“Friendly” PC Models: Key Contractual and Compliance Considerations

Over the past few years, the healthcare industry has seen an increase in the number of arrangements between clinical practices and non-clinical business entities for the provision of management services. These arrangements are referred to as “Friendly-PC” or “MSO-PC” models since they are typically structured between a Management Services Organization backed by a private equity fund or other non-clinical investor or lender (MSO), and a physician-owned Professional Corporation (PC). They allow an MSO to indirectly invest in the operations of a PC to the extent permitted by state law and the PC to receive management services from the MSO so its physician owners may focus on patient treatment. They are structured to maintain compliance with the Corporate Practice of Medicine doctrine (CPOM), which over 30 states have adopted in some form. States that adhere to CPOM generally restrict non-licensed persons from employing licensed physicians to provide professional services.

The rise of the Friendly-PC model follows the upsurge in telehealth services that occurred in the wake of the Covid-19 pandemic, as the model is readily adapted to dermatology, psychotherapy, men’s health, and other services often provided via telehealth. MSOs with private equity backing sometimes use the model on a broad level to “roll-up” the provision of management services across numerous PCs in a particular practice area (e.g., primary care, radiology, or dentistry) within the same city, state, or region. It can also be used on a smaller scale where a non-licensed individual entrepreneur seeks to engage in a joint venture with a physician partner.  Regardless of the scale or practice area, this article offers a high-level overview of business and compliance considerations for MSOs and PCs, the contractual structure, and general recommendations for establishing a model that runs efficiently and mitigates levels of risk.

Business considerations

MSOs and PCs should carefully consider their respective business goals and whether a Friendly-PC model is an appropriate fit before engaging with one another. From the PC’s side, the owners should consider the extent to which they are willing to sacrifice some control over the management services that keep the PC running in exchange for freeing up more time to focus on patient treatment. The MSO should consider its familiarity with the PC’s owners, including if there is any concern they will soon retire or otherwise resign from or attempt to compete with the clinical practice. One of the greatest risks to the MSO from a business standpoint is that it will indirectly invest in the PC only for the owners to exit, in which case the MSO could be left “high-and-dry” without staff capable of treating patients. The Friendly-PC model attempts to bind the owners to the arrangement to the extent permitted under applicable law, but there is no firm guarantee that they will not leave. As a result, a trusting relationship between the MSO and the owners is helpful when implementing a new model.

Compliance considerations

A friendly-PC model can potentially implicate a variety of federal and state health care laws. MSOs and PCs should be aware of the following compliance considerations in particular:

• Corporate practice of medicine The parties should review the CPOM laws of the states in which they operate and structure the Friendly-PC model to reduce the level of risk that a government agency may view the MSO as exerting inappropriate influence over the PC’s clinical services. In particular, the PC should maintain sole responsibility for clinical services and decision-making related to patient treatment, referrals, prescriptions and service orders, and staffing decisions related to licensed practitioners. New Jersey and New York are two states that have developed case law that may allow insurers to refuse payment where an MSO effectively controls the delivery of the PC’s clinical services.

• Fraud and abuse The fee paid in exchange for management services may implicate the federal Anti-Kickback Statute (AKS) and related state laws to the extent a government agency views it as intended to induce referrals to the PC. The Friendly-PC model may also be deemed to create a “financial relationship” that subjects the parties to referral and billing restrictions under the federal Physician Self-Referral (Stark) Law and related state laws. One strategy to mitigate the level of risk in connection with these laws is to structure the contracts in a manner that satisfies the AKS “Personal Services” safe harbor at 42 C.F.R. § 1001.952(d) and the Stark Law “Personal Services” exception at 42 C.F.R. § 411.357(d). For example, the amount of the fee should constitute the fair market value (FMV) of the management services and should not vary based on the volume or value of any referrals or other business that flows between the PC and MSO. The parties should further document the rationale used to determine FMV so that it can later be shared with a government agency in the event of an audit or investigation.

• Data privacy On the federal level, the Health Information Portability and Accountability Act of 1996 (HIPAA) establishes standards for the protection, use, and disclosure of any Protected Health Information (PHI) that a PC collects from its patients. To the extent that the PC discloses any PHI to the MSO for the performance of management services (e.g., billing), HIPAA requires that the parties enter a Business Associate Agreement that subjects the MSO to HIPAA’s standards as well. The parties should also check whether the states in which they operate have enacted data privacy laws that may restrict the transfer of other patient personal information from the PC to the MSO.

Contractual structure

MSOs and PCs that are ready to proceed with a Friendly-PC model will establish the arrangement through an interlocking contract structure, which commonly includes a Management Services Agreement (MSA), Transfer Restriction Agreement (TRA), and certain consulting contracts. The exact contractual requirements will vary depending on business considerations and state law, but they typically address the following items:

• Management services agreement (MSA) The MSA is the primary contract outlining the relationship between the MSO and the PC. It contains provisions similar to those in a typical vendor contract but tailored to fit the Friendly-PC model. For example, the MSA should promote CPOM compliance by designating the PC as solely responsible for clinical services and decision-making, and asserting that the MSO will not attempt to interfere with these areas. The MSA also expressly lists the management services that the MSO will provide, which may include billing and collections, accounting, HR, IT, marketing, recordkeeping, and obtaining supplies, equipment, and office space. It further states the fee that the PC will pay the MSO. As mentioned, the parties can mitigate the level of risk under applicable fraud and abuse laws by setting the fee in accordance with FMV for the management services and not taking into account any referrals or other business that flows between the PC and MSO.

• Transfer restriction agreement (TRA) The TRA is a supplementary contract that provides an MSO with a measure of control over the transfer of a PC’s shares (to the extent permitted under state law). It generally provides that a PC’s owners may not sell their shares without the MSO’s approval, and that the MSO may direct an owner to sell their shares to a chosen replacement following a trigger event (e.g., an owner’s death or disability, loss of professional license or credentialing with a particular insurer, bankruptcy, or resignation as a provider for the PC). MSOs often view this control as critical since it mitigates the level of risk that an owner might exit the Friendly-PC model and leave the MSO “high-and-dry.” Importantly, a TRA is more likely to be scrutinized in a state that takes a strict approach to enforcing CPOM laws, such as New Jersey and New York. The parties should review local CPOM laws and court cases to determine the extent to which an MSO’s control over the transfer of a PC’s shares is permissible and draft their TRA accordingly.  

• Consulting contracts  A friendly-PC model often involves the MSO’s engagement of the PC’s owner(s) for the provision of non-clinical consulting services. This engagement benefits an owner by creating another opportunity to obtain compensation from the MSO, and benefits the MSO by further incentivizing the owner to remain involved in the model (i.e., reducing the level of risk that an owner will leave the MSO “high-and-dry”). From a compliance standpoint, the key consideration is that any compensation the MSO pays to the owner should be based on the FMV of the non-clinical consulting services and should not account for the volume or value of clinical services the owner provides to patients of the PC.

Looking ahead

The prevalence of Friendly-PC models is likely to increase in the coming years as the availability of telehealth expands and private equity funds continue to pour into the healthcare industry. MSOs and PCs should monitor for guidance from government agencies that pertains to CPOM and the ability of a non-clinical business entity to engage with a clinical practice. They should also continue working with legal counsel when structuring new models to promote effective operations and mitigate the levels of risk under federal and state laws to the greatest extent possible.

Photo: Sean Gallup, Getty Images

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