The MSO markup: what comparable outsourcing companies earn above cost

A management fee has two parts: the cost of the services provided by the MSO and the profit factor, or markup. Ask what markup an MSO should earn and you hear round numbers with no source, which is a problem when the standard is fair market value and the fee is about to be reviewed by an appraiser, a buyer, or a state regulator.

The market has an answer. Across 73 healthcare outsourced-services M&A transactions with disclosed EBITDA margins in the Scope Research Healthcare M&A Valuation Database, 2012 through 2026, the median EBITDA margin is 18.5%. Convert that margin to a markup on cost results in a median of 22.7%.

Why M&A comparables are evidence

The trick to benchmarking MSO profit is that almost no company files financials as "an MSO." But the market is full of companies selling something similar to what an MSO sells, one line at a time. Medical billing and revenue cycle firms, clinical and administrative staffing agencies, consultants, IT and monitoring vendors, and group purchasing organizations, to name a few types. When one gets acquired, its EBITDA margin occasionally gets disclosed publicly.

The 73-deal set is built from those transactions, and approximate the outsourced non-clinical stack, or, in other words, the MSO service list included in the MSA.

Margin to markup, the arithmetic

An EBITDA margin is profit divided into revenue, while a markup is profit divided into cost. Same profit, different denominator: markup = margin / (1 minus margin). Management fee opinions are usually built on cost plus a markup, so quoting a margin where a markup belongs understates the fee.

A 15% margin implies a 17.6% markup. The 18.5% median implies 22.7%. A 25% margin implies 33.3%. The markup calculator on the MSOs module does the conversion for any margin, free, and the module filters the comparable set by service line for a fee built on a narrower scope.

What the markup is for

The markup defends the fee in two directions. A fee implying a 40% margin needs a good reason, since the median outsourced service provider earns 18.5%, and a fee at bare cost is problematic in a different way: no rational service provider sells at zero margin, so a costless markup doesn’t pass the sniff test either. The 22.7% median is a starting, which is why it, or something like it, belongs in the FMV work papers and the quality of earnings review for anything that requires an MSO, and therefore, a management fee.

Common questions

What is a typical MSO markup? The answer is it depends, but our sample indicates that the median EBITDA margin across 73 healthcare outsourced-services M&A comparables is 18.5%, resulting in an implied markup on cost of 22.7%.

How do you convert an EBITDA margin to a markup on cost? Markup = margin / (1 minus margin). An 18.5% margin equals 22.7% of cost. The markup is always the larger number as long as costs are lower than revenue.

Where do these comparables come from? The Scope Research Healthcare M&A Valuation Database: 73 acquisitions of healthcare outsourced-services companies between 2012 to 2026 where EBITDA margins were disclosed publicly, spanning revenue cycle, staffing, consulting, IT services, group purchasing, and many others.

Can an MSO support a higher markup? Sometimes. Service lines carry different margins, and scope, risk, and capital intensity all should be factored in. Some analysts prefer to use different benchmarks. True managerial expertise in the C-suite may warrant a higher markup, particularly if it is responsible for running a model that results in higher than typical margins. That is up to the MSO or appraiser to support, if so.

Sources and method

Markup benchmarks are implied by the EBITDA margins of 73 healthcare outsourced-services M&A transactions (2012 to 2026) in the Scope Research Healthcare M&A Valuation Database. Figures cited are the free-tier statistics: the median margin, its implied markup on cost, and the composition of the comparable set. Cost benchmarks referenced are built from public CMS data covering roughly 1.1 million clinicians. Full methodology on the MSOs module.

This article is a market-data benchmarking resource. It does not provide, and must not be relied upon as, a fair market value determination, valuation opinion, appraisal, or legal, tax, or compliance advice. The opinion of value for any specific arrangement remains the professional judgment of a qualified appraiser.