Is a Management Services Organization (MSO) Right For Your Practice?

By Nick Hernandez, MBA, FACHE | Published 6/24/2020 0

Consideration of partnering with an MSO should not be taken lightly. (Photo source: iStock)

Are you considering partnering with a Management Services Organization (MSO) instead of merging your practice with another or selling to a hospital? Recently more private practice physicians approach me about “selling” to private equity or “joining” an MSO.

There is often confusion about how these two are related and exactly what it means to join an MSO. The structures of MSOs vary greatly, as well as the management services they offer. Furthermore, the laws related to these entities vary by state. This may further complicate the design structure.

This article will attempt to give a high-level overview of two common structures of MSOs:

One that takes ownership (partial or full) of a medical practice
The other that provides business services without taking any ownership.

The acquisition

For starters, most MSOs are very particular about the practices they purchase. Aside from being specialty-specific, they have specific parameters when it comes to size, revenues, location, number of offices, and so forth.

If your practice meets what they are looking for, you may be in a position to entertain offers from an MSO as well as independent buyers (i.e. other practices or hospitals).

The sale to an MSO is different from a traditional sale

You can expect a sale to an MSO to be different from a traditional sale in these main areas:

- - time frame
  - due diligence
  - financing (or payment of the purchase price)
  - transition structure

Established MSOs will have a team of individuals dedicated to acquiring practices. Their primary job will be to dissect all of your practice data to determine if your practice represents a sound investment for them. This process is often very time consuming and demanding on the seller and his or her advisors (consultant, attorney, and accountant).

Contingencies

In a traditional sale, it is common for the seller to be completely cashed out for the purchase price at closing. Full cash payment is less common in an MSO acquisition.

Often the MSO will make a portion of the purchase price contingent on one of two conditions:

- - the seller stays on as a practicing physician in the practice for a period of time after the sale (an earn-out)
  - the performance of the practice for a period of time after the sale (a performance-based buyout).

If so, it would be prudent for you to learn as much as possible about the company, including but not limited to:

- - its principals
  - the private equity investors
  - its history
  - performance.

You should also speak with current and former selling physicians.

In most MSO acquisitions, the MSO will require the seller to stay on and work at the practice for two to three years or longer. These work-back requirements may be tied to a purchase price payout or cash penalty if the seller exits early.

Post-sale working arrangement

One of the first things you should consider is do you want to keep working after the sale? If so, for how long?

Another consideration of selling to an MSO vs. a hospital vs. merger with another practice is how well you deal with the loss of control. Some of these transactions may convert you to an employee, not an owner.

Therefore, the company may set your work hours and vacation schedule. It may even decide who will be on your staff. You may be required to change referral patterns or change a number of outside vendors.

For some physicians, this does not matter. For others, it will cause endless aggravation. Before you sell to an MSO, find out what will change, and do some honest self–reflection.

Risk assessment

Finally, assess your risk tolerance, including when you need the money from the sale of your practice.

MSO deals are often different. Be sure you know the answers to the following questions:

How much will be paid at closing?
What amount will be held in escrow?
How much may be held back pursuant to some future earn-out?

There is also another consideration for those MSOs that do have a holdback of some of the purchase price that is paid later. That amount is pursuant to a non-guaranteed earn-out that pays you a percentage of future profits or revenue.

If revenue drops, the earn-out drops and you may not receive your full anticipated sale price. If you are risk-averse, then that particular MSO arrangement may not be right for you.

If you are considering a sale of your practice to an MSO, be sure you do the following:

consider the requirements they make of you as terms of the sale,
make sure the numbers add up,
do your due diligence on the MSO,
measure your expectations and values against what they have to offer
and finally, seek professional advice.

Another type of MSO

There is another type of MSO that may provide business services without taking ownership of your practice. In this type of relationship, you would enter into a long-term contract with the MSO without giving up any ownership. Your practice would receive similar management benefits but you would not receive any cash payments in lieu of shares in your practice.

Consequently, this type of arrangement can deliver outstanding assistance to your practice (depending, of course, on how the MSO is structured). However, it is in no way a form of succession planning nor an exit strategy. This is because you are not taking on an ownership partner.

Nonetheless, these steps arrangements can help your practice run better. Thus they may be more appealing to physicians looking to join your practice. Furthermore, without giving up any ownership stake, it allows for partnership paths for physician employees.

One of the downsides to the other types of MSOs is that their buy-in at a certain point in time may prohibit or limit those physician employees who were on a path to partnership and partners who may not have yet become owners.

Final thoughts on MSOs

The primary benefit of joining an MSO is to have access to management services and to gain the best pricing on supplies and services. As a particular MSO grows, it obtains economies of scale that allow it to obtain preferred pricing on a whole host of items that vary from specialty to specialty.

Consideration of an MSO (either partnering with or selling to) is certainly nothing that should be taken lightly. When you begin contemplating this initiative, it is highly advisable to contact a consultant who has a lot of experience working with MSOs. Firstly, because that individual will be able to answer your questions as to the pros and cons. And, secondly, he will help you weigh whether or not this endeavor is a good fit for your practice. And who knows…you may even consider starting your own MSO!

Nick Hernandez, MBA, FACHE

Website: http://www.abisallc.com/

Nick Hernandez, MBA, FACHE is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives.

Since founding ABISA in 2007, his emphasis has been on developing and maintaining a strong relationship with physicians and identifying areas for business opportunity and support. The company’s client list includes physician groups, hospital systems, healthcare IT organizations, venture capitalists, private equity firms, and hedge fund managers.

Nick is a graduate of the United States Naval Academy and a former Captain in the U.S. Marine Corps. He holds MBA degrees in both Operations Management and Information Technology & E-Business Management from Wake Forest University. He is Board Certified in Healthcare Management and has been named a Fellow of the American College of Healthcare Executives.

He is a frequent guest lecturer and is often quoted in the national media. He has consulted with clients in multiple countries and has over 20 years of leadership and operations experience. Nick is a Subject Matter Expert in business strategy, practice management, telemedicine, health IT, and oncology.