MSO and Friendly PC Structures for NY Medical Practices

New York is one of the most strict states in the country when it comes to who can own and operate a medical practice. The corporate practice of medicine doctrine, codified in the Education Law and developed through Department of Health and Office of the Professions guidance, prohibits non-physicians and corporate entities from owning a medical practice or employing physicians to deliver clinical care. The doctrine has been on the books for nearly a century and shows no sign of relaxing. At the same time, capital, technology, and operational expertise from non-physician sources are essential to running a modern medical practice. The market's answer to this tension is the Management Services Organization, or MSO, paired with a physician-owned professional corporation, often called a Friendly PC. When properly structured, the arrangement allows physicians to own and control the clinical entity while a non-physician MSO provides management, operations, and back-office services under a long-term contract. When poorly structured, the same arrangement can be challenged as a sham vehicle for unlawful corporate practice, with consequences ranging from rescission of the management agreement to professional discipline against the participating physicians. This guide walks through how the structure works, what the regulators look for, and the contract terms that hold the arrangement together. For broader context on healthcare regulation in New York, our Stark and Anti-Kickback guide covers the federal fraud and abuse framework that interacts with state corporate practice rules, and our fee sharing arrangements guide covers the related state-law fee splitting prohibitions.

What the Corporate Practice Doctrine Actually Prohibits

The corporate practice of medicine doctrine in New York is grounded in Education Law Section 6522 and related provisions, and reinforced by Public Health Law and Department of Health regulations governing Article 28 facilities. The basic rule is that the practice of medicine in New York may be conducted only by a licensed physician acting individually, or by a Professional Corporation (PC) or Professional Limited Liability Company (PLLC) whose shareholders or members are all licensed physicians. A general business corporation, an LLC owned by lay persons, or any entity with non-physician owners cannot deliver medical care or employ physicians to deliver medical care.

The doctrine reaches further than ownership. New York also restricts who can control a medical practice, who can share in fees from medical services, and who can hold themselves out as providing medical services. A non-physician entity that exercises clinical control, takes a percentage of medical fees, or markets itself as a medical practice can be found to be engaged in unauthorized corporate practice even if technically the physicians remain the nominal owners.

The penalties for violations are real. A physician participating in a sham arrangement faces professional discipline by the Office of Professional Medical Conduct (OPMC), including license suspension or revocation. The non-physician participants face civil penalties and possible referral to the Attorney General. Management agreements found to facilitate corporate practice are voidable, meaning the courts will not enforce the MSO's right to its management fees. In litigated cases, courts have ordered disgorgement of fees collected under invalid agreements.

These penalties are serious enough that any New York medical practice with non-physician investment or management has to be structured with care. The MSO/PC structure is the standard solution, but only if it is structured correctly and operated consistently with the documents over the long run.

The MSO/PC Architecture

The standard structure separates the medical practice from the business operations into two distinct entities. The Friendly PC is owned by one or more licensed physicians and holds the clinical license, the malpractice insurance, the patient relationships, and the right to bill insurers and patients for medical services. The MSO is owned by the non-physician investors or operators and provides management services to the PC under a long-term Management Services Agreement (MSA). The MSO does not own the PC, employ physicians, or share in clinical fees. It receives a fixed or formula-based management fee for the services it provides.

The two entities are legally distinct and each has its own books, bank accounts, employer identification number, contracts, and tax filings. The PC employs the clinicians and bills for medical services. The MSO employs the administrative staff and bills the PC for management. The cash flows in one direction (the PC pays the MSO under the MSA), and the management fee is structured to compensate the MSO for its services without crossing into clinical fee splitting.

What makes the structure work is the MSA. A well-drafted MSA defines the services the MSO provides, the fee for those services, the duration of the relationship, and the terms under which the MSO can be replaced. It also specifies what the MSO does not control, including all clinical decisions, hiring and firing of clinicians, and any matter that would constitute the practice of medicine. The MSA is the primary document that regulators and courts will examine when evaluating whether the structure is bona fide.

What the MSO Can Legally Do

The MSO's role is broad on the business side and narrow on the clinical side. The legitimate scope of MSO services in New York includes the following areas.

• Office space and facility management. The MSO can lease space, sublease to the PC, manage build-out and maintenance, and own the medical equipment that the PC uses under a separate lease.
• Non-clinical staffing. The MSO can hire and pay administrators, billers, schedulers, receptionists, IT staff, and any other personnel who do not deliver clinical care or hold positions requiring a clinical license.
• Billing and collections. The MSO can manage the revenue cycle, including coding support (within compliance limits), claims submission, follow-up, and collections, on behalf of the PC.
• IT, EMR, and technology. The MSO can own and operate the practice management system and electronic medical record platform and license access to the PC.
• Marketing and patient acquisition. The MSO can run marketing programs, manage the website, handle SEO and digital advertising, and operate referral programs that comply with anti-kickback rules.
• Compliance and credentialing support. The MSO can provide administrative support for licensing, credentialing, and compliance programs, while the PC retains responsibility for clinical compliance.
• Procurement. The MSO can negotiate vendor contracts, group purchasing arrangements, and supply chain management on behalf of the PC.

What the MSO cannot do is exercise clinical control. The MSO does not decide which patients the PC will accept, what services the PC will provide, what protocols the PC will follow, or which physicians the PC will hire or terminate. Clinical decision-making rests with the PC and its physician owners. The MSA should make this division of authority explicit and clear.

Structuring the Management Fee

The management fee is the most heavily scrutinized element of the structure. The fee has to compensate the MSO fairly for services rendered, but it cannot be structured in a way that effectively transfers clinical fees to the non-physician owners. The two principal risks are fee splitting under New York Education Law and Anti-Kickback Statute exposure for any practice that bills federal health care programs.

The traditional safer formulation is a fixed monthly fee, set at fair market value for the services provided, calibrated to cover the MSO's actual costs plus a reasonable margin. A fixed fee removes any direct linkage between MSO compensation and clinical revenue. The downside is that fixed fees can become uneconomic if the practice grows or shrinks substantially, requiring periodic renegotiation.

Many MSAs use a percentage-of-revenue or percentage-of-collections formula. This approach is more economically flexible but raises both fee splitting and Anti-Kickback concerns. The defense is that the percentage is calibrated to the actual cost of services rendered and represents fair market value compensation. Practices using percentage-based fees should obtain a fair market value valuation from a qualified healthcare valuation firm and should document the reasoning for the percentage chosen. The percentage should be defensible as compensation for services rather than as a share of professional revenue.

Hybrid structures combine a base fee for fixed-cost services with a smaller variable component tied to volume metrics that are defensible (such as patient encounters managed) rather than to revenue or collections. Hybrid structures sometimes survive scrutiny better than pure percentage arrangements while preserving some economic flexibility.

Whatever the structure, the management fee should not vary based on referrals to other entities owned by the MSO or its principals, which would trigger Anti-Kickback exposure on top of state fee splitting concerns. The fee structure should be documented with a contemporaneous fair market value analysis and reviewed periodically as the practice's economics evolve.

The Friendly PC: Choosing the Physician Owner

The PC must be owned by a licensed physician, but the choice of physician matters more than transactional documents alone. The PC's nominal owner is the only person legally empowered to make ownership decisions for the practice, including dissolving the PC, replacing the MSO, or selling the practice. If the relationship between the physician owner and the MSO breaks down, the physician's legal rights as the PC owner are paramount under New York law, and courts will not enforce side agreements that purport to override those rights.

Sophisticated MSO/PC arrangements address this risk through a combination of mechanisms. The MSA itself runs for a long term, often 10 to 30 years, with substantial early-termination penalties to make MSO replacement economically unattractive. A separate stock pledge or stock transfer restriction agreement gives the MSO certain rights with respect to the physician's PC stock, although these arrangements have to be carefully structured to avoid being treated as backdoor non-physician ownership.

Some structures use a rotating or successor physician owner mechanism, where the original physician owner can be replaced by a designated successor under defined circumstances, with the new physician stepping into the same MSA. The transition mechanism has to respect the corporate practice doctrine and cannot be used to install a physician who has no genuine ownership role.

The friendliness of the friendly PC is operational, not legal. The physician owner has to actually function as an owner, with real decision-making authority over clinical matters, real fiduciary responsibility, and real economic stake in the practice's success. Arrangements where the physician is paid a flat salary, has no upside, and has no meaningful authority are at the highest risk of being challenged as sham structures.

Federal Layers: Anti-Kickback, Stark, and Beyond

New York's corporate practice doctrine operates alongside the federal fraud and abuse framework. Practices that bill Medicare, Medicaid, or other federal health care programs face additional restrictions under the Anti-Kickback Statute and the Stark Law. The MSO/PC structure has to comply with both layers simultaneously.

The Anti-Kickback Statute prohibits the offer, payment, solicitation, or receipt of any remuneration in return for referrals of federal health care program business. Management fees that include any element of compensation for referrals trigger AKS exposure. Even fees that are nominally for services can be challenged if they exceed fair market value or if any portion can be allocated to referrals. The personal services and management contracts safe harbor provides a path to compliance but requires specific contractual elements, including a written agreement, a term of at least one year, fair market value compensation set in advance, and other criteria.

The Stark Law applies more narrowly, covering physician self-referrals for designated health services. MSO/PC structures generally do not implicate Stark directly, but related arrangements (such as the MSO owning ancillary services that the PC's physicians may refer to) can. Each of those arrangements has to be analyzed under the Stark exception framework.

For practices that participate in any federal health care program, the documentation supporting fair market value and commercial reasonableness of the management fee is critical. Practices that ignore this documentation face exposure not only on the corporate practice front but on potential False Claims Act liability if federal programs have paid for services delivered through a non-compliant structure. For deeper coverage of these federal frameworks, see our Stark and Anti-Kickback compliance guide.

Common Pitfalls in MSO/PC Structures

Several recurring problems show up when structures are reviewed years after formation. Each is preventable with care at formation and discipline in operations.

• Operating outside the documents. The MSA may be well-drafted, but the parties operate as if the MSO is in clinical control. Emails, marketing, internal hierarchy, and decision-making patterns all matter. Regulators look at how the practice actually functions, not just the contracts.
• Compensation arrangements that look like ownership. A physician owner who receives only a flat salary, with all upside flowing to the MSO, looks like an employee rather than an owner. The economics should reflect the legal structure.
• Lack of fair market value documentation. Management fees set without a contemporaneous FMV analysis are vulnerable to challenge. The analysis should be performed by an independent valuation firm and refreshed periodically.
• Marketing as one practice. A website, brochure, or building signage that holds the MSO and PC out as a single integrated medical practice undermines the corporate practice defense. Branding has to maintain the legal distinction.
• Hiring and firing of clinicians by the MSO. The PC employs clinicians. If the MSO is making clinical hiring decisions, the structure is at risk. The MSO can provide HR support, but employment decisions for clinicians must rest with the PC.
• Cross-investment in clinical operations. An MSO that holds equity in the PC, even indirectly, undermines the structure. The MSO's stake should be limited to its rights under the MSA.
• Ignoring AKS and Stark interactions. Compliance with state corporate practice does not address federal program risk. Practices that bill federal programs need both layers analyzed.

When the MSO/PC Structure Is the Right Tool

The MSO/PC structure is well-suited to several common scenarios in New York healthcare. Private equity investments in medical practices typically use this structure to give the investor economic participation while preserving physician ownership. Multi-site practice expansions often use a single MSO to serve multiple PCs, generating economies of scale on the management side. Hospital-affiliated physician practices sometimes use the structure to give the hospital business control while preserving the physician practice's autonomy.

The structure is less well-suited where the non-physician investor wants direct clinical control or the ability to dictate clinical decisions. New York's doctrine does not allow that, regardless of how the structure is dressed up. Investors who insist on clinical control should be advised candidly that the structure cannot deliver what they want and that any arrangement that purports to do so is at risk.

The structure also has to be evaluated against alternatives. Some healthcare assets in New York can be owned through Article 28 facilities, which are licensed by the Department of Health and have their own ownership rules that allow some non-physician participation. Some clinical services, including certain ancillary diagnostics, can be provided by separate entities that do not require physician ownership. The right structure depends on the specific clinical scope, payer mix, and regulatory profile of the practice.

For practices considering acquisition or sale, the MSO/PC structure adds complexity. Buyers acquiring an MSO are generally acquiring a contract right to provide services, not a medical practice. The valuation, due diligence, and post-closing integration all have to account for the structure. For broader context on healthcare practice transactions, our guide to buying and selling a medical practice covers the standard transactional framework, and our LHCSA change of ownership guide covers the analogous framework for licensed home care agencies.

How Agarunov Law Firm Helps with MSO/PC Structures

At Agarunov Law Firm we represent physicians, healthcare investors, and management companies in structuring, operating, and transacting MSO/PC arrangements in New York. Our work includes formation of the PC and MSO entities, drafting the management services agreement and ancillary documents, fair market value coordination, federal anti-kickback and Stark analysis where federal programs are involved, periodic compliance review for established structures, and transactional support when an MSO or PC changes hands. We coordinate with healthcare valuation firms, accounting professionals, and clinical compliance counsel as the engagement requires. Our office at 30 Broad Street in the Financial District serves clients throughout New York City and the surrounding region. For broader healthcare practice information, our New York healthcare practice page describes the full scope of representation we offer. For investors evaluating healthcare practice acquisitions, we layer the MSO/PC analysis onto the broader medical practice transition framework.

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