MSAs in the IV Hydration Space

The concept of an MSAs (management services agreement) can be confusing for IV hydration business owners.  If you’re curious, you should have these questions:  What is an MSA?  Why do I need one?  What does a “good” one have in it?

An MSA is a contract.  That’s the simple part.  It’s a contract between two entities, a clinical entity (e.g., company, professional corporation, partnership or LLC) and a business entity.  One entity does clinical things (e.g., provides IV hydration services).  The second one does all the business things that any healthcare business needs—reception, accounting, HR, financial management, marketing, sales.

Healthcare businesses need (or want) MSAs for two reasons:  first, because the law of the state where they operate requires only a specific clinician to own a clinical entity.  For instance, the law in a state might say a physician (and no one else) must own any entity that provides medical services.  And it might define even IV hydration services as a medical service.  In that state then, only a physician could own a business that provides IV hydration services.  In that event, non-clinicians (or clinicians without the requisite license) would/could own the business entity (but not the clinical one).  the second reason for using an MSA is because that’s what the entrepreneur thinks a buyer will want.  The entrepreneur will build an MSA based model (called an MSO model) in states that don’t require an MSO model because the entrepreneur believes private equity only wants to buy MSO modeled healthcare businesses.  And (if you haven’t figured it out already) the laws that drive this issue are state laws (not federal ones), which means there are at least 50 different moving pieces.  State laws change regularly (more often than federal ones) so this is something that needs to be checked periodically.

One of the difficult things in an industry where regulations are emerging (e.g., the IV hydration space) is to consider this question:  although the laws in my state don’t require an MSO model, are the legal developments that apply to the IV hydration industry such that we ought to do an MSO model anyway?   This sort of analysis assumes there is change afoot and it may “hit” your state sometime, and it’s best to adapt before the laws in your state are impacted.   This is a complex business decision that requires a thorough discussion with experienced counsel.

What about the MSA itself?  What should be in it?  This depends on state law since states do address the content of such agreements.  New York law, for instance, requires the management fees to be consistent with fair market value.  California law forbids percentage based MSAs (as do other states).  Regardless of the specific state laws applicable, a thoughtful MSA needs to address—

1. The detailed business-related services the MSO will provide to the clinical entity;
2. The clinical services that the clinical entity will provide;
3. A clear commitment on the part of both parties to adherence to state and federal laws;
4. The fees payable to the MSO;
5. Financial controls in place, such as a sweep account and lien provisions (to protect the MSA fees payable to the MSO);
6. The rights of the MSO relative to the clinical entity as it relates to issues like the ability to require a change of clinical owner;
7. Restrictive covenants like confidentiality, non-solicitations and noncompetes;
8. Termination provisions, particularly those that are based on threats to the business of either party (e.g., bad actor clauses); and
9. To the extent possible under state law, the possibility of the MSO sharing liquidity event proceeds if the clinical entity is sold.