The Healthcare Attorney’s Guide to Developing More Effective Management Agreements

When entrepreneurs and provider organizations work together to implement new services, improve existing services, or streamline operations, they often use management services agreements (MSAs) — and healthcare attorneys play a key role in ensuring these agreements are properly formatted and implemented. For example, a physician network may partner with a digital health technologies developer to implement new remote monitoring and diagnosis capabilities. MSAs are also common in merger and acquisition situations where a health system that purchases a surgery center contracts with the former owners to continue to manage the facility.

One of the hurdles attorneys face in developing management services contracts is compliance with the Anti-Kickback Statute (AKS). The AKS prohibits business relationships between provider organizations that offer financial incentives for referring patients to services that are paid for by Medicare, Medicaid, and other federal health insurance programs.

The MSA Safe Harbor

The AKS includes a safe harbor that specifies the requirements for permissible management services agreements. These requirements include:

1. The agency agreement is set out in writing and signed by the parties.
2. The agency agreement covers all of the services the agent provides to the principal for the term of the agreement and specifies the services to be provided by the agent.
3. The term of the agreement is not less than 1 year.
4. The methodology for determining the compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arm’s-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal health care programs.
5. The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any State or Federal law.
6. The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services. (Citation: 42 CFR § 1001.952 – Exceptions)

These requirements are well known and commonly addressed in MSAs to achieve regulatory compliance, but they often raise concerns from the parties that they limit flexibility in establishing the most successful business arrangements.

Marcum’s experienced healthcare consultants have identified an approach for working with healthcare attorneys and their clients to achieve both regulatory compliance and business success.

Common Concerns

Agents proposing or leading a new venture are often concerned about whether the management fee will cover all costs and provide an adequate return. In many cases, agents are concerned about the requirement for a fixed management fee, especially if growth is projected. Agents also want to be sure payments are guaranteed and that there are provisions for default.

The principal in an arrangement wants to be sure the agent will perform properly, adequate resources are dedicated to the venture, and the management fee is reasonable. Some think that the management fee is generally for a fixed, minimum one-year term is too strict.

The approach Marcum developed to address these concerns incorporates the following key safe harbor requirements:

• The methodology for determining the management fee is set in advance and does not change;
• The agreement is for one year (or longer at counsel’s and the parties’ agreement; in that case the management fee is set for one year);
• The agreement clearly defines and covers all the services to be provided; and
• The management fee is consistent with fair market value in arm’s-length transactions.

We have found that focusing on the costs of a management arrangement is a technique that addresses many concerns from both parties. For the agent, it satisfies the concern about adequately covering expenses. For the principal, it satisfies the concern about ensuring only reasonable and necessary expenses.

Reviewing costs generally happens through a budget development and review process. Budget development should include identifying startup costs and creating a pro forma operating budget. Startup costs include capital expenditures, financing costs, organizational costs, direct expenditures for executive and staff time, and operating expenses during startup. The pro forma operating budget should generally cover three years and include traditional line-item expense details, rather than taking the form of a functional budget that aggregates expenses into broad categories.

A budget that is well reasoned and agreed upon by the parties can address other concerns and regulatory requirements as well. First, it provides key information used in industry standard methodologies for determining fair market value, including a rate of return that is acceptable to both parties and commensurate with the relevant facts and risks of the investor. Second, a good budget can help an attorney and the parties develop the fixed-rate payment arrangement required for most management agreements. Healthcare attorneys have varying views on the best structure for fixed rates, but regardless of the how the management fee is structured, developing an accurate budget is a fundamental step in getting the numbers right.

Marcum’s healthcare consultants have a long history in supporting the role that healthcare attorneys play in ensuring their clients’ success and improving the healthcare system.