Private equity investors and non-physician entrepreneurs are increasingly entering the healthcare space. To navigate state regulations, they frequently utilize the "Friendly PC-MSO" model. In this operational structure, a physician-owned professional corporation (“PC”) provides clinical care, while a separately owned Management Services Organization (“MSO”) handles administrative and business operations.

While this model is standard across the industry, Maryland imposes strict regulatory requirements that can easily trap healthcare entrepreneurs and medical groups. Structuring a compliant MSO arrangement requires careful attention to state-specific rules regarding the corporate practice of medicine and illegal fee-splitting.

The Corporate Practice of Medicine in Maryland

Maryland maintains a strict stance against the corporate practice of medicine. The Maryland Board of Physicians has established that a standard corporation cannot employ a physician to practice medicine. Instead, medical practices must be owned by licensed physicians through a professional entity, such as a professional service corporation.

The underlying goal of this doctrine is to ensure that clinical decisions are made solely based on patient care, completely insulated from corporate profit motives. For an MSO arrangement to be compliant in Maryland, the management company cannot exert undue influence over clinical operations. The physician owners of the professional corporation must retain ultimate authority over diagnosis, treatment plans, physician hiring, and patient scheduling.

If an MSO agreement allows the management company to dictate case volume or influence clinical protocols, regulators may view it as an unlawful corporate practice of medicine, regardless of how the legal entities are incorporated.

The Trap of Percentage-Based Management Fees

One of the most common reasons an MSO structure fails a regulatory compliance review in Maryland is the compensation structure. Understandably, investors frequently prefer to tie MSO compensation to the financial performance of the clinic by utilizing a percentage of revenue management fee.

However, Maryland strictly prohibits fee-splitting among licensed healthcare professionals and non-licensed entities. Allowing an MSO to take a percentage cut of medical revenue is frequently classified as an illegal sharing of professional fees.

Further, such arrangements have the potential to trigger intense scrutiny under the Maryland Anti-Pay-for-Referral Act (“APRA”). The APRA, unlike its federal counterpart (commonly referred to as “Stark Law”), applies to all payers and strictly regulates compensation arrangements between healthcare entities. To avoid severe regulatory penalties, management fees should be structured as flat fees that reflect the fair market value of the specific administrative services provided.

Structuring a Compliant Management Services Agreement

To successfully operate a Friendly PC-MSO model in Maryland, healthcare entities must proactively build compliance into their foundational documents. The Management Services Agreement (“MSA”) is the critical link between the two entities and must be meticulously drafted.

Medical practice owners and MSO investors should ensure the following core elements:

• Clearly delineate clinical and business duties: The MSO should solely handle non-medical aspects of the practice, such as billing, marketing, human resources, and facility operations.

• Establish fair market value compensation: Implement a fixed compensation model for the MSO that does not fluctuate based on the volume or value of medical services billed by the professional corporation.

• Preserve clinical autonomy: Ensure the physician owners retain absolute control over patient medical records and all clinical decision-making.

How MDRXLaw Can Help

MDRXLaw represents medical groups, healthcare entrepreneurs, and management services organizations in structuring compliant joint ventures and administrative service agreements.

If your organization is considering an MSO structure or needs to review an existing Management Services Agreement for compliance with Maryland regulations, contact our team at info@mdrxlaw.com or (212) 668-0200 to discuss your situation.