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The Physician-Owned Management Services Organization

Joe Laden
President, Ohio River Valley Associates, LLC, Louisville, KY

A Management Services Organization (MSO) is a legal entity created to provide management and administrative services to other organizations. For the purpose of this article, we will describe the physician-owned MSO that provides services to multiple independent anesthesiology groups and is owned and governed by the owners of the anesthesiology groups the MSO serves.

The physician-owned MSO is designed to allow private practice physicians to maintain 100 percent control of their practice while optimizing operating efficiencies, enhancing the care they provide and building long-term financial assets. The MSO model allows anesthesiologists to provide services to healthcare facilities, surgeons and patients in a more efficient and cost-effective manner. Following are the specifics of how this is accomplished.

An anesthesiology group can divide its general functions into clinical and business. Over the years, anesthesiologists have found that their business operation has increased in importance and complexity as adequate reimbursement becomes more of a challenge and government regulation increases. Business operations usually consume 5–10 percent of anesthesia practice revenue with the remainder paying clinicians’ salary and benefits. Two non-clinical goals of a well-run anesthesia practice should be to decrease business overhead and provide the best possible business and financial management. Success in these goals will maximize income of the anesthesia practice owners.

Organization

The MSO can be used to achieve these goals for several anesthesiology groups by placing their business management and financial functions within a single corporation, the MSO. The anesthesia clinical practices are relieved of direct involvement in these functions and of personnel who may have been carrying out these functions.

The end result is that anesthesiologists continue ownership in their anesthesia clinical practice and also own a portion of the MSO that provides services to the practices. If, for example, three anesthesia practices got together to form an MSO, and the practices had 10, 20 and 30 owners, the MSO would be owned equally by 60 anesthesiologists. Each anesthesiologist would purchase an equal number of shares to capitalize the MSO. The MSO, in this model, would be owned by individuals, not by the three practices. The MSO would be governed by a representative board of directors (or managing members if a LLC-limited liability corporation). Each practice would have proportionate representation on the board of directors. Using this example, the MSO board may have one member from the smaller practice, three from the largest practice and two from the remaining practice. The operating agreement of the MSO would have provisions to delineate the powers of the board and to assert minority rights that would prevent the smaller practices from being outvoted on important matters.

It is important to note that after the formation of the company by the three anesthesia practices in the example we are using, there are now four companies and the MSO is subservient to the owners of the three independent practices. Nothing changes about the clinical practices. They go on as usual, staffing facilities and providing anesthesiology and pain management services. Each practice maintains its existing contracts with hospitals, payers and its employees. The transformation from pre- to post-MSO is illustrated in Figures 1 and 2.

The MSO will be capitalized with a small investment by physician owners, typically $1,000-$4,000 per physician. Each anesthesiology group will be charged a service fee by the MSO that includes all management, accounting and billing fees with the total less than 6 percent depending on the size of the MSO and its ability to negotiate favorable vendor contracts. The MSO service fee replaces the total practice overhead costs each group incurred prior to being serviced by the MSO.

Services

The first order of business for the MSO is to consolidate business and financial management services in an efficient and practical manner with the goals of functional improvement and lower costs. It will be necessary to consolidate billing and collection, accounting, payroll, financial reporting, employee benefit administration, credentialing and hospital privileging. There will be a significant savings achieved by this centralization and standardization.

Let’s continue with our example and assume that prior to the creation of the MSO two of the practices outsourced their billing to two different billing companies and the third did in-house billing. The choice will be whether to take all billing in-house or to outsource all billing to a single outsourced provider. It is best to take care of this decision before the MSO is formed by obtaining and comparing bids for consolidated billing. A lower price and enhanced service can be obtained when multiple groups with one management team negotiate together. Billing would be done under the separate tax IDs of the three groups but the cost of billing will be based on the aggregated patient revenue of the three groups with 60 owners and additional non-owner MDs, CRNAs and AAs. It will be the job of the MSO management team to prepare outsourced billing RFPs, analyze bids, interview companies and make a final recommendation to the MSO governing board and leaders of the individual practices. If in-house billing is to be considered, the management team will analyze the current in-house operation, compare with outsourcing and produce a report and a recommendation for the physician owners.

At this point, you may ask, “how can a group of 10 help a group of 30?” The larger group probably has lower costs than the group of 10 and it may have a professional manager and be a historically well-run group. One benefit is simply the numbers the smaller group adds. The larger group needs all the smaller groups to bring up the collective count of providers and patient revenue. Another benefit is that the MSO has demonstrated that it can bring multiple groups together under common business management and therefore has an excellent chance of increasing to four, five or more groups. The potential expansion of an MSO that has already demonstrated its synergy can be used as a negotiating advantage with vendors. Vendors will appreciate the fact that when the MSO adds another practice it will be easy and profitable for the vendor to simply provide the same services to more doctors and other clinical personnel.

You are likely wondering how the MSO can help with payer negotiations. Basically, it cannot. In our example, the three clinical practices do not change other than consolidating vendors and transferring business personnel to the MSO. They are still three small practices without much influence over large commercial insurance companies. The MSO management team will do independent payer negotiations for the individual clinical practices and will have knowledge of all the groups’ current rates. Hopefully, the MSO negotiating team will be more successful with payers than the individual practices had been. There is no guarantee that this will be the case given the current reluctance of large payers to increase fees. We will address a solution to this problem later.

Following is a list of services that can be negotiated using the advantage of size. If multiple groups use multiple vendors, the existing vendors can be contacted and offered the option of working for a larger number of doctors or for none. This strategy should easily reduce unit pricing on these services.

  • Revenue Cycle Management (RCM) services (billing and collection
  • Accounting including financial statements and taxes
  • Payroll services including timekeeping
  • Outsourced paying of practice expenses and cash management
  • Banking and use of lockboxes
  • Credit card processing of patient payments
  • Software for scheduling, credentialing and human resource services
  • Compliance services
  • Patient satisfaction surveys (online and on paper)
  • Quality management software and systems
  • Office supplies
  • IT hardware, software and service
  • Independent retirement plans run through the same vendor platform

Some services can be consolidated with the advantage of better service that will be provided to a larger entity. These are:

Insurance brokerage services. Using a single large broker for all employee benefit insurance and corporate liability insurance can be an advantage. Brokers are rapidly losing lucrative medical group clients due to hospital employment, group mergers and practice buy-outs. Brokers who affiliate themselves with an MSO that is expanding should be willing to deliver dedicated premium service and provide products to a large group at lower negotiated prices.

Malpractice insurance. It will be difficult to reduce malpractice premiums for doctors who remain in individual, small groups but the MSO management team should be able to exert some leverage on these insurers. There can be pricing benefits when all doctors are on the same renewal date with the same insurer. When the MSO reaches sufficient size, establishment of a captive insurance company may be possible.

Collection Agencies. These companies will be willing to lower their fees and provide individualized service to the MSO participants. It is a large advantage to the collection agency to have accounts from multiple practices sent from a single billing entity in a standard format.

Management

The job of the MSO representative board of anesthesiologists is to make sure the business of the practices is run efficiently and effectively. However, the physician board is not expected to carry on the consolidation and efficiency measures outlined above and maintain them on an ongoing basis. An extremely important feature of the MSO is that a larger organization can afford to attract experienced, top notch business management personnel.

It is the management team that carries out day-by-day administrative tasks designated by the physician board of directors. The management team should be led by a medical practice administrator experienced in the unique characteristics of anesthesiology and pain management practices. The MSO will assemble a team of anesthesia support personnel that will provide local support to all the anesthesia groups served. When the MSO is formed, it will have the opportunity to take on competent practice business personnel who have been working for the founding anesthesiology groups.

Will the MSO Concept Work For You Financially?

The MSO works with the business expenses of the anesthesiology practice, which normally range from 5–10 percent. Assume the MSO will save 1–4 percent in reduced billing and other overhead costs. Multiply by practice patient revenue and divide by the number of anesthesia practice owners. If patient revenue per owner ranges from $600,000-$1,200,000, the range of potential savings is $6,000 to over $40,000 per anesthesiologist owner per year on a continuing basis.

An Appreciating Asset

An operating MSO with tens of millions of dollars of anesthesia practice revenue under management is a significant asset that increases in value to its owners over time as managed practices increase in size and new anesthesiology practices are added.

The MSO can be designed to keep its service fees to its anesthesiology groups as low as possible resulting in no profit. Alternatively, it may be engineered to produce profits that would be distributed with a possible small tax advantage to physician owners. If the owners want the MSO to expand through marketing activities it will allocate a portion of services fees to this activity. Keep in mind that the MSO physician board determines the service fee and the level of profit the MSO will produce.

What is Needed to Make This Work?

In order to set up the MSO, routine legal and accounting work by experienced professionals is required. What can be challenging, however, is the task of obtaining agreement from dozens of anesthesiologists who are owners of multiple independent anesthesiology groups. This will be successful only if a few leaders emerge during the planning process and if all anesthesiologists truly understand and buy into the concept. It will be very helpful to bring in someone who has already been through the process of forming a medical group MSO.

Anesthesiologists need to understand that although the MSO is not a panacea, change will be needed to maintain future independence. The MSO is, for many groups, the best alternative. Following the implementation of the Affordable Care Act there will be increasingly intense pressure on anesthesiology groups by hospitals to operate more efficiently, lower costs and provide more demonstrable value to hospitals. It will be a primary goal of the MSO management team to guide the MSO’s clinical practices on the path to maintain physician incomes while enhancing deliverables to anesthesia group facilities and other stakeholders.

MSO vs . Alternatives

Most anesthesiologists are organized in independent groups and it is probable that most want to stay this way. Hospital employment is not the route for anesthesiologists unless their salaries are so low that hospital employment at hospitaldetermined “fair market value” salaries is attractive. In the last few years, there has been a wave of practice buyouts. Anesthesiologists have traded their independence and ownership for cash and stock compensation, usually resulting in lower future income. For most anesthesiologists,a sale is neither possible nor desirable. The opportunity to “go big” and preserve independence while achieving economies of scale is the main attraction of the physician-owned MSO.

Single Tax ID Strategy

We previously emphasized that formation of an MSO does not create an entity that can collectively negotiate with payers on behalf of its anesthesiology group practices. What is possible, however, is to eventually clinically merge some or all of the practices served by the MSO. The least invasive method is to merge into a single tax ID “practice without walls” where business operations are centralized in the MSO but clinical practices remain at their respective hospitals and patient revenue streams and expenses are allocated to the individual clinical divisions. When multiple anesthesiology groups are organized via their MSO and financial operations are standardized and centralized, a subsequent merger into a single tax ID is not difficult and will be guided by the MSO management team.

MSO Expansion

After the MSO is up and running, additional anesthesia practices can be invited to become owners in the MSO by buying in at a share price established by the original owners. The share price for second tier groups will be higher than original groups because they do not have to contribute startup company “sweat equity” and emotional risk taken on by the original MSO founders. However, the second tier participants will obtain the immediate benefits of lower costs, seasoned management and a proven operation. The expanding MSO increases economies of scale as well as negotiation advantage with vendors. For example, if billing service fees are negotiated with an outsourced vendor on a sliding scale based on total MSO anesthesia group patient revenue, the billing fee percentage for the original MSO anesthesia groups will decrease as more practices have their billing outsourced to the selected vendor.

After the MSO is established and successfully operating for its anesthesiologists it can offer services to specialties other than anesthesiology, adding each specialty in a unique division. While billing for other specialties is different from anesthesia, management, accounting, human resources and other MSO services can be scaled to accommodate these specialties, providing increased economies of scale to all MSO owners.

Where To Go From Here

There needs to be a meeting of minds among the members of two or more anesthesiology groups. This usual impetus for action is the perception of negative influences on the business of anesthesiology from outside sources. A meeting of anesthesia group representatives to discuss the future is a good place to start. The groups will need to decide early on that a combination of anesthesiology groups is the path that should be followed and that there is strength in numbers. The physicians will also need to agree that groups of different size and care models need to be treated equally.

An immediate merger of multiple anesthesiology groups is a possibility, but this may be too large a leap for the groups involved. Formation of an MSO may be the answer. It would be wise to investigate the MSO concept further by contacting anesthesiology groups that have already implemented a successful physician-owned Management Services Organization.


Joe Laden has worked for anesthesiologists for 33 years and is currently President of Ohio River Valley Associates, LLC, a physician owned and governed management services organization. He can be reached at Joe.Laden@ onemso.com.