> ## Documentation Index
> Fetch the complete documentation index at: https://mso.getlemma.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Evolve the fee structure (fixed → cost-plus → percentage)

> The standard arc as a group matures, and the mechanics of the transition: amendment versus restated MSA, board consents, a refreshed FMV study, per-state re-checks, and true-ups.

Almost every MSO-PC group re-papers its management fee as it matures. The standard arc runs **fixed → cost-plus → percentage where lawful**, and this guide covers both why the arc exists and how to execute a transition without creating the exact problem the change is meant to solve.

## The arc

```mermaid theme={null}
graph LR
    A["Launch<br/>Fixed monthly fee"] --> B["Scale<br/>Cost-plus markup"]
    B --> C["Mature<br/>% of collections,<br/>where lawful"]
```

### Stage 1, launch with a fixed monthly fee

**Why:** simple to administer, easy to FMV-support when the MSO's service scope is thin, and it gives the PC predictable costs before revenue stabilizes.

**Its limit:** the MSO's earnings don't move as the practice grows. Incremental profit strands in the PC, where no investor can reach it, which is backwards from what capital is underwriting.

### Stage 2, move to cost-plus once the MSO absorbs real services

**Why:** the MSO's cost base is now measurable, and a markup on that base scales fee income with the business while staying tethered to an FMV anchor. This is the transition that matters most, and it is why this arc exists at all.

**Why investors want it:** MSO profit becomes a **defined, recurring margin** rather than a number reset by negotiation. A cost-plus fee produces earnings that grow predictably with the cost base as the group scales, which is a stream that can be underwritten and multiplied.

**Why regulators accept it:** the fee is tied to services actually provided, at costs that can be documented, with a margin that can be benchmarked. It is a price, not a profit share.

### Stage 3, percentage of collections, only where lawful

**Why:** maximum alignment with practice performance.

**Why many groups never get here:** it is structurally identical to sharing professional fees with a non-licensee, and materially risky in New York, Florida, and other states with active fee-splitting doctrines. See [Fee-splitting](/concepts/model/fee-splitting).

## Prerequisites for a transition

* Current MSA reviewed
* The MSO's actual cost base calculated and allocated per PC
* A **refreshed FMV study**, completed **before** the new fee takes effect
* Per-state fee-splitting re-check for every PC moving to the new structure
* Counsel engaged in each affected state

## Steps

<Steps>
  <Step title="Re-check state law for every affected PC">
    The new structure must be lawful in each state. A cost-plus markup is broadly acceptable; a percentage is not. If one PC's state prohibits the new structure, that PC stays on the old one via a state rider — do not move it and hope.
  </Step>

  <Step title="Commission the FMV study before the change, not after">
    An FMV opinion obtained after a fee increase took effect is worth far less than one obtained before. The sequence is part of the evidence: it shows the fee was set by reference to FMV rather than justified afterward.
  </Step>

  <Step title="Choose: amendment or amended and restated MSA">
    |               | Amendment                                | Amended and restated                               |
    | ------------- | ---------------------------------------- | -------------------------------------------------- |
    | **Use when**  | Only the fee provisions change           | Multiple provisions change, or the document is old |
    | **Advantage** | Shorter; preserves the original          | One clean current document                         |
    | **Watch**     | A stack of amendments becomes unreadable | Loses the amendment history unless noted           |

    If your MSA predates 2025, prefer a **restatement** — you almost certainly need to update the clinical carve-out for Oregon, California, and Vermont developments anyway. See [Draft the MSA](/guides/agreements/draft-a-management-services-agreement).
  </Step>

  <Step title="Define the new fee precisely">
    For cost-plus, specify:

    * **The cost base**, which MSO costs are included, and which are excluded
    * **The allocation methodology** across PCs
    * **The markup percentage**
    * **The calculation period** and true-up mechanism
    * **Documentation** the MSO must provide with each invoice
  </Step>

  <Step title="Adopt board and member consents on both sides">
    Both entities must independently approve. For the PC, this is the clinician-owner considering whether the new fee is one the practice should agree to, and the minutes should reflect that consideration, not a rubber stamp.
  </Step>

  <Step title="Set a clean effective date and handle the mid-year transition">
    Prefer a period boundary, month, quarter, or fiscal year. If mid-period:

    * Prorate cleanly
    * State in the amendment which periods use which method
    * Handle the true-up explicitly
  </Step>

  <Step title="Update the invoice template and any automation">
    A cost-plus invoice needs to show the cost base and the markup. Update the accounting system's recurring entries, the invoice format, and any payment automation.
  </Step>

  <Step title="Update the financial model and reforecast">
    The MSO's earnings profile changes materially. If you are raising, the new structure is what the raise is priced on — model both and understand the difference. See [How investors read MSO-PC financials](/concepts/finance/how-investors-read-mso-pc-financials).
  </Step>
</Steps>

## The true-up

Cost-plus requires reconciling estimated costs to actual. Specify:

* **Frequency**, quarterly or annually
* **Direction**, both, or only in the PC's favor
* **Mechanism**, a credit or additional invoice
* **Dispute process**

An unreconciled cost-plus fee is functionally a flat fee with extra steps, and it will be treated as one.

## The thing not to do

<Warning>
  **Never reprice past periods retroactively to increase MSO earnings before a raise or a sale.**

  It is the classic diligence red flag in this sector. It converts a valuation question into a credibility question, and buyers price credibility across the whole deal, not just the affected line.

  If your fee has been below FMV, raise it prospectively, document why, and be prepared to explain the history. That is a defensible conversation. Restating prior periods is not.
</Warning>

## Verify it worked

* [ ] State law re-checked for every PC on the new structure
* [ ] FMV study completed **before** the effective date
* [ ] Amendment or restated MSA executed
* [ ] New fee defined precisely, including cost base, allocation, markup, and true-up
* [ ] Board and member consents adopted on both sides, with real consideration reflected
* [ ] Clean effective date; mid-period proration handled
* [ ] Invoice template and automation updated
* [ ] Financial model reforecast
* [ ] No retroactive repricing of prior periods

## Common failure modes

| Failure                                                 | Consequence                             |
| ------------------------------------------------------- | --------------------------------------- |
| FMV study after the fact                                | Sequence undermines the evidence        |
| Moving all PCs to a percentage without per-state checks | Fee-splitting exposure in strict states |
| Vague cost base definition                              | Disputes and an unsupportable fee       |
| No true-up mechanism                                    | Cost-plus in name only                  |
| Consents not adopted                                    | The change isn't properly authorized    |
| Invoices unchanged after the structure changed          | Documentation contradicts the agreement |
| Retroactive repricing                                   | Credibility damage in diligence         |


## Related topics

- [Set the management fee](/guides/agreements/set-the-management-fee.md)
- [Draft the management services agreement (MSA)](/guides/agreements/draft-a-management-services-agreement.md)
- [Produce investor-grade financial reporting](/guides/banking/produce-investor-reporting.md)
- [Where the profit lives: MSO economics and fee structures](/concepts/finance/where-the-profit-lives.md)
- [Fee-splitting rules, explained](/concepts/model/fee-splitting.md)
- [How investors read MSO-PC financials](/concepts/finance/how-investors-read-mso-pc-financials.md)
- [MSA clause anatomy](/reference/legal/msa-clause-anatomy.md)