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Fair Market Value for Telemedicine MSO Management Fees
The COVID-19 pandemic catapulted digital healthcare to prior-unseen heights in 2020, pulling forward demand for telemedicine services at an extraordinary pace. Even while growth in virtual visits has leveled off since the monthly 1,000% increases in the spring of 2020, telehealth usage rates are expected to remain significantly higher than their pre-pandemic levels. Investor interest in the sector is high as a result, with more funding dollars pouring into the segment over each of the past two years than ever before.
Many telemedicine organizations operate utilizing a “friendly PC/captive MSO” model, where a physician-owned professional corporation (PC) bills and collects from payers and patients and purchases management services and technology from a captive management services organization (MSO) through a management services agreement (MSA). The PC is typically responsible for employing or contracting with licensed healthcare professionals and retaining independent clinical decision-making separate from the MSO. The management fees paid by the PC to the MSO may be based on a variety of different structures, and are intended to represent fair market value for the bundle of services and technology provided by the MSO to the PC under the MSA.
Management Fee Structures: Management fees are typically structured using one, or a combination, of three main structures:
Percentage of revenue or collections (e.g. 20% of practice revenue)
Although straightforward in concept, use of a “fee-splitting” structure is prohibited in certain states (e.g. New York), and would therefore be a liability for a telemedicine MSO that is aimed at cross-regional or national coverage.
2. Fixed fee (e.g. $200,000 annually)
An annual fixed fee is set in advance, to be paid in installments over the course of the year. Although this method may also appear straightforward, technology start-ups typically have unpredictable growth rates, making the level of service required difficult to predict in advance.
3. Cost plus (e.g. MSO cost plus 30%, or 130% of MSO costs)
The “cost plus” method, which generally seems to be the best structure for startup stage telemedicine MSOs, allows for a sliding scale where fees correlate to the cost of the services provided by the MSO. One of the primary costs of a telemedicine MSO is the build-out of the technology platform. These technology investments are typically amortized, although they can also potentially be expensed/marked up if losses accumulated by the MSO are collateralized by a note for use in future periods.
MSO Services Provided: The specific services provided by the MSO and/or any MSO intellectual property involved has a significant impact on the FMV management fee. These may tend to fall into three main categories, each requiring a unique fair market value/markup analysis:
1. Administrative/Back-Office Support
MSOs typically provide billing and other back-office, general management, and administrative services.
2. Clinical Support
The MSO may provide clinical office space, medical supplies, clinical staffing, and a variety of other resources depending on state CPOM laws.
3. Software/Technology Platform
Telemedicine MSOs are required to make significant investments in their core telemedicine technology that requires unique technical expertise and managerial oversight.
4. Marketing
Telemedicine MSOs are typically responsible for marketing as well, which often involves a paid acquisition strategy for attracting new patients to the platform.
At BFMV we use an “FMV framework” to structure and refine a suitable approach for valuation of these arrangements. BFMV has developed a primer to outline our framework for assessing the FMV compliance of MSO management fees. This resource may be helpful for attorneys, physician groups, or MSO leadership teams in structuring management fees that seek to further their business goals while remaining compliant with CPOM and healthcare fraud and abuse laws and regulations.
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If you would like valuation assistance related to MSO management fees, please contact us.
