More Restrictions on Physician Noncompetes Ahead?

The nation’s health care system is in the midst of a structural shift that has been accelerating with the implementation of the Affordable Care Act. A paradigm change in reimbursement from the traditional fee-for-service model to payment-based on quality and outcomes is changing healthcare delivery, resulting in significant industry consolidation.
As a result, providers are consolidating, and hospitals and health systems are employing physicians in an effort to achieve economies of scale and control the full continuum of care. To protect their investment and market share, hospitals and health systems typically impose contractual noncompete restrictions on physicians who leave their employment.

Although these changes might facilitate value-based care, they also concentrate market power in a few large providers, increasing their bargaining power when negotiating reimbursement rates with insurance companies and other payors. The noncompete restrictions on physicians can also lead to increased costs and limited access and choice for patient consumers. While there is no national standard governing the enforceability of noncompete agreements, states have responded to these concerns by enacting a series of laws limiting the restrictions allowed in physician noncompete agreements. Legislators anticipate that as doctors choose more freely how and where to practice, competition and patient choice will increase, potentially leading to decreasing health care costs and improved access to care.

Noncompete agreements generally are signed by physicians when they become employees or owners of a practice group or when they enter into an employment contract with a hospital or health system. Typically, such agreements prohibit doctors from practicing in a specific region for a specified amount of time after leaving a practice; often, they also prevent doctors from soliciting their former patients. If enforceable, these clauses cause a doctor to move and build a new practice elsewhere, a potentially disruptive and costly proposition which protects employers from competition while limiting doctors’ opportunities (and patient choice) in the area where they currently practice.

While courts in general look upon noncompetes as a restraint of trade, they do enforce them, albeit with some reluctance. States are becoming more active than the courts by specifically restricting these clauses via statutes limiting or eliminating the geographic restrictions, placing limits on patient access, and reducing the amount of time any such restrictions can last.

New England has followed the trend toward constraining the use of restrictive covenants in agreements with medical practitioners. Massachusetts already had such laws in place since 1977, but three other states — Connecticut, New Hampshire and Rhode Island — have recently enacted similar laws. Although the specific language in these statutes differs, they all limit employers’ ability to craft restrictive employment contracts, shifting negotiating power back to doctors. Whether this will create enough new competition to spur the price reductions and broader access to care foreseen by legislators remains to be seen.

On July 12, 2016, Rhode Island Governor Gina Raimondo signed Rhode Island’s H7586. The new statute generally renders void and unenforceable any provision of a physician’s employment agreement that restricts “the right of such physician to practice medicine.” The statute provides for one exception: restrictive covenants that are made in connection with the purchase and sale of a physician’s practice, provided that the covenant is not for more than five years. However, the vagueness of the phrase, “in connection with the purchase and sale” might cause the exception to apply more broadly than was intended by the legislature.

For example, the statute does not require that the physician subject to the covenant be the seller of the practice. Therefore, a restrictive covenant might be enforceable against a physician in a large practice or hospital setting even if the physician has no ownership interest in such practice. Courts will be left to interpret the language of the statute as these circumstances are likely litigated.

New Hampshire’s physician noncompete statute, passed in early June of this year, does not include an exception for the sale of a practice. Therefore, any physician noncompete entered into after Aug. 5, 2016, is unenforceable in that state, regardless of its geographic scope or time limit. However, the law does not address nonsolicitation clauses in such agreements, which means that employers are likely still free to restrict physicians’ ability to contact and accept patients that they treated in their prior practice.

Connecticut’s law, which became effective July 1, 2016, is more complex. The law sets out the requirements for all physician restrictive covenants entered, renewed or amended on or after July 1, 2016. The statute has two main provisions. The first specifies that (1) any restriction cannot be longer than one year, and (2) any geographic restriction cannot be greater than 15 miles from the physical location of the physician’s practice. The second is that physician noncompete clauses will not be enforceable unless they are made part of, or in anticipation of, an ownership interest in the employer or unless the employer terminates the physician for cause.

As health care costs continue to rise and patients complain that they cannot select the provider they prefer, lawmakers are likely to continue seeking legislative solutions to encourage competition in the medical field. Thus, restrictions on physician noncompete clauses are likely to expand. Employers in these states who have utilized noncompete provisions in employment agreements should review their agreements to determine enforceability in light of these new laws.

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