Nobody will approve your management fee in advance. The federal regulator that polices kickbacks is barred by statute from telling anyone whether a payment is fair market value. So the number your professional corporation pays your management company stands or falls on the file behind it. For a cash-pay clinic, the first job is knowing where a value standard legally applies and where it is borrowed.
Where a value standard actually reaches a cash-pay clinic
Most writing on fair market value rests on two federal laws that may not apply to you. The Anti-Kickback Statute covers items “for which payment may be made in whole or in part under a Federal health care program” (42 U.S.C. § 1320a-7b(b)). The Stark law covers designated health services payable by Medicare. When CMS rewrote its definitions in 2020, a commenter asked it to confirm they would not govern state law, and CMS answered: “The commenter is correct” (85 Fed. Reg. 77534).
That leaves four different situations.
| Situation | What governs the fee | Source |
|---|---|---|
| California, any payer | A percentage fee is lawful only if “commensurate with the value of the services furnished” | Bus. & Prof. Code § 650(b) |
| Florida and Texas, any payer | The state kickback law exempts what the federal statute and its regulations permit, so the federal safe harbor becomes the working yardstick | Fla. Stat. § 817.505(3)(a); Tex. Occ. Code § 102.003 |
| New York and Illinois | The form of the fee, and a valuation does not cure it | N.Y. Educ. Law § 6530(19); 225 ILCS 60/22.2(f) |
| Any federal program patient, or a lab billing private plans | The federal rules bind directly | 42 U.S.C. § 1320a-7b(b); 18 U.S.C. § 220 |
Two of those rows need a closer look.
California never says “fair market value.” Section 650(b) allows a fee “based on a percentage of gross revenue” if it is “commensurate with the value of the services furnished.” In Epic Medical Management v. Paquette, the Court of Appeal held that the statute “permits precisely the arrangement” of a percentage management fee on that condition, then tested it by comparing the fees to what the manager actually spent, finding “a rough correlation.” In California the evidence is cost, with a reasonable margin.
In New York and Illinois the question is the fee’s form. New York treats an arrangement where payment for space, facilities, equipment or personnel services depends on the licensee’s income or receipts as fee sharing; we cover that in New York corporate practice of medicine. Illinois lets a licensee pay “a fair market value fee” on a percentage basis only for billing and collection services, and separately bars paying a percentage of fees, revenues or profits for “the marketing or management of the licensee’s practice” (225 ILCS 60/22.2(d), (f)). An appraisal of a percentage fee does not help in either state. The multi-state picture is in percentage fees and fee splitting.
Nobody will pre-approve the number
The statute that lets HHS’s Office of Inspector General issue advisory opinions says those opinions “shall not address” whether fair market value “shall be, or was paid or received” (42 U.S.C. § 1320a-7d(b)(3)(A)). In Advisory Opinion 98-4 OIG looked at a management company paid its costs plus a percentage of net practice revenues, said “there is at least a potential technical violation,” and explained that it was prevented from deciding whether the fee was fixed at fair market value. Two later opinions, 11-15 and 12-06, involved management fees the parties had certified as fair market value. Both were unfavorable.
The new state statutes do not fill the gap. California’s SB 351, Oregon’s SB 951 and the 2025 Massachusetts market oversight act regulate control, restrictive covenants, ownership disclosure and transactions. None sets or reviews the level of a management fee, which is why SB 351 did not retire section 650.
The vocabulary everyone will use on you
Even where the federal definitions do not bind, a regulator, a buyer’s diligence team or an opposing lawyer will use them.
- Fair market value: “The value in an arm’s-length transaction, consistent with the general market value of the subject transaction.”
- General market value, for services: what would be paid “as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.”
- Commercially reasonable: the arrangement “furthers a legitimate business purpose of the parties” and “is sensible, considering the characteriztics of the parties.” (All three: 42 CFR § 411.351.)
CMS added that an arrangement “may be commercially reasonable even if it does not result in profit,” and then limited the point: it was “not convinced that the profitability of an arrangement is completely irrelevant” (85 Fed. Reg. 77533 to 77534). Quote both halves or neither.
The management contract safe harbor changed in the same month. It now requires that “the methodology for determining the compensation” be “set in advance,” be “consistent with fair market value in arm’s-length transactions,” and not take into account the volume or value of federal program referrals (42 CFR § 1001.952(d)(1)(iv)). A formula can qualify where a fixed total once was required. OIG declined to define fair market value or name a method for finding it (85 Fed. Reg. 77840).
One trap for anyone running a lab: EKRA’s exception for management contracts points to the safe harbor “as in effect on the date of enactment,” which was October 2018, before the change. If you draw labs in house, a formula that fits today’s safe harbor may not fit EKRA’s frozen copy.
The six papers that support a fee
No rule lists these in one place. Each comes from something a regulator or a court has said it looks for.
- A signed agreement that lists every service, runs at least a year, and states the fee method up front. These are the safe harbor’s first four elements, 42 CFR § 1001.952(d)(1)(i) to (iv).
- A cost build-up. Show what the management company spends to deliver the services, plus a reasonable return. CMS named “cost plus reasonable rate of return” as an acceptable method where comparables are unreliable (66 Fed. Reg. 944), and it is what the Epic court measured.
- Comparables from parties that do not refer to each other. That is the definition of general market value. OIG’s hospital guidance adds a caution: make sure the market rate “is not distorted.”
- An independent appraisal, where the fee is large or unusual. CMS called an appraisal from a qualified independent expert “acceptable” and also said “there is no requirement that parties use an independent valuation consultant” (66 Fed. Reg. 944 to 945). Internally generated surveys, it said, “do not have strong evidentiary value.”
- A business-purpose memo and service logs. OIG’s 2023 general guidance asks whether remuneration is for “legitimate, reasonable, and necessary services that are actually rendered,” and says the business rationale and activity logs should be kept. The safe harbor requires that services not exceed what is reasonably necessary.
- A dated periodic re-check, with legal review. The same guidance says fair market value assessments should be “performed and updated routinely as appropriate.”
What the file cannot do
Paper is not a defense by itself. CMS wrote that the law “requires substantive compliance, not merely documentary (or ‘paper’) compliance” (85 Fed. Reg. 77532). OIG wrote that a fair market value payment will not legitimize an arrangement “if there is also an illegal purpose” (70 Fed. Reg. 4864). In Tuomey, a hospital with a consultant’s valuation and favorable legal opinions still lost, because the record showed it “shopped for legal opinions approving of the employment contracts, while ignoring negative assessments.”
What this means for you
Find your row in the table before you pay for a valuation. In New York or Illinois, fix the form of the fee first. Everywhere else, build the file in order: agreement, cost build-up, comparables, then an appraisal if the number is large. Calendar a review date and keep the service logs. How the two companies fit together is in friendly PC and MSO structure, and why “we do not bill insurance” is a weaker defense than it sounds in anti-kickback rules for cash-pay clinics.
Related reading
Frequently asked questions
Does fair market value apply to a cash-pay clinic?
Sometimes. California requires a percentage fee to be commensurate with the value of the services for every payer. Florida and Texas exempt from their all-payer kickback laws what federal law permits, which makes the federal safe harbor the practical test. The federal statutes themselves apply only when a federal health care program may pay, and CMS has said its definitions do not govern state law.
Is a percentage of revenue management fee legal?
It depends on the state. California allows it if the fee is commensurate with the value of the services. New York treats payments that depend on a licensee’s receipts as fee sharing. Illinois bars paying a percentage of fees, revenues or profits for marketing or management. Under the federal safe harbor a formula may now be set in advance, but it must still reflect fair market value.
Do I need an independent valuation for my MSO fee?
No rule requires one. CMS has said an independent appraisal is an acceptable way to show fair market value and that it is not mandatory when other appropriate methods exist. A cost build-up and genuine comparables can carry a modest fee. An appraisal earns its cost when the fee is large, unusual, or about to be examined by a buyer.
Can the OIG approve my management fee?
No. The statute authorizing advisory opinions bars OIG from addressing whether fair market value was or will be paid, and OIG says so in its opinions on management arrangements. None of the 2025 state laws on management companies reviews fee levels either. The support for your fee is the file you keep, and nobody signs off on it in advance.
This is general information, not legal advice. Rules vary by state and change. Confirm your own facts with counsel.