Physician Practice Management Entities: Control and Consolidation
The accounting by physician practice management entities for contracts with physician practices can be complex. Make sure you get it right by using this supplement to BDO's "Blueprint" on Control and Consolidation.
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Physician practice management entities (PPMEs), sometimes referred to as “management services organizations” (MSOs), emerged in the 1980s and 1990s in response to the growing complexity of healthcare administration and the need for more efficient practice management. These companies provide a range of services, including billing, human resources, compliance, and IT support, allowing physicians to spend more time focusing on patient care. The popularity of PPMEs was driven by the desire for investors to consolidate physician practices to achieve economies of scale, improve negotiating power with payors, and enhance operational efficiencies.
In recent years, there has been a resurgence of interest in PPMEs fueled by advancements in technology, regulatory changes, and the increasing administrative burdens on healthcare providers. This renewed interest has been significantly bolstered by private equity (PE) investment. Many PE firms are attracted to the healthcare sector because of its growth potential. PPMEs can be used as vehicles to achieve scalable growth and improved efficiencies through consolidation and professional management.
However, PPMEs face regulatory challenges. For example, many states enforce strict corporate practice of medicine laws that limit or prohibit non-physician ownership of medical practices. These laws are designed to ensure that medical decisions are made by licensed physicians rather than businesses. As a result, PPMEs (which are often owned by non-physician investors) must understand and comply with these laws. Further, because the laws vary by state, a PPME that wants to operate in multiple jurisdictions must navigate a myriad of regulations.
Some PPMEs solely provide administrative services (in exchange for a fee) to support physicians that want to maintain control of their practices. If the arrangement does not give the PPME control of the practice, it is accounted for under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606, Revenue From Contracts With Customers.
Other PPMEs and physician practices execute management services arrangements that are more complex. Such contracts may give the PPME the right to make some significant decisions (other than medical decisions) on behalf of the physician practices. These arrangements need to be analyzed to determine whether the PPME controls and consolidates the physician practice under ASC 810, Consolidation, or if it must apply other applicable U.S. GAAP (such as ASC 606) to account for its arrangements.
For example, to navigate corporate practice of medicine restrictions, PPMEs often use a nominee shareholder structure (see Section 3.3.1.2), which is sometimes referred to as a “friendly physician model.” In this model, the PPME appoints a licensed physician (the nominee shareholder who holds the equity of the physician practice) to be responsible for all significant decisions. However, the PPME maintains power over the physician practice because it has the right to appoint another physician to replace the nominee shareholder without cause.
If a PPME determines that it controls a physician practice, it must consolidate the physician practice as of the date it obtains control of the physician practice (which can also be referred to as the “acquisition date”). Typically, a physician practice meets the definition of a business, and its initial consolidation is accounted for in accordance with ASC 805, Business Combinations (see Sections 5.1 and 5.2.1).
However, a PPME also may acquire specific assets without obtaining control of the entire physician practice. In such cases, the PPME must determine whether the acquired assets meet the definition of a business. If they do, the PPME accounts for the acquisition as a business combination; if they do not, the PPME accounts for the transaction as an asset acquisition (see Section 5.2.2). If a PPME does not control a physician practice, it typically accounts for its contract under ASC 606. See our Blueprint, Revenue Recognition Under ASC 606.