Currently 18 U.S. states require that veterinary practices be owned exclusively by licensed veterinarians. Despite these restrictions, corporate consolidators have found ways to legally own and operate veterinary clinics within these states. Veterinary consolidators employ creative legal structures involving professional corporations (PCs) and management services organizations (MSOs), to essentially ‘sidestep’ these ownership rules, allowing them to effectively manage and profit from veterinary practices.
These structures were started in human healthcare businesses in the 1990s and are used now in both human and veterinary health in states that do not allow corporate ownership.
The Legal Structure Used by Corporate Consolidators (Step-by-Step)
1. Formation of a ‘Friendly’ Professional Corporation (PC)
The typical strategy is to create a ‘friendly’ professional corporation (PC). The PC is 100% owned by a veterinarian(s) who are related to the corporate consolidator, and these veterinarians are, from a legal perspective, the practice owners. The PC buys or controls the medical assets of the business, like prescription drugs and lab equipment, and, most importantly, employs veterinarians and licensed technicians. By doing this, the PC satisfies state laws requiring veterinarian ownership.
2. Establishment & Role of the Management Services Organization (MSO)
Alongside the PC, a separate legal entity known as a management services organization (MSO) is formed. The MSO is owned by the corporation and takes care of non-medical assets like computers, phones, and office supplies. It also manages property leases and provides administrative services to the PC.
3. Revenue and Expense Flow Through the PC
All revenues must go through the PC since the 18 states require a veterinary-owned business to provide (and bill / collect money) veterinary services. The PC incurs various expenses (product costs, doctor labor…), including a management or administrative services fee charged by the MSO. This fee is designed to ‘sweep’ all excess cash from the PC to the MSO. While the method for setting these fees varies by state regulations and corporations, the goal is the same: to have the PC break even and ensure all profits go to the MSO.
Chances of Risk in the Legal Structure
A structure like this doesn’t come without its risks. A major one for corporate consolidators is that all revenues flow through an entity they don’t own. To mitigate this risk, consolidators use veterinarians who are ‘friendly’ to the corporation and put additional controls in place to prevent the PC owner from ‘going rogue’ and keeping the profits within the PC.
Adaptations of This Legal Framework
Each corporation tweaks this basic legal structure slightly based on their lawyers’ interpretations of the regulations. Despite these variations, the core elements remain consistent: a friendly PC, an MSO owned by the corporation, and an administrative services fee to transfer money from the PC to the MSO.
Legal Structure Longevity
This legal structure has been around for about 30 years, helping corporate groups own thousands of human and veterinary medical facilities. It’s rarely been challenged in court and will probably keep working well for a long time.
The major legal case surrounding this structure was a recent case between New York State and Aspen Dental, a major consolidator of dental practices. The results of this case guide lawyers in advising their clients and while Aspen Dental paid significant fines, the case has provided some clarity on what to do and not to do!
States Requiring Licensed Veterinarian Ownership
The states that require veterinary practices to be owned by licensed veterinarians are politically diverse. They include some of the bluest states like New York, Washington, and Minnesota, as well as some of the most business-friendly, supposedly least regulated red states like Texas, Idaho, North Carolina, Nebraska, Kansas, Iowa, Ohio, and Alabama. There doesn’t seem to be any clear pattern to which states have this rule and which don’t; it’s all about state-by-state lobbying and regulations. However, in reality, there are legal ways to work around it.
Navigating Ownership Laws: The Success of Corporate Consolidators
Corporate consolidators have come up with tried and true legal structures to navigate state laws that require veterinary practices to be owned by licensed veterinarians. These structures, involving friendly PCs and MSOs, let them follow the rules while still managing their operations and finances effectively. Despite the risks, these strategies have proven to be durable and adaptable over the years, helping the continued growth and consolidation of veterinary practices across the United States.
Have legal questions about selling your practice? Ackerman Group is here to steer you in the right direction. We have deep relationships with these consolidators as well as veterinary attorneys who specialize in sophisticated legal structures like these. Chat with us to get started.