Is an equity MSO the right choice for you?
20 April 1999
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By Don Hicks
For years, equity management services organizations (MSOs) sounded like one more health care fad trumpeted by zealous consultants eager to get engagements. Elegant and intriguing on paper, equity MSOs never quite worked. Now, however, equity MSOs are achieving the kinds of results health care executives crave. This article focuses on how to evaluate whether an equity MSO is for you as well as the nature and possible benefits of equity MSOs. Self-Assessment The following questions will help you determine if the equity MSO is right for you: • Are you eager to maintain your independence, while still being involved in managed care contracting? • Do you need and want the long-term management support that can come only from a group? • Do you need capital for information systems and other practice management upgrades? • Do you want to collect clinical data to improve patient outcomes? • Are you committed to growing practice volume while still managing expenses? • Do you want to compete head to head with other medical groups? • Are you committed to local health care and steering clear of Wall-Street driven practice management firms? • Do you want access to as much of the health care premium dollar as possible? • Are you willing to participate in a risk-sharing relationships with a hospital? If you answered yes to at least half of these questions, an equity MSO is an opportunity worth considering. In an equity MSO a cluster of primary care physicians creates a medical group with one tax identification number while still holding on to the style and flavor of the original practices. Each physician contributes the same dollar value for capitalization, typically using the fair market value of the hard assets within a practice. At the same time, a local hospital agrees to match the value of physicians’ combined assets in cash. These two equal contributions form the capital used to launch the MSO. The MSO board usually includes equal representation from the new medical group and the hospital. The majority of states allow the president and vice-president of the MSO’s board to be physicians with the total board divided evenly. If the MSO needs more capital to cover the purchase of information systems and other start-up costs, the hospital can deliver that capital without affecting the MSO’s governance or ownership rights. Additional capital can be loaned to the MSO in the form of debt, but the MSO must repay the debt with interest before making a distribution to the MSO owners. How It Happens Physicians form a group. Physicians form a true legal group, which can develop from an existing group, independent practice association (IPA), or simply convincing physicians within a market to come together. Although group members are most likely to be primary care physicians, they can also come from the ranks of subspecialists. Creating a group with a single tax identification number, as detailed below, facilitates physician involvement in governance, enhances managed care contracting clout and creates a platform for improving clinical outcomes through shared information systems. Physicians find a hospital partner. In this step, physicians ideally focus on a potential hospital partner where most physicians’ patients are hospitalized. Most commercial managed care plans budget dollars equally for the hospital component of a premium as the combination of the premium dollars allocated for the professional component of primary and subspecialist physicians. Participating in risk pools that cover both the hospital and physician components is important to clinical management and economic reward. Physicians create a new organization. Physicians create a single tax identification entity and transfer title during the initial capitalization and start-up. Because the physician group and MSO both need funds to start a practice, each physician owner must contribute to the funding with cash, practice, assets or a combination of the two. For example, suppose the new group and MSO agree that each physician must contribute $25,000, but the practice hard assets of one physician, Dr. Young, are only $10,000. Dr. Young would need to contribute $15,000 in cash and other assets. Dr. Young situation’s is different from that of Dr. Hardtz. Because Dr. Hardtz has practice hard assets of $25,000, his ownership can be funded exclusively through the contribution of practice assets in the form of computer terminals, office supplies and equipment. The medical group uses the aggregate value of these assets to fund their half of the initial capitalization cost of the newly created MSO. The hospital, in turn, provides cash to fund the MSO’s start-up. As a result, the medical group and hospital each own half interest in the MSO—either in stock or as part owners. For example, assume that 50 primary care physicians each put in $25,000 of assets to form a new group. The hospital would then match the total of $1.25 million (50 times $25,000) to provide for MSO start up and operating expenses. The medical group and hospital would then each have an equal number of board members. Because the legacy of distrust between hospitals and medical groups, many MSOs prefer to have physicians functioning in the roles of board president and vice-president while also operating with super majority voting requirements. Physicians cope with size and services. To develop adequate resources to add value to physician practices, 40 to 50 physicians need to be involved in MSO development. However, not all of these physicians need to be members of the group since the MSO can always market its services to non- member specialists or other non-aligned primary care practices. Linking with a significant number of practices is vital in covering the costs of information systems, which can run from $1 million to $2 million. The purpose of any MSO is to provide support to physicians in the form of information technology, billing and collections, practice operations, supplies and equipment, and managed care contracting. The MSO board should decide which services will be delivered and at what cost. In most cases, all physician staff become MSO employees. The MSO, in turn, administers a common wage and salary schedule, and provides staff supervision, training, and performance appraisal. While some physicians are troubled by their loss of direct control over staff, the majority of physicians see office functions improve with focused management. One about to be formed equity MSO in Washington state completed an analysis of the costs and overhead of 25 primary care practices. While physicians were distressed to learn that their current overhead was in excess of 64 percent, they were pleased to learn that an MSO could reduce overhead to acceptable national levels of 54 to 56 percent and boost physicians’ incomes 8 to 10 percent. MSO Checklist But what can physicians realistically expect from MSOs? Here’s a checklist of what you can expect. The MSO should provide: • Improved quality of management for practice sites over a reasonable period of time such as one to two years. • Better access to management tools and system-oriented processes. • Benefit packages equal to or better than those delivered by the average physician practices. • Systematized central billing office operations capable of dealing with numerous managed care plans. (This centralization not only frees up patient care space to boost practice volumes and revenues, but also allows staff to focus more closely on patient care.) • Management information systems that allow physicians to manage risk through features such as claim adjudication, utilization management, preauthorization and certification, and financial management of contracts and risk pools. • Clinical information that produces better patient outcomes From the patient’s point of view, the most important benefit of the equity MSOs is physician ownership. With the equity MSO, physicians still decide how patients are managed, with no corporation lurking around the corner to tell them how to practice medicine. Physicians, in turn, retain a sense of professional autonomy and practice control, while reaping the rewards of increased access to resources such as information technology, billing and collections, and staff management. Don Hicks is a vice-president with Health Directions, Inc., a Chicago-based MSO turnaround and practice management firm.
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