Here at HVG, we’ve seen dozens and dozens of various entity formations of management services organizations (MSO) and management services agreements (MSA) that require an FMV opinion. As an appraiser, we encounter certain unique challenges when it comes to opining to an FMV management fee. In certain states with restrictions on fee splitting and/or corporate practice of medicine (CPOM) in-force the management fee cannot be contracted (or expressed) as percentage of reimbursements or patient volume. And second, there exists no relevant and/or sufficient market data for management fees to utilize as a suitable comparison, similar to physician compensation or private company transaction data. This begs the question of what does a proper and defensible FMV opinion for management fees look like?
The most appropriate method for an appraiser to utilize is what’s called the cost-plus method. Meaning, the MSO charges the provider company the actual expenses incurred plus a FMV mark-up. The same goes for supplies. Sometimes the MSO is called upon to procure/source various medical supplies. Therefore, the appraiser applies a normal and customary mark-up on the supplies purchased by the MSO on behalf of the provider entity. It’s worth noting that a typical MSO purchases supplies that will likely all be consumed so there is no inventory-carrying risk.
Depending the medical specialty and type of management services, a fixed rate management fee can be expressed which is a function of the number of FTE physicians. MGMA reports bifurcated cost data on a number of specialties.
Often times there are one-time set-up costs or on-boarding costs that the MSO incurs. Again, these costs should be passed through to the provider entity along with a normal and customary FMV mark-up. In many situations, the management company may not know what the costs will be or the amount of time needed to complete the management services. I believe it’s unreliable and entirely too imprecise for an appraiser to opine on the amount of time needed to sufficiently and satisfactorily complete specific tasks such as credentialing, recruiting, interviewing, EMR setup, bookkeeping, scheduling, purchasing, coding, etc.
Due to the varied, non-homogenous nature of management services, an FMV opinion for a management fee should be expressed within a range. FMV is not a precise number and management services can differ rather significantly. Finally, I believe it’s permissible to utilize a % of reimbursement as a sanity-check or a “not-to-exceed” rate for the management fees. There exist ample amounts of market data on management fees paid as a % of revenues by ASC, SNF, hospitals and home health agencies that the appraiser can use as a proxy for FMV management fee.
It’s understandable that costs and the number of FTE providers may not be the same each month because of growth and other factors. It may be such that the management fee is reviewed periodically to ensure the actual fees paid haven’t exceeded the “ceiling” rate or a percentage of net collections.