Management service organizations (MSOs) can be defined as “a healthcare specific administrative and management engine that provides a host of administrative and management functions necessary to be successful in the ever changing healthcare environment.”¹ MSOs are primarily utilized by non-physicians as a vehicle to legally owning an entity that provides administrative support to a medical practice’s operations.² These entities carry out a variety of duties, including (but not limited to) those related to:

1. Financial Management;
2. Business Operations;
3. Human Resources Management;
4. Staff Education/Training;
5. Coding, Billing, and Collections;
6. Office Space Management;
7. Provision of Electronic Health Records (EHRs) and Medical Equipment;
8. Regulatory Compliance Oversight/Management;
9. Contract Management; and,
10. Risk Management.³

MSOs are typically formed to transfer the non-clinical business functions of a medical practice to a separate (although often friendly/related) business entity that may be owned by non-physicians.⁴ Most states only allow medical practices to be owned by physicians, which can limit the number of investors in a medical practice, as well as the financial value of the practice.⁵ MSOs are a way for non-physicians to receive revenue from a medical practice’s operation.

MSOs can be formed as a general business corporation or a limited liability company, a decision that is typically guided by accounting and legal considerations.⁶ MSO entities can be formed outside of the state or inside the state a medical practice operates in.⁷ After the MSO is formed, the MSO will enter into a management services agreement (MSA) with one or more medical facilities or practices, which serves as the start of a business relationship.⁸ The MSA will include details of all the services which the MSO will provide, as well as services that an MSO may not provide (e.g., clinical services).⁹ While MSOs are not required to provide a minimum number of services, they commonly provide financial services, utilization and care management services, information systems support, administrative and actuarial services, network development services, and quality improvement and reporting.¹⁰

The formation of an MSO can benefit medical practices or health systems in multiple ways, including:

1. Improved cost and quality;
2. Increased efficiency due to centralization of management and administrative function; and
3. Enticement to attract partnerships or expand.¹¹

Joining an MSO will often provide access to the best pricing on services and supplies and allow practices to outsource as many non-clinical services as they wish. MSOs (particularly large ones) can obtain preferred pricing on healthcare insurance and medical supplies, and pass those benefits on to practices. Many MSOs also provide services for billing and/or discounted electronic health record (EHR) systems where members can all utilize the same platform.¹² These services provide cost efficiencies and increased purchasing power that can result in a competitive advantage for smaller medical practices.¹³

The rapid growth of managed care and the increased integration among providers in the mid-1990s led to the acceleration in the growth of MSOs; however, by the early 2000s, this trend reversed, effectively breaking up most of the MSOs in the healthcare industry.¹⁴ The 2010 passage of the Patient Protection and Affordable Care Act (ACA) set off MSOs’ modern popularity,¹⁵ becoming ubiquitous in recent years among healthcare entities, due to pressures within the healthcare industry to reduce costs, implement new technologies, and comply with increasingly complex regulations.¹⁶ In particular, MSOs are becoming increasingly popular among healthcare entities seeking to better manage costs, implement new technologies, negotiate with payors, and comply with changing federal and state regulations.¹⁷ The scope of services typically provided by an MSO may be characterized by two classifications, either: (1) a comprehensive MSO, or (2) a limited MSO. The various levels along the spectrum of MSO activities, ranging from comprehensive to limited, are set forth in the below exhibit.

The scope of MSO services may also reflect the specific needs and concerns of the healthcare entity contracting with the MSO. For example, as fraud and abuse scrutiny increases and the claims submission process for reimbursement becomes significantly more complex, MSOs may choose to focus their services on coding, billing, and other revenue cycle management tasks. Consequently, future installments in this three-part series on the valuation of MSOs will review the reimbursement and regulatory environments in which MSOs operate and the technological advancements being leveraged by MSOs.