The MSO-PC model, also known as the “Friendly PC model,” has been gaining popularity in recent years as the digital health, telehealth, and healthtech industries have exploded in the post-COVID era. This model has been essential in facilitating the scaling of many virtual health businesses while remaining in compliance with the Corporate Practice of Medicine Laws (CPOM). However, there are several legal and tax considerations to be aware of to ensure that the business remains in compliance with the maze of rules between Federal and State laws.
The MSO-PC model refers to an organizational entity structure where there is a separation of the business between the MSO, or management services organization, and the PCs, or professional corporations. The MSO entity typically handles many, if not all, of the administrative functions like finance, marketing, HR, R&D, and the PCs typically operate a medical or healthcare business. This structure helps facilitate private equity investment into the MSO and ensures compliance with CPOM laws because the PCs are owned by licensed professionals. In this structure, the MSOs charge the PCs an administrative or management fee for the services that are provided by the MSOs to the PCs.
The above fees and their calculation can be the source of many pitfalls if the organizations are not in compliance with CPOM and tax laws. The pitfalls include the following:
- There are several methods in which this management fee can be calculated, included fixed fees, cost plus, or percentage of revenue. Depending on where the organization is operating, certain state laws may have limitations on the methodologies that can be used.
- The management fee must be set at a fair value, which is not always easy to determine, and often a valuation will be required ahead of any diligence events such as fundraising, sale or acquisition, or IPO.
In addition to the above, care must be taken to ensure the management fee is settled appropriately (i.e., cash is actually transferred from the PC to the MSO) to avoid issues with the validity of the deduction taken by the PC. If the deduction for the management fee were disallowed by the IRS, then it would leave the PC exposed to income taxes, fines, and penalties.