Buyer and Seller Beware! Addressing Challenges with Healthcare Management Services Agreements

With efficiency as the name of the game in the face of declining revenues, many provider organizations are considering whether to outsource certain administrative and/or managerial functions. One vehicle to accomplish this is a management services agreement (MSA) under which one provider organization purchases specified services from another.

MSAs: Benefits and Compensation Challenges

Through an MSA, an organization can access specialized administrative capabilities (including strategic planning, compliance functions, revenue cycle optimization, and operational support) without the capital investment or potential organizational restructuring required for full integration. For those providing management services, MSAs provide stable revenue streams and market positioning opportunities. Most importantly, these arrangements allow organizations to leverage existing expertise and infrastructure efficiently, creating value for both parties when properly structured.

Determining appropriate compensation for these arrangements, however, requires a detailed understanding and sophisticated analysis of the identified services. MSAs require rigorous business justification and a comprehensive fair market value (FMV) assessment to deliver genuine value while protecting both parties’ interests.

Commercial Reasonableness: The Foundation of Defensible Arrangements

The cornerstone of a successful MSA lies in demonstrating that the arrangement makes legitimate business sense independent of any referral relationship between the purchaser and the service provider. This requires a thorough, fact-driven assessment addressing several fundamental questions:

• Does the arrangement fulfill a legitimate business purpose?

Organizations must clearly articulate why the management services are needed and how they align with operational objectives. Vague descriptions such as “operational assistance” are insufficient and invite regulatory scrutiny.

• Are the services adequately defined?

A detailed list of services and how they will be delivered by the service provider is crucial to setting expectations. This step is also key to determining FMV compensation.

• Is the service provider qualified?

The rationale for selecting a particular service provider should be documented, demonstrating that the chosen provider possesses the necessary expertise, resources, and track record to deliver the specified services effectively.

• Will the arrangement have independent contract oversight?

Independent oversight (e.g., a third-party audit or board approval to renew the arrangement) helps ensure arrangements truly serve legitimate business purposes and withstand internal and external scrutiny.

FMV Compensation: The Regulatory Imperative

The parties to an MSA must demonstrate that compensation meets FMV requirements under the Stark Law and Anti-Kickback Statute. To withstand government scrutiny, organizations need to demonstrate through comprehensive documentation that compensation for the identified services reflects market pricing.

An FMV appraisal resulting in a value conclusion requires consideration of all three valuation approaches—income, market, and cost—although one or more of these approaches may be rejected based on appraiser judgement.

• The cost approach evaluates the internal costs required to develop equivalent capabilities independently, providing a baseline for outsourcing decisions.
• The market approach analyzes compensation levels for comparable management services in similar markets, with careful attention to service scope and provider characteristics.
• The income approach quantifies the financial benefits the organization expects to receive from the management services, such as increased operational efficiency, cost savings, or revenue enhancement.

One way to view the application of these approaches is the “build or buy” decision analysis. The cost approach is the “build” perspective, while the market approach is the “buy” perspective. The income approach then serves as a reasonableness check, ensuring that after paying the management fee, the service recipient can still generate a reasonable profit.

Common Pitfalls in MSA Implementation

In our experience, parties to MSAs should avoid four common implementation pitfalls:

1. Organizations frequently discover that contracted management services overlap with existing internal capabilities, resulting in unnecessary costs and operational confusion. Careful scope definition at the outset of service determination prevents this oversight and supports the reasonableness of the arrangement.
2. Arrangements lacking clear performance expectations, regular deliverable reviews, and comprehensive documentation of provided services face increased regulatory risk and performance challenges.
3. Management companies must price their services appropriately relative to their experience, capabilities, resources, and risk taken in providing the services. When management services are not well defined, organizations can neither appropriately capture all associated direct and indirect costs nor determine a reasonable profit.
4. In the event deviations from comparable market rates occur, the lack of documentation justifying such deviation could compromise an organization unnecessarily.

Best Practices for MSA Development

Similarly, we have identified the following best practices to which parties should adhere in developing MSAs:

1. Include detailed written descriptions of services, performance expectations, reporting requirements, and accountability measures.
2. When using benchmark data to inform valuation decisions, ensure comparisons reflect similar service scopes, provider capabilities, and market conditions.
3. Maintain thorough records demonstrating the rationale for outsourcing decisions, provider selection criteria, and compensation determinations.
4. Implement regular review processes to ensure contracted services deliver expected value and remain aligned with organizational objectives.

Considerations for Long-Term Success

MSAs require ongoing attention beyond initial implementation. Organizations should regularly evaluate whether these arrangements continue to serve their intended purposes, adjust service scopes as operational needs evolve, and ensure compensation levels remain appropriate relative to market conditions and performance outcomes.

The regulatory environment surrounding financial arrangements between providers continues to face heightened scrutiny, making compliance monitoring an essential component of MSA management. Organizations must stay current with regulatory developments and adjust their arrangements accordingly to maintain defensibility.

MSAs represent valuable tools for healthcare organizations seeking operational support while maintaining strategic flexibility. Their complexity, however, demands careful attention to commercial reasonableness and fair market valuation. Organizations that approach MSAs with appropriate rigor and professional guidance can create arrangements that deliver genuine value while remaining compliant.

How We Can Help

PYA’s healthcare valuation professionals bring deep industry knowledge and regulatory experience to help organizations structure arrangements that satisfy both business objectives and compliance requirements. Establishing fair market value and commercial reasonableness requires rigorous analysis using established valuation methods, comprehensive documentation that meets regulatory standards, and independent third-party validation. Our subject matter experts can provide the specialized expertise necessary to navigate these complex regulatory requirements.