Practice management agreements: the core of the MSO-group practice alliance - management service organizations

Healthcare Financial Management, Dec, 1996 by J. Mark Waxman

Physician group practices increasingly are negotiating practice management agreements with management service organizations (MSOs). Understanding the issues surrounding the creation and implementation of practice management agreements is critical to maintaining a successful MSO-group practice relationship.

The scope of the management commitment must be established and the agreement must provide sufficient flexibility to allow the physicians and MSO to mutually benefit from marketplace changes.

As healthcare organizations realign to respond to and take advantage of new financial incentives, one type of relationship has become increasingly attractive - the partnership between a management service organization (MSO) and a physician group practice. MSO-group practice partnerships provide opportunities to:

* Create an entity that provides equity potential to physicians through part-ownership of a management company capable of sustained growth;

* Allow capital investment in physician group practices;

* Enhance or transfer goodwill value in the form of managed care contract participation through a multitude of high-quality, geographically dispersed groups that all contract with a single MSO; and

* Purchase high-quality management services, which may include advice regarding capital commitments and, at times, direct infusions of capital.

The relationship between MSOs and physician group practices is conceptually a simple one. Basically, the relationship is contractual, defined by a practice management agreement between the MSO and the physicians or physician group. But as the healthcare delivery system has evolved, MSOs have become publicly traded companies, and physician group practices have become structurally more complex. As a result, practice management agreements also have become more complex.

An understanding of the issues surrounding the creation and implementation of practice management agreements is critical to helping MSOs and group practices sustain their partnerships. Therefore, it is important to carefully articulate the scope of the management commitment and to ensure that sufficient flexibility exists to allow the MSO and physicians to mutually benefit from marketplace changes over time.

Precontracting Activities

Before engaging in substantive contractual discussions, each party should conduct a meaningful due diligence investigation of their prospective partner. The parties should exchange financial and other relevant information, subject to the terms of a prenegotiated confidentiality agreement.

The due diligence should evaluate:

* The stability of the organization;

* The leadership of the organization;

* The organization's management depth and track record;

* The organization's ability to provide capital for future projects; and

* Cultural compatibility.

In addition, to help ensure the success of the business partnership, those individuals of the respective organizations who will be responsible for implementing the management arrangement on a day-to-day basis should be introduced and encouraged to develop a working relationship.

Basic Partnering Issues

If, following due diligence activities, the MSO and physician group practice decide to move forward to formal contractual discussions, several basic issues about the nature of the partnership need to be considered in order for the parties to successfully negotiate an agreement.

Both the MSO and the group practice should attempt to develop a joint three-to five-year business plan. If, as part of this plan, the MSO or an affiliated physician group wishes to have the option to acquire the group practice and/or its tangible assets, provision for such acquisitions must be made.

In addition, if the group physicians wish to be able to acquire an equity stake in the MSO or a related entity, such a provision must be incorporated into the agreement. Critical issues to be addressed related to such a provision include the mechanism for acquisition of the equity interest (direct purchase, stock for assets, options) and the valuation mechanism or formula to be used.

Practice management agreements also should include specific provisions regarding how practice decisions are to be made, particularly those related to capital investments and the development of new markets.

Terms and Conditions

Several key elements must be included in the terms and conditions of the practice management agreement:

Services to be provided. The agreement must clearly delineate the services to be provided by the MSO and sanction the MSO's authority to provide these services. The contracting parties together determine the type of services that the MSO will provide, such as turnkey management and operations, including facilities, equipment, nonlicensed personnel, and supplies.

Other agreements might stipulate a more limited range of services, such as marketing, credentialing, billing and collection, purchasing, insurance, accounting, legal services, and management information systems. Whatever the arrangement, the parties must ensure that the MSO has the administrative and financial ability to fulfill it.