What is an MSO in healthcare, and does my practice need one?

The practice entity, often a professional corporation owned by licensed clinicians, bills patients and payers and collects the cash. It pays the MSO a management fee for everything non-clinical: front desk and billing staff, the lease, equipment, IT, HR and finance. The fee is the MSO's revenue and one of the practice's biggest costs. When investors own the MSO, the fee is also how profit reaches them, which is why regulators care how it is set.

The federal reference point is the Anti-Kickback Statute, which reaches business paid for by federal health care programs such as Medicare and Medicaid. A violation is a felony, punishable by a fine of up to $100,000, up to 10 years in prison, or both. Its safe harbor for management contracts asks for a signed written agreement that covers all the services, a term of at least one year, and a fee methodology set in advance that is consistent with fair market value and does not take into account the volume or value of referrals or other business between the parties.

Percentage-of-collections fees draw the most questions. In Advisory Opinion 98-4, OIG looked at a manager that would be paid its costs plus a percentage of the practice's net revenue while it also marketed the practice and ran its billing, and concluded the arrangement may involve prohibited remuneration. In 2020 OIG relaxed the safe harbor to accept a compensation methodology set in advance instead of a fixed aggregate amount, but the fair market value and referral conditions stayed.

State law is the second layer, and it varies. Corporate practice of medicine and fee-splitting rules decide whether a non-clinician may own the practice at all and whether a percentage fee is allowed; an MGMA article by healthcare attorneys lists percentage-of-revenue fees as an option only "where allowed". States are also writing new rules for investor-backed MSOs. California's SB 351, signed on October 6, 2025, bars private equity groups and hedge funds involved with physician or dental practices from controlling coding and billing decisions or the terms on which the practice contracts with payers. None of this is legal advice; have a healthcare attorney in your state review the structure before anyone signs.

If the clinicians own everything and plan to keep it that way, an MSO adds a second entity, a second tax return and an intercompany fee you have to defend, for little benefit. It makes sense when a non-clinician co-owner or investor needs a share of the economics in a state that bars them from owning the practice, or when several sites or entities share one back office (see how multi-location groups structure their entities).

If you run one, keep separate books for each entity. Check every month that the fee booked matches the formula in the agreement and that the MSO's receivable equals the practice's payable, and review a consolidated P&L. A practice entity whose profit leaves as the management fee will always look thin on its own.