Five Things You Should Know Before Selling Your Medical Practice to an MSO
In January 2024 the percentage of physicians employed by corporate entities in the United States was 22.5%, up from 15.3% in 20191. After several years of rapid growth corporate physician employment has leveled off.
If you are considering selling your medical practice to a corporate entity, here are the five things you should know:
Item #1: Who Are the Corporate Buyers and What Is CPOM?
Corporate buyers of medical practices include health insurers, private equity firms, and umbrella corporate entities that own multiple physician practices. The growth in corporate employment of physicians is happening despite the fact that most states have implemented some form of restriction on the Corporate Practice of Medicine (CPOM).
CPOM restrictions essentially prohibit non-licensed individuals or companies from owning or operating a medical practice. The rationale behind these restrictions is to protect physicians’ autonomy in making medical decisions based on what’s best for the patient, without undue influence from corporate interests focused on profitability. Restrictions vary by state. For example, California2 and New York3 have very strict restrictions, while states like Arizona and Florida are more friendly to corporate ownership, allowing ways for non-licensed individuals to own a stake in medical practices.
Item #2: What Is an MSO and How Does It Work?
One way that some corporate buyers circumvent CPOM restrictions is by creating a separate entity, typically called a Management Services Organization (MSO), and contracting with this entity to help run the practice.
The typical structure involves a Professional Corporation (PC), owned by “friendly” physician(s), entering into a Management Services Agreement with an MSO to assist the PC in running the practice. The agreement outlines the operations structure and will typically look something like this:
- The PC holds insurance contracts and employs clinical staff like physicians and APPs (i.e. Nurse Practitioners, Physician Assistants)
- The MSO employs non-clinical staff, owns tangible assets, leases office space, and handles billing and collections on behalf of the PC
- In exchange, the PC pays the MSO a management fee, typically a percentage of collections
This structure creates a binding relationship between the practice and the MSO, giving investors in the MSO some comfort level with their investment.
Item #3: Potential Benefits of Selling to an MSO
Selling your medical practice to an MSO can offer several potential advantages compared to a traditional doctor-to-doctor sale. One of the primary benefits is the potential to receive a higher purchase price for your practice. MSOs often have access to greater financial resources and may be willing to pay a premium for a well-established, profitable practice.
Another significant advantage of selling to an MSO is the reduction in administrative burden. MSOs typically handle many of the non-clinical aspects of running a practice, such as billing, collections, and human resources. This can allow you to focus more on providing high-quality patient care and less on the day-to-day management of your practice.
Selling to an MSO can also be beneficial for your employees. MSOs frequently offer improved benefits packages, which can help attract and retain top talent. This can be particularly important for ensuring continuity of care for your patients and maintaining the reputation of your practice.
Finally, the deal structure when selling to an MSO may include equity in the MSO itself. This equity could potentially be valuable if the MSO continues to grow and expand. However, it is important to note that assessing the potential value of this equity can be challenging, and it may not always amount to a good investment. It is essential to carefully evaluate the terms of the deal and seek advice from a professional appraiser before making a decision.
Item #4: Potential Drawbacks of Selling to an MSO
One of the primary concerns is that MSOs need to generate returns for their investors, which may lead to changes in how the practice operates. The new management may seek to increase profits by focusing on higher patient volume, encouraging more procedures, and optimizing doctor time. This shift in priorities could potentially impact the quality of patient care and the work-life balance of physicians.
Another significant drawback is the loss of physician autonomy. When selling to an MSO, physicians may lose control over key decisions such as hiring, firing, and shaping the practice culture. This loss of control can be particularly challenging for physicians who have built their practice around a specific vision or set of values.
Additionally, the new ownership may not align well with the goals and aspirations of existing employed physicians. Some physicians may have been working towards practice ownership themselves and could feel discouraged or resentful if they are unable to compete with an MSO buyer. This misalignment could lead to staff turnover and a disruption in the continuity of patient care.
Finally, selling to an MSO involves dealing with a more sophisticated buyer, which can result in a longer and more complex transition process. The due diligence required to close the sale will likely be more extensive also.
Item #5: Key Considerations and Recommendations
Before deciding to sell your medical practice to an MSO, it is essential to carefully evaluate your objectives and priorities. Take the time to thoroughly review key factors such as your retirement savings, post-sale compensation, practice value, potential loss of autonomy, and work-life balance. This introspection will help you determine whether selling to an MSO aligns with your long-term goals.
One of the most critical aspects of the due diligence process is understanding the total consideration you will receive from the sale. If this consideration includes equity in a new venture or existing MSO, assessing its value can be challenging due to the lack of transparency and control. To mitigate this risk, we recommend aiming to receive at least your practice’s fair market value in cash and treating any additional consideration as a potential bonus. Seeking the advice of a valuation professional can provide valuable insights and help you make an informed decision.
Throughout the due diligence process, it is essential to engage the services of a skilled lawyer to review contracts. MSO buyers are often more sophisticated, and their requests for information can be extensive and complex. Having experienced professionals on your side can help you navigate the process more effectively and protect your interests.
Conclusion
Selling your medical practice to an MSO is a complex and highly personal decision that requires careful consideration. By thoroughly evaluating your objectives, understanding the total consideration, and engaging the right professional support, you can make an informed decision that aligns with your long-term goals and financial well-being. Remember, taking the time to conduct due diligence and seek expert advice can help you navigate this process with confidence and ensure the best possible outcome for yourself, your staff, and your patients.
[1] Physicians Advocacy Institute, https://www.physiciansadvocacyinstitute.org/PAI-Research/PAI-Avalere-Study-on-Physician-Employment-Practice-Ownership-Trends-2019-2023; Accessed February 9, 2025
[2] California Hospital Association, https://calhospital.org/wp-content/uploads/2022/11/BRG-CPOM-Report-Final-Draft-031622.pdf; Accessed February 9, 2025[3] New York State Education Department, https://www.op.nysed.gov/corporate/corporate-practice-professions; Accessed February 9, 2025
