As the current wave of physician practice M&A accelerates, private equity investors and transaction attorneys are employing multi-tiered legal structures that satisfy unique healthcare-industry considerations, including the ownership requirements dictated by state-specific “Corporate Practice of Medicine” laws. Managed services organizations (or “MSOs”) are typically at the heart of these legal structures and can be useful when addressing many healthcare-specific transaction requirements. MSOs also can align incentives and allow non-physician partners to provide useful services to affiliated medical practices. Understanding the function of an MSO is critical for physician practices that are exploring opportunities to partner with private equity groups, and engaging healthcare investment bankers and attorneys who are experienced advising provider groups can help establish optimal corporate structures to unlock the value of your practice.
In most states, Corporate Practice of Medicine requirements stipulate that an entity providing medical services be provider owned. For this reason, physician-owned practices typically are structured as professional corporations (“PCs”), professional limited liability companies (“PLLCs”), or another corporate structure that requires professional ownership. Oftentimes, in addition to providing clinical services, the PC or PLLC is also the entity that employs administrative staff and holds non-clinical assets, all of which works well as long as physicians own 100% of the practice. However, for a practice to pursue a transaction with a private equity group while remaining compliant with all necessary rules and regulations, a new LLC needs to be created within the corporate structure: the MSO.
Here’s how it works:
- Physician owners retain 100% ownership of the PC or PLLC, which continues to hold all clinical assets and wields independent discretion in regard to clinical operations. Physician control is important to remain compliant with the Corporate Practice of Medicine; nobody except for a practicing physician can make decisions with respect to the delivery of care.
- All non-clinical assets are transferred to the MSO, with which the physician practice signs a Managed Services Agreement (“MSA”). The MSA allows the MSO to collect fees from the practice to manage the non-clinical assets.
- A holding company is created to hold all of the ownership shares in the MSO, and the selling physician(s) are established as the sole owners of the holding company. For private equity to invest in the business, they will buy shares in the holding company from the physicians, thereby purchasing a portion of the claim to the management fee without owning the clinical operations of the business.
Here’s how it looks graphically:
Creation of the MSO and Holding Company
Credit: McDermott Will & Emery
Given the complexities of forming, negotiating, and transacting in an MSO, it is imperative that physician groups retain knowledgeable and experienced transaction attorneys and healthcare investment bankers. When the right advisors come together to help you find the right partner that can create the most value, the MSO structure for private equity investment can be an excellent vehicle for building outstanding healthcare services businesses.