Non-Compete Agreements Among Healthcare Providers: 6 Trends

Written by Molly Gamble (Twitter | Google+)  | November 16, 2012

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Physicians' steady interest in hospital employment — a trend that has accelerated in recent years and is not expected to reverse — has implications for their employment contracts, particularly restrictive covenants, or non-compete clauses.

Healthcare employers in states that enforce non-compete clauses — the majority do — have traditionally used the contract provision to protect themselves when a physician decides to depart and practice elsewhere. The clause establishes a geographic boundary in which the physician is barred from practicing in for a specified period of time. If the physician violates the provisions, the covenant also defines the amount in damages the physician must pay.  

Emerging nuances in hospital-physician relationships, the proliferation of accountable care organizations and other factors of today's rapidly consolidating healthcare industry are influencing how providers choose to approach non-compete clauses and attune them to their broader organizational strategies. Here are six trends and key issues influencing restrictive covenants in a time of rapid healthcare consolidation.

Editor's note: This article highlights current, broad trends observed in restrictive covenants in employment contracts between healthcare providers. State law governs restrictive covenants. Therefore, states vary in their interpretation and enforcement of such clauses, if such clauses are legal in the state. This article speaks to no specific state law concerning restrictive covenants and is structured to review general trends pertaining to this type of contract provision.

1. When employing physicians, hospitals are tolerating potentially less restrictive covenants. As more physicians seek hospital employment, hospitals are trying to master a delicate balance by establishing a secure physician base while maintaining loyalty with independent physicians in the market. Hospitals are still seeking to protect themselves with restrictive covenants, but are approaching them differently. The rapid pace and competitive nature of hospital-physician integration has prompted more narrow clauses than years past, according to Ronald L. Vance, JD, managing director and physician strategy team leader for Navigant Consulting in Atlanta.   

Previously, a health system's restrictive covenant may have prohibited a departing physician from practicing in the community for up to two years after the physician terminated his or her agreement with the health system. The geographic terms (i.e., cannot practice within 15 miles of the health system) and time restrictions were quite broad, according to Mr. Vance.

Now, a covenant's terms may allow physicians to have an exit strategy in which they are able to practice in the community as long as they do not join a competing health system or become shareholders in another endeavor that would compete with their former employer. Generally, the geographic restrictions are also more narrowly defined, such as five miles, although this varies depending on the density of the market.  

"More sophisticated [physician] practices won't join a system without some thoughtfulness about an exit strategy," says Mr. Vance. Less restrictive non-compete clauses allow for physicians' potential exit so they can still practice and, ideally, remain allegiant to the health system. Despite these allowances, health systems are still structuring clauses to prevent departing physicians from becoming part of a larger competitor.

Less restrictive non-compete agreements also include provisions for physicians to repurchase their practice assets — generally under the same terms, methodology and valuation approach the system used in its initial purchase of the practice. This clause is rarely put to use, according to Mr. Vance. "If physicians received a significant amount of money for their [practice] assets, I've seen few practices reconstituted. Few physicians go back into practice. It's almost impractical," he said. "That said, health systems still want to retain allegiance from physicians who desire to leave employment, but remain practicing in the community."   

2. Accountable care organizations will give rise to unorthodox terms of employment that resemble legal covenants, but aren't. ACOs and clinically integrated networks are likely to unleash new conditions for physician employment or participation that do no classify as restrictive covenants. These conditions will likely be a bit softer than non-compete agreements, but will have the same amount of power, if not more, according to Mr. Vance. For physicians participating in an ACO, conditions of participation will typically factor in quality outcomes, patient satisfaction and costs of care, if not more criteria.

"[Physicians will have to] perform within quality and service scorecard measurements to remain members of a clinically integrated network of providers; if they don't meet those performance standards, they will find it challenging to remain competitive within their respective markets," said Mr. Vance. In the past, traditional legal vehicles were used to protect health systems' and physicians' interests, but new care delivery models and enhanced performance requirements are prompting alternative ways for parties to commit to one another.

3. More hospitals are finding themselves on the receiving ends of tortious interference claims. Hospitals are finding themselves in unmarked territory as many try to avoid the effects of non-compete agreements. "As we have more hospital acquisitions of practices, hospitals are [finding themselves] on the receiving end of non-compete suits because they're being sued by the practice they hired away from for tortious interference," says Jeffrey Clark, JD, partner with McGuireWoods in Chicago.

Tortious interference is the act of infringing on other parties' agreements, contractual commitments or contractual relationships. The trend of hospitals facing these suits is a twist from the norm, since hospitals were most frequently the entity enforcing non-compete agreements with employed physicians. The change is largely due to the growing competition in certain markets, as hospitals race to build their ranks of employed physicians. "Sometimes, [hospitals] are sued by the physician groups that are trying to stave off hospitals," said Mr. Clark.

4. Systems are raising the bar for liquidated damages clauses. In the past, health systems that enforced restrictive covenants often included provisions for liquidated damages as a remedy for a breach of the non-compete. This is a way for parties to avoid litigation, which can become quite costly and time-consuming. Liquidated damages clauses establish the sum a departing physician must pay the system if he/she continues to work in a geographic area that violates the terms of the non-compete agreement.

In highly competitive markets, liquidated damages did not act as an effective barrier for larger health systems, according to Mr. Vance. "In prior eras of high competition, systems that really wanted to employ a physician would buy out the liquidated damages clause," he says. Now, in contracts that do include liquidated damages clauses, the monetary amount is set relatively high. The sum of a liquidated damages clause is often written as a percentage of the physician's base salary. Thus, more established physicians with higher salaries will often have higher sums in their clause. Mr. Vance also said there is additional scrutiny on the fair market value compensation packages physicians may receive, which must account for any signing bonuses, loans and/or other payments, including funds that allow the physicians to pay liquidated damages.    

5. Sophisticated physician practices are ramping up their scrutiny and use of non-compete agreements. Because physician practices are under such pressure, they're very sensitized to the chance of losing physicians, according to Mr. Vance. "There is increasing scrutiny over non-competes for sophisticated private practice groups. Even though it's not something candidates want, I think you'll see a resurgence of private practices using more restrictive non-competes when recruiting."

In recent years, physicians have found it more difficult to demand joining physicians buy into their existing practice due to evolving economic factors. "In the last 10 years, if there was patient demand, patients were more willing to go to new doctors because they were accessible. It was less important for that doctor to be tied to some known doctor in the area," says Mr. Vance.

As a result of this demand, existing physician practices couldn't get physicians who were moving into the community to pay a buy-in when those new physicians could just as easily set up shop next door and become competitors. "They economically can't get doctors to step up to [buy-ins]," says Mr. Vance.

Less opportunity for physician buy-in and buy-outs reduces the barrier for physicians to leave a privately owned practice and walk down the street to work at a hospital. As a result, private practices are more concerned about bringing in junior talent that will establish and expand a patient base, then leave for hospital employment or join another area private group and become the practice's competition.

6. Oversight from the Federal Trade Commission is not out of the question. The FTC showed some teeth this past summer when it ordered 10 cardiologists in Reno, Nev., to be exempt from non-compete clauses with Reno-based Renown Health. The health system acquired a 15-cardiologist practice in 2010 and a 16-cardiologist practice in 2011. An FTC analysis found this left Renown with control over 88 percent of the cardiology market in the Reno region, a finding that was exacerbated with the fact that the cardiologists faced a $750,000 fine if they left Renown and practiced within 50 miles of the region within the next two years. Under the FTC settlement, Renown agreed to suspend the non-compete provisions for the 10 cardiologists until at least six accepted offers with competing practices in the Reno area.

The Renown-FTC event is an isolated incident with its own set of circumstances, but it demonstrates how non-compete clauses — especially those that are narrowly structured — can influence hospitals' market share and incur scrutiny over anticompetitive conduct. "There is a test that [the non-compete clause] has to be reasonable in geographic scope, duration and impact," says Mr. Clark. For now, FTC scrutiny may be more likely in areas that have regional medical centers, given the density of those markets and how consolidation can affect reimbursement rates and payor negotiations. Hospitals in urban areas with numerous competing health systems and overlapping service bases are less prone, though not exempt, from anticompetitive scrutiny.

Physician Employment Agreements: Read the Fine Print

Created April 3, 2011 by Steven M Hacker, MD

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I cover two physician employment agreement scenarios in my book: one is for a senior medical resident who is about to be hired by a physician employer, and the other is for the physician who is about to hire another physician to work in his or her practice. Both scenarios are common. Both scenarios are relevant to the same discussion about the physician employment agreement. A fair and legal agreement should be applicable to both scenarios. Whether you are being hired or hiring, all employment contracts for physicians should be prepared and reviewed by a board-certified health care attorney.  This article details some of the important aspects you should consider as you negotiate an employment contract.

Key Clauses and Regulatory Issues

There are many complex health care statutes that must be understood and negotiated as part of your agreement. Issues include noncompete clauses, nonsolicitation clauses, and various regulatory issues that require legal attention, such as anti-kickback statutes, Stark laws, False Claims Act, Fraud Enforcement Recovery Act, and Health Insurance Portability and Accountability Act (HIPAA).

Noncompete clauses restrict a terminated physician employee from practicing within a certain geographic distance of your practice. Be cautious of this clause.  It can be emotionally upsetting. If you are unexpectedly terminated, you may no longer be able to practice where you live, have to move your family, and establish new patients in a remote location. Always sign a contract considering the “what if.”  What if it doesn’t work, then what happens?

The noncompete clause must be reasonable; otherwise, it will not be enforceable. You cannot be restricted from practicing in an entire state. That restriction is too broad and would not be enforceable. Most restrictions need to “reasonable” to be enforceable. Reasonable may be three miles in a metropolitan city but may be thirty miles in a rural setting. Discuss with your attorney what distance would be reasonable given your situation. Additionally, you can add a liquidated damages clause for noncompetes. This is a nice “out” and gives you the option of setting a price to forego enforcing the noncompete clause. Always negotiate the shortest distance and time period for this clause. Try to make the noncompete clause enforceable for no more than eighteen months.

Nonsolicitation clauses refer to restricting the act of soliciting patients or employees from a practice at which a physician or other staff member was employed. This means that it is illegal for you for a certain amount of time to solicit your favorite employees or patients away from the practice in the event of your termination. Typically, there is a time element to this clause. Nonsolicitation clauses may be enforceable for twenty-four months or more. Always negotiate the shortest time for this clause.

The anti-kickback statute (AKS) results from amendments to the Medicare and Medicaid Anti-Fraud and Abuse Act and makes it illegal to knowing and willfully solicit, receive, offer, or receive payment of any remuneration for referring patients or arranging for acquisition of goods or services reimbursable by Medicare or Medicaid. Violations are punishable by a fine of up to $25,000 and up to five years imprisonment. Additionally, exclusion from federally funded health care programs such as Medicare and Medicaid may result. Do not sign any agreement that requires or induces you to perform or refer certain Medicare reimbursable services for payment. This is a contract issue that should always be reviewed by a board certified health care attorney.

Regulatory issues include the Stark laws. These laws protect against physicians referring to a lab or facility that they may have a financial interest in. The law was written to prohibit physicians from making a referral to an entity for the furnishing of designated health services paid by Medicare or Medicaid when the physician or his or her family has a direct or indirect financial relationship with the entity. There are a number of safe harbors within this complex law.

Malpractice Policies

The contract will need to detail financial responsibility for purchasing a malpractice policy. It will detail limits for malpractice. There are two types of malpractice policies: Claims Made and Occurrence. The Claims Made policy will only respond if the claim is made while the policy is in effect, while with an Occurrence policy, the carrier is responsible for the claim if the incident occurred anytime during the active policy period. If a Claims Made policy is terminated, then continued coverage (“tail”) should be purchased until such time that all possible claims that can be brought has expired. The employment contract should define who is responsible for purchasing “tail” coverage.

Employment Conditions and Term

Additionally, there will be conditions for full-time employment that must be specified in any contract. These conditions include obligations such as obtaining the appropriate licensure to practice medicine and prescribe medications. You must affirm that no medical board has disciplined you and that your license has not been revoked or suspended. You must also affirm that you have or have not been treated or sanctioned for alcohol or substance abuse.

General contract matters that must be considered include the term of the contract. This is often two to three years. Renewal may occur automatically at the end of the term. Termination clauses with and without cause should be defined.

Compensation

Incentive bonuses in the form of compensation or stock may be considered. Commonly, you may receive a bonus based upon revenue generated above a certain amount. This number may tie to the office overhead formula. For instance, assume a 50 percent office overhead and a physician’s annual salary of $150,000. You may receive an additional 25 percent to 50 percent of revenue generated after you have generated $400,000 in revenue. In this scenario, the practice theoretically makes approximately $100,000 on the first $400,000 generated (revenue – overhead – physician salary/package = practice net). Any additional amounts over that $400,000 generated, the physician and the practice share in an agreed-upon percentage. You must make sure a health care attorney reviews this portion of the contract as well to be sure there are no anti-kickback or Stark violations unintentionally included.

Key Points to Consider

Finally, I am including a table below that summarizes the most important points that need to be discussed with any potential employer.

1.       Realistic and reasonable noncompete clauses.

2.       Liquidation clauses for noncompete.

3.       Malpractice issues regarding their responsibility for tail coverage.

4.       Obligations, duties, and responsibilities for your practice.

5.       Definition of the on-call schedule.

6.       Definition of the necessity for maintaining hospital privileges.

7.       Definition of bonuses, salary, and productivity requirements.

8.       Partnership terms must be defined clearly.

9.       Be certain nothing in the contract violates the Stark laws, anti-kickback statutes, and HIPAA.

10.   Clarify the ownership of the patients’ records in the event of termination.

11.   Understand Termination with and without cause.

12.   Define who will pay for CME (Continuing Medical education) credits.

13.   Define how many days will be paid for attending a professional meeting per year.

14.   Define how much you will pay for licensure for boards, tests, exams, DEA license, medical society memberships, dues, accreditation for hospitals, and hospital staff fees.

15.   Define duration of the clause for non-solicitation of employees.