> ## 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.

# Set the management fee

> Fee methodologies, documenting fair market value, fee-splitting exposure by state, the invoice-and-payment mechanics, and what to do when the PC can't pay.

The **management fee** is what the PC pays the MSO for services under the MSA. Setting it correctly means satisfying two audiences at once: regulators asking whether it is fair market value for services actually rendered, and investors asking whether it captures the enterprise's economics.

<Warning>
  Fee structure interacts with state fee-splitting law, the Anti-Kickback Statute, tax transfer pricing, and CPOM control analysis simultaneously. Set it with healthcare counsel, and document the reasoning.
</Warning>

## Prerequisites

* The MSA's services scope defined, in detail
* Your state's fee-splitting rule confirmed, see [Fee-splitting](/concepts/model/fee-splitting)
* The MSO's actual cost of providing the services, calculated
* Market benchmarks available

## The three methodologies

| Method                        | Calculation                              | Fee-splitting risk | Investor appeal                            |
| ----------------------------- | ---------------------------------------- | ------------------ | ------------------------------------------ |
| **Flat**                      | Fixed monthly amount, reset annually     | Lowest             | Weakest, doesn't scale                     |
| **Cost-plus**                 | MSO's costs of service + a stated markup | Low                | Strong, a defined margin on a growing base |
| **Percentage of collections** | A stated % of a defined revenue base     | **Highest**        | Strongest                                  |

Additional variants used in practice: **per-provider per-month**, **per-location per-month**, and hybrids combining a base fee with a variable component.

## Steps

<Steps>
  <Step title="Calculate the MSO's actual cost of providing the services">
    Even if you'll charge a flat fee, you need this number. It is the floor, the FMV anchor, and the basis for any future cost-plus transition.

    Include: non-clinical salaries and benefits, occupancy allocated to the practice, technology and licensing, insurance, professional services, marketing, and an allocation of MSO overhead.

    **For a multi-PC group, allocate per PC** using a defensible driver, headcount, square footage, visit volume, or direct attribution. Document the methodology. Arbitrary allocation undermines FMV for every entity in the group.
  </Step>

  <Step title="Confirm what your state permits">
    Percentage fees are materially riskier in New York and Florida, among others, and unremarkable in permissive states. If you operate in several states, the answer may differ per PC, which means state-specific fee riders rather than one national number.
  </Step>

  <Step title="Choose the methodology">
    | Situation                     | Usually                               |
    | ----------------------------- | ------------------------------------- |
    | Launch, thin service scope    | **Flat**                              |
    | Scaling, measurable cost base | **Cost-plus with a stated markup**    |
    | Mature, permissive state      | Percentage, if counsel is comfortable |
    | Strict fee-splitting state    | Flat or cost-plus, always             |
  </Step>

  <Step title="Set the amount and document FMV">
    Support it with:

    * The MSO's documented cost of service
    * Market benchmarks for comparable management arrangements where available
    * Published data on MSO fee ranges in your vertical
    * A formal **FMV study** for larger arrangements or before a raise

    Retain the analysis with a date. An undocumented fee is the weakest position in an examination.
  </Step>

  <Step title="Specify the mechanics in the MSA">
    * **Calculation method**, stated precisely enough to reproduce
    * **Invoicing**, monthly, from the MSO
    * **Payment terms**, within N days, from the PC's operating account
    * **Priority**, after clinical payroll and the PC's direct obligations
    * **Deferral**, what happens if the PC cannot pay in full
    * **Annual FMV review**
  </Step>

  <Step title="Run the fee-coverage test before finalizing">
    Model it: can this PC pay this fee out of its own collections, after clinical compensation and direct expenses, at expected volume?

    If not — persistently, not just during the ramp — the fee is too high or the PC's economics don't work. Both are problems, and one of them is an FMV problem. See [Where the profit lives](/concepts/finance/where-the-profit-lives).
  </Step>

  <Step title="Adopt board and member consents on both sides" />
</Steps>

## The invoice-and-payment mechanics

Not optional detail. This is the difference between a fee and a sweep.

<Steps>
  <Step title="The MSO issues an actual invoice">
    Numbered, dated, stating the period, the calculation, and the services. Not a journal entry.
  </Step>

  <Step title="The PC pays it from the PC's operating account">
    On the PC's authority, after covering clinical payroll and direct expenses.
  </Step>

  <Step title="Both entities book it at identical amounts">
    Expense in the PC, revenue in the MSO.
  </Step>

  <Step title="The invoice is filed in both entities' records" />
</Steps>

**A standing automated sweep is not a management fee.** No invoice means no evidence of a price for services; automation implies the MSO controls the PC's receipts; and the amount swept usually isn't the contractual fee, which means the MSA doesn't describe what happens. See [Intercompany money movement](/concepts/banking/intercompany-money-movement).

## When the PC can't pay in full

Common during the credentialing ramp. Two legitimate options:

**Defer part of the fee**, in writing, with a stated expectation of payment. Watch that perpetual accrual is itself a red flag — it suggests the fee was never a price the PC could support.

**The MSO lends the PC money**, on a written promissory note at a rate no lower than the applicable federal rate, with a repayment schedule and board consents. See [Intercompany loans between MSO and PC](/reference/legal/intercompany-loan-note).

**What not to do:** skip it silently, or have the MSO pay PC expenses directly with no intercompany entry.

## Verify it worked

* [ ] MSO's cost of service calculated and allocated per PC on a documented basis
* [ ] State fee-splitting rule confirmed for every PC
* [ ] Methodology chosen and stated precisely in the MSA
* [ ] FMV analysis documented and dated
* [ ] Fee-coverage test run and passed at expected volume
* [ ] Invoice-and-payment mechanics specified
* [ ] Board and member consents adopted
* [ ] Annual FMV review calendared

## Common failure modes

| Failure                                    | Consequence                                     |
| ------------------------------------------ | ----------------------------------------------- |
| No FMV documentation                       | Weakest position in an examination              |
| Percentage fee in a fee-splitting state    | Direct exposure                                 |
| Arbitrary cost allocation across PCs       | Undermines FMV for the whole group              |
| Fee exceeding what the PC can support      | FMV problem plus negative PC equity             |
| Standing sweep instead of invoiced payment | The central documentation failure               |
| Fee accrued but never paid in cash         | A standard diligence adjustment                 |
| Never reviewed                             | A defensible 2022 fee may not be defensible now |
| Retroactive repricing before a raise       | The classic red flag                            |


## Related topics

- [Draft the management services agreement (MSA)](/guides/agreements/draft-a-management-services-agreement.md)
- [Evolve the fee structure (fixed → cost-plus → percentage)](/guides/agreements/evolve-the-fee-structure.md)
- [Move money between PC and MSO (the right way)](/guides/banking/move-money-mso-pc.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)
- [Intercompany money movement](/concepts/banking/intercompany-money-movement.md)
- [MSA clause anatomy](/reference/legal/msa-clause-anatomy.md)
- [Intercompany loans between MSO and PC: structure and example clause](/reference/legal/intercompany-loan-note.md)