How Management Fees Should Be Set (and Why “Percentage of Revenue” Gets Practices in Trouble)

The management fee is where the MSO structure either holds together or quietly falls apart. It’s the mechanism that justifies why money moves from the professional entity to the management company — and if it’s not structured correctly, it can look less like payment for services rendered and more like a workaround for a non-physician sharing in clinical revenue, which most CPOM states specifically prohibit through fee-splitting rules.

Why “A Percentage of Revenue” Is the Default Everyone Reaches For

It’s simple to calculate, it scales naturally as the practice grows, and it feels intuitively fair — the management company earns more as it helps the practice earn more. The problem is that a fee tied directly to clinical revenue can be read as the management company having a financial stake in clinical decision-making, which is exactly what CPOM and fee-splitting rules are designed to prevent, regardless of how well-intentioned the arrangement actually is.

What a Defensible Fee Structure Looks Like Instead

The standard we build toward is fair market value for the actual services being delivered — priced the way an independent, arm’s-length management company would price those same services if the professional entity hired them separately. That can be a flat monthly fee, a fee based on actual costs plus a reasonable markup, or a fee tied to non-clinical metrics like square footage managed, staff supported, or hours of service delivered — but importantly, not tied to the volume or value of clinical procedures performed.

The test isn’t whether the fee is generous. It’s whether an independent, unrelated management company could reasonably charge the same amount for the same services.

How to Actually Set and Defend the Number

• Itemize every service the management company actually provides — marketing, staffing support, facilities, systems, billing — and price each component individually
• Benchmark against what similar services would cost from independent, unrelated vendors in your market
• Document the rationale in writing at the time the fee is set, not reconstructed later if it’s ever questioned
• Revisit the fee periodically as the scope of services changes, rather than letting it drift out of step with what’s actually being delivered
• Avoid any structure — even an indirect one, like bonuses tied to clinical volume — that effectively reintroduces a revenue-percentage relationship through the back door

Getting this right protects both entities. It’s also, in our experience, one of the first things a lender, a buyer, or a regulator asks to see — which makes it worth building correctly from the outset rather than retrofitting later.

If your current management fee is structured as a revenue percentage, or you’re setting one up for the first time, that’s exactly where we start every engagement.