial advantage for growing practices that struggle with high turnover or compliance with employment laws. By ensuring HR processes align with legal requirements, MSOs help minimize the risk of labor disputes and penalties.

From a compliance standpoint, MSOs assist practices in navigating HIPAA, the Stark Law, the Anti-Kickback Statute (AKS), among other complex regulations. Failure to comply with these laws can result in fines, loss of licenses, or even criminal charges, making regulatory oversight a crucial MSO function.

The Corporate Practice of Medicine (CPOM) and MSO compliance

A primary reason providers use MSOs is to comply with CPOM laws, which prevent non-physicians from owning or controlling medical practices. These laws exist to ensure that clinical decisions are made based on patient care, not financial incentives.

To comply with CPOM laws, an MSO must be structured so that physicians retain full control over clinical decisions. The MSO should not dictate medical protocols, treatment plans, or hiring and firing decisions related to clinical personnel. Instead, its role should be strictly limited to business operations such as office management, vendor negotiations, and financial oversight.

MSOs must also structure their fee arrangements carefully. While some MSOs charge flat monthly fees, others use percentage-based revenue models — an approach that may be legal in some states but prohibited in others. If the MSO serves a practice that receives governmental payer reimbursements (e.g., Medicare or Medicaid), additional scrutiny is required, particularly regarding marketing or patient referral services, which could violate Stark or AKS laws. Legal counsel should thoroughly review MSO agreements to ensure compliance with federal and state regulations.

Structuring an MSO for success

For an MSO to be successful, it must be structured correctly from the outset. Several models exist, including:

• Service fee-based MSO — The MSO receives a fixed monthly fee or percentage of practice revenue (where allowed) in exchange for administrative services.
• Cost-plus model — The MSO charges the practice actual costs incurred plus a margin for profitability.
• Equity-based model — Physician owners receive equity in the MSO or its affiliated entities as part of their compensation structure.

Regardless of the model, MSO agreements must clearly define the roles and responsibilities of both parties. The agreement should specify which services the MSO will provide, how fees will be calculated, and how compliance will be maintained. Financial transparency and regulatory adherence are essential to avoiding legal and financial risks.

Are MSOs right for your healthcare business?

For physicians looking to offload administrative tasks and focus on patient care, an MSO can be a valuable resource, offering financial stability, operational efficiency, and regulatory compliance support.

However, not all MSOs are structured effectively. A poorly structured MSO can lead to compliance risks, financial losses, and legal liabilities.

Before entering into an MSO agreement, healthcare providers should conduct thorough due diligence, consult with healthcare attorneys, and ensure that the MSO aligns with the practice’s long-term business strategy. As healthcare industry evolves, MSOs will continue to play a crucial role in helping independent providers compete with larger healthcare systems while maintaining financial and operational control.