Recent MSO Litigation Reminds Us to Thoroughly Vet Investment Opportunities

Management Services Organizations, or MSOs, provide administrative services to medical practices. These services may include human resources, contract management, or coding and billing, for example. MSO arrangements can be risky if physicians who refer to the managed clinical practice are investors in the MSO. According to the Department of Justice (DOJ), the United States has recovered over $36 million in MSO-related kickback settlements, including recoveries from 43 physicians.

Litigation and settlements involving allegations of kickbacks paid for physician referrals through illegally structured MSO arrangements by True Health Diagnostics LLC (True Health) and Boston Heart Diagnostics Corporation (BHD) illustrate the government's interest in stopping improper MSO investments and payments. Two more cases in a long string of judicial action involving True Health and BHD were wrapped up recently:

On November 30, 2023 – Five defendants, including True Health and BHD laboratory executives and hospital executives from New York, Pennsylvania, Tennessee, and Texas, were found guilty of conspiring to violate the Anti-Kickback Statute (AKS) following a 7-week trial. 18 individuals were originally indicted for conspiring to commit illegal remunerations in violation of the AKS on January 12, 2022. Of the 18, 12 pled guilty, and one was convicted in July 2023. The defendants face up to five years in federal prison at sentencing.
On December 4, 2023 – A hospital executive in Lexington, TX, and two physicians from Cleburne, TX, agreed to pay a total of $880,199 to resolve False Claims Act allegations involving the (AKS) and the Stark Law as alleged in the May 26, 2022, DOJ complaint. It alleged that New York-based True Health and Massachusetts-based BHD executives and employees conspired with several small East Texas hospitals, including Rockdale Hospital dba Little River Healthcare (LRH), to pay physicians to induce referrals for laboratory testing performed by BHD or True Health within hospital facilities. Allegedly, True Health and BHD affiliated with multiple MSOs to conceal the scheme and to more effectively market to potential referring doctors. The doctors were actively sought out by MSO recruiters and offered opportunities to buy ownership interests in the MSOs. Participating physicians would then receive referral-based payments that were labeled as MSO investment returns. In one complaint, it is noted that MSO payments to physicians were not based on returns from genuine investments. Allegedly, one physician received a 17,000% return on his MSO investment, and other physicians received similar-sized returns. According to the complaint, the problematic payouts were allegedly disguised as "investment returns" from at least eight different management services organizations (MSOs).

Additional announcements related to True Health and BHD include the following:

On June 28, 2022, DOJ announced that 15 named physicians agreed to pay a total of $2,831,280 to resolve related False Claims Act allegations involving the AKS and the Stark Law.
On March 22, 2022, a DOJ press release named ten additional settling physicians and another settling CEO. Brett Markowitz, the founder and CEO of Florida Rejuvenation Holdings, LLC, was allegedly paid by True Health for referrals. The physicians agreed to pay $1,680,430 to resolve allegations and cooperate with the investigation; Markowitz agreed to pay $185,000 and cooperate fully as well.
According to a January 2022 article, seven physicians and a Chief Executive Officer (CEO) in Sherman, Texas, will pay over $1.1 million to settle similar allegations and have agreed to cooperate fully with all future litigation involving other parties.
In late 2015 and early 2016, True Health and a partner company allegedly offered Richard DeFoore, CEO of Jones County Regional Healthcare d/b/a Stamford Memorial Hospital (Stamford) in Texas, an arrangement under which Stamford could profit by billing for diagnostic laboratory tests. According to the DOJ, the United States announced a settlement with him. DeFoore agreed to pay $50,000 and cooperate with investigations of and litigation against other parties; he is also excluded from participation in federal healthcare programs for three years.

BFMV offers valuation consulting services toward compliant arrangements for MSOs, among many types of healthcare transactions. The BHD/True Health complaints highlight several valuation-related situations that we would advise physicians and healthcare executives to avoid:

The MSO is not structured to prevent management's interference with — or undue control over — clinical decision-making
The MSO promises high financial returns from nominal investments (i.e., low-risk/high-return opportunities)
MSO investment returns are based on factors or formulas other than ownership percentage (i.e., returns that are linked to referrals)
MSO returns are predicated on physician practice patterns changing significantly following the investment
Under the MSO arrangement, no notable services are being provided, and/or the MSO fee is not fair market value for the management/administrative services being provided
MSO returns are paid before investment payments are made or deposited

Commercial reasonableness and fair market value payment terms are important components of a compliant MSO relationship. Contact BFMV for a consultation or if you have valuation questions about FMV MSO arrangements.