On December 30, 2008, the Fifth Circuit issued a decision that should cause management service organizations (MSOs) to think twice about their dental MSO arrangements in Texas. The court affirmed a bankruptcy court's holding that the MSOs’ business services agreements (BSAs) with individual orthodontists were void for illegality because they enabled the MSO to practice dentistry without a license. Texas law provides that a person is deemed to be practicing dentistry if the person owns, maintains, or operates an office or place of business in which the person employs or contracts with another to practice dentistry. Tex. Occ. Code § 251.003(a)(4). Under the terms of the BSAs, the MSO purchased or leased office space and equipment for the orthodontists, billed patients, filed insurance claims, hired non-dental personnel, and managed and controlled the bank accounts of the orthodontists' funds. The court found that these typical management services constituted the practice of dentistry. In re OCA, Inc., No. 07-30430 (5th Cir. Dec. 30, 2008).

The court determined that "the pervasiveness of the [MSOs] involvement in the practice of dentistry that the BSAs require the MSO to engage in, the fact that every district court that has considered whether similar BSAs violate Texas law has held that they were void for illegality, and the longstanding tradition in Texas preventing unlicensed individuals or corporations (other than professional corporations in the relevant profession) from in substance owning a controlling equity interest in the practice of a licensed health profession," required upholding the bankruptcy court's ruling. The court rejected the MSOs’ argument that the bankruptcy court erred in its decision because the BSAs contained severability and modification clauses. Although the MSO had not raised this issue in the prior proceedings, the court found that the severability clauses would not save the BSAs from being void for illegality because the illegal provisions were an essential part of the contract.

The holding of this case cautions MSOs that the scope of their involvement in Texas dentistry practices should be limited. The statutory definition of the practice of dentistry encompasses many MSO functions and, as the court noted, it would be nearly impossible to sever such services to maintain the MSO arrangement. While there may be little opportunity for MSOs’ involvement in dental practice, MSOs are not entirely precluded from providing services to other healthcare providers in the state. Under Texas law, typical management service arrangements between physicians and MSOs, for example, do not constitute the practice of medicine and are not void for illegality as long as MSOs do not perform functions that exert significant control over patient care decisions, such as directly employing or profit sharing with physicians. See, e.g., Flynn Bros. Inc. v. First Medical Associates, 715 S.W.2d 782 (Tex. App.—Dallas 1986).