Part 1: Curtail Abuse of Physician Non Compete Agreements

Physician non compete agreement is a scary term. Logically, there are only two ways to reduce out-of-control healthcare costs: (1) Consume less healthcare by shifting from high-cost to lower-cost services. (2) Lower healthcare prices, though price transparency and competition. Fortunately, state legislatures can achieve both objectives with relatively minor reforms, so the supporting documentation includes references to states that have already carried out the proposed reforms. Unfortunately, all reforms to reduce health costs will face resistance from powerful entrenched interests profiting from the status quo (see Michael Hicks’ recent article on record “not for profit” hospital profits, referenced below).

To summarize Part 1, states should give physicians freedom to innovate with lower-cost care delivery models, like “insurance-free” direct primary care, by passing legislation modeled on those states who have already eliminated or curtailed the abuse of non-compete clauses in physician employment contracts.

Here’s how that small reform can impact runaway healthcare costs, written for Indiana lawmakers, but applicable to many states.

Reduce Cost by Reducing Consumption of High-Cost Services

The demand for healthcare is somewhat inelastic each year, but cost savings are attainable by shifting consumption away from high-cost care towards low-cost care. For example, boosting access to relatively cheap primary care, which plays a vital role in preventing illness, in order to decrease demand for more expensive hospital and specialist care. Indiana’s doctors are innovating with new models that enhance access to care while decreasing costs, but this freedom to innovate is being stifled by the abuse of non-compete clauses in their physician employment contracts. Too frequently, Indiana’s doctors find themselves unjustly trapped by covenants not to compete buried in their hospital employment contracts. Contrary to the customary use of restrictive covenants to protect either trade secrets or key customer relationships, physician non-compete clauses appear to be intended to lock physicians into long-term employment, and to sever all physician-patient relationships should they ever leave. This is an improper use of such covenants and illustrates the fundamental reason they are disallowed between attorneys and law firms. It also results in less innovation and higher healthcare costs for consumers. Indiana should follow the growing number of states that have eliminated or curtailed physician non-compete clauses to foster greater diversity of care options and the emergence of cost-saving, innovative new care delivery models.

Substituting low-cost primary care for high-cost hospital care is not a new concept.  The Affordable Care Act endorsed this approach by including “free” preventive visits in health insurance plans.  However, because this provision still forced patients to navigate the confusing world of insurance deductibles, co-payments, networks and medical billing codes, many people continue to skip their “free” doctor visits for fear of incurring costly surprise medical bills. According to the Kaiser Family Foundation’s 2019 Employer Health Benefits Survey, nearly one in two Americans reported that they or a family member postponed getting needed healthcare in the last year due to fear of cost. Sadly, postponing needed care today invariably leads to more expensive problems tomorrow. A more effective strategy is to remove all barriers to the routine primary care people need and utilize the most each year by freeing it from the fear and stigma of health insurance altogether.  

Two years ago, Indiana joined a growing movement of states by passing legislation to encourage the expansion of direct primary care, which offers people (insured and uninsured alike) equal and open access to a primary care physician without the barriers imposed by health insurance. As reported by a Medicaid population study in Washington, the predictable result of greater access to primary care is a reduction in higher-cost downstream care:

Link: Direct primary care (DPC) has been shown to reduce consumption of expensive specialist and hospital care.

Direct primary care is just one of the innovations occurring in healthcare delivery that lowers costs by increasing access.  Others include remote telemedicine, mobile “house call” doctors, and the spread of retail-based urgent care clinics. Indiana should encourage these innovations to reduce the consumption of high cost medical services by giving doctors the flexibility to exit hospital systems and innovate with these new models.  

The trend among states nationwide has been to discourage, curtail and even prohibit non-compete clauses for physicians and other clinical personnel as a means of broadening citizens’ access to care.  Following is a synopsis of the different statutory methodologies utilized:

  • Non-compete clauses disallowed for all employees (e.g. California, Oklahoma, North Dakota)
  • Non-compete clauses disallowed for physicians (e.g. Massachusetts, Delaware, Colorado, Rhode Island)
    • E.g. Mass. Gen. Law Ch. 112 § 12X renders void any non-compete provision restricting “the right of a physician to practice medicine in a particular locale and/or for a defined period of time.”
  • A physician non compete agreement is permitted, but subject to stricter standards than general employees.
    • Tennessee: permitted so long as: (1) in writing; (2) last no longer than two years after the physician’s employment is terminated; and (3) either (a) are geographically limited to the greater of the county where the physician is employed or a ten mile radius of the primary practice site; or (b) there is no geographic restriction, but the physician is restricted from practicing at any facility in which the employer provided services during the physician’s time of employment (Tenn. Code Ann. § 63-1-148)
    • Texas: permitted so long as covenant does not deny the physician access to a list of the patients seen or treated within one year of termination of employment; provide access to medical records of the physician’s patients upon proper authorization; provide for a buyout of the covenant by the physician at a reasonable price; and allow the physician to provide continuing care and treatment to a specific patient or patients during the course of an acute illness. (Tex. Bus. & Com. Code Ann. § 15.50.)
    • New Mexico: prohibits provisions in a physician non compete agreement which restricts the right of healthcare practitioners (including physicians, osteopathic physicians, dentists, podiatrists and certified registered nurse anesthetists) to provide clinical healthcare services. The law, however, does allow non-disclosure provisions relating to confidential information; non-solicitation provisions of no more than one (1) year; and imposes reasonable liquidated damages provisions if the practitioner does provide clinical healthcare services of a competitive nature after termination of the agreement.  In addition, healthcare practitioners employed by the practice for less than three (3) years may be required, upon termination, to pay back certain expenses to the practice, including loans; relocation expenses; signing bonuses or other incentives related to recruitment; and education/training expenses. (N.M. Stat. § 24-1l-1 et seq.)
    • Connecticut: limits the allowable duration of a physician non compete agreement (to one year) and geographical scope (up to 15 miles from the “primary site where such physician practices”) of any new, amended or renewed physician agreement.  The law also renders physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause. (Conn. Gen. Stat. §20-14p(b)(2).
  • New legislation in 2019:
    • Washington: statute severely curtails all non-competes. The new law will become effective January 1, 2020:
      • Any physician non compete agreement exceeding 18 months will be considered unreasonable and unenforceable.
      • Employers must disclose the terms of a non-compete to an employee or contractor prior to acceptance of employment.
      • Employers asking existing employees to sign new non-competes must provide independent consideration, e., some additional pay or benefit to which the employees are not already entitled.
      • Employers wishing to enforce non-competes against laid-off employees must pay full base salary throughout the non-compete period (minus compensation earned by the employee through other employment).
      • Employers seeking to enforce non-compliant non-competes can be sued by the employee or the Attorney General, and be ordered to pay the greater of actual damages or $5,000, plus attorneys’ fees and costs.
      • Out-of-state forum selection clause will not be enforced against Washington-based employees or contractors, no matter where the employer is based.
    •  Florida: effective July 1, Florida law now prohibits a physician non compete agreement between a physician and an entity that employs or contracts with, either directly or indirectly, all physicians who practice the specialty within the same county. The new law also dictates that the restrictive covenant shall remain void and unenforceable for a three-year period following the entry of a second employer to the market that, either directly or through related or affiliated entities, employs one or more physicians who practice the same medical specialty. The statute expressly states that such restrictive covenants are void and unenforceable because they do not promote a legitimate business interest. The statute further sets forth public policy justifications to invalidate the restrictive covenants. Namely, the statute finds that such covenants do not benefit a patient, as they restrict access to physicians and increase the cost of healthcare.

The trend among states is clearly to discourage or disallow a physician non compete agreement.  In accordance, a bill eliminating physician non-compete clauses was introduced in the Indiana General Assembly during the 2018 session.  Many Indiana physicians were supportive of this effort, as was the Indiana State Medical Association, whose parent organization, the AMA, takes the following position:

AMA Code of Medical Ethics Opinion 

Competition among physicians is ethically justifiable when it is based on such factors as quality of services, skill, experience, conveniences offered to patients, fees, or credit terms.

Covenants-not-to-compete restrict competition, can disrupt continuity of care, and may limit access to care.

Physicians should not enter into covenants that:

(a) Unreasonably restrict the right of a physician to practice medicine for a specified period of time or in a specified geographic area on termination of a contractual relationship; and

(b) Do not make reasonable accommodation for patients’ choice of physician.

Physicians in training should not be asked to sign covenants not to compete as a condition of entry into any residency or fellowship program

Unfortunately, the 2018 bill did not emerge from committee. Without passage of such a bill, the status quo regarding physician non-compete clauses prevails in Indiana. To be enforceable, restrictive covenants are required to: (1) protect a legitimate business interest, and, (2) be reasonable in scope, duration and geography.  

Without clear statutory guidance on these points, Indiana relies upon the judicial “blue-pencil doctrine,” whereby courts have the power to modify inappropriate restrictive covenants to comply with these requirements.  However, because this retroactive enforcement mechanism requires individual physicians to square off against large hospital systems and their formidable legal teams in court, the blue-pencil doctrine is inadequate to prevent even the most egregious, unenforceable non-compete clauses from having a chilling effect on physician mobility and their freedom to innovate. 

Consider, as an example, a current Indiana physician employment contract, which was found to contain the following elements:

  • 10-year employment term;
  • Following termination, a 2-year prohibition on the provision of primary care services anywhere within a 25-mile radius, regardless of the reason for termination; and, 
  • If the doctor were to somehow open a new practice (for instance, after he had been laid off by the hospital), then a 2-year prohibition against announcing the opening of the doctor’s new practice targeted to persons residing within a 25-mile radius — essentially severing all existing doctor-patient relationships.

Egregious provisions like these are endemic in Indiana physicians’ employment contracts.  Though overreaching and likely unenforceable, they persist due to the vastly unequal bargaining power of individual doctors and large hospital systems. By virtue of intimidation, they accomplish their goal of chilling doctors’ willingness to exit and innovate with new models.  

Again, to be enforceable, restrictive covenants are supposed to: (1) protect a legitimate business interest, and, (2) be reasonable in scope, duration and geography. Here are the problems with physician non-compete clauses like the example cited above:

First, an employer’s “protected business interest” is typically a trade secret or a customer relationship – in this case, ostensibly the hospital’s customer relationship with the physician’s patients.  However, law firm clients face exactly the same situation if their personal attorney leaves his law firm. Attorney non-compete clauses are disallowed because preservation of the attorney-client relationship is considered a higher priority than the law firm’s customer relationship.  The same level of deference is warranted by the physician-patient relationship, which can literally involve life and death. In the most egregious examples, hospitals actively sever physician-patient relationships by prohibiting departing doctors from informing patients of their departure, and then refusing to convey the physician’s contact information to frustrated patients who call looking for their doctor.

Second, the blanket prohibition against the “provision of primary care services” or the “practice of medicine” is overly broad — such a sweeping definition would ostensibly prohibit the provision of free charitable care.  With the abundance of different care delivery models today, many types of medical practice are now noncompetitive. For example, an “insurance-free” direct primary care practice, or a cash-pay telemedicine provider, is not competing with a traditional hospital that provides neither of those options.  

Third, if physician non-compete clauses are to be permitted, Indiana should emulate the growing number of states that statutorily limit the scope and duration of such clauses, so that physicians are never forced to abandon their communities and sever all patient relationships in order to practice their livelihoods.  This clarification would properly recognize the primacy of the patient-physician relationship compared to the hospital’s customer relationship, analogous to attorneys and law firms. It would give patients the choice to remain with their trusted physician and avoid depriving communities of valuable health professionals and further limiting their care options and access.

While the State only reluctantly intervenes in private contracts, many states are finding that legislative clarification is the only practical remedy to the chilling effect physician non-compete clauses have on new cost-saving care delivery innovations.  This is not to advocate for the elimination of all non-compete clauses across all industries. That argument was proffered by large hospital system lobbyists and other proponents of the status quo resistant to such reforms in 2018 to defeat the proposed bill.  As Michael Hicks profiled in his recent article, Indiana has a hospital monopoly problem, these same hospitals are the beneficiaries of a marketplace devoid of alternative care models.  Rather, in healthcare, where the physician-patient relationship bears resemblance to the attorney-client relationship, non-compete clauses should be scaled back or eliminated to protect physician-patient relationships while giving doctors the freedom to innovate with models like direct primary care, which will help bring down healthcare costs by expanding the diversity of care options available to consumers.

Solution: pass legislation modeled on that in other states that eliminates, or more precisely defines the limits of, physician non-compete clauses.  If such clauses are to be permitted, they should be limited in scope only to truly competitive forms of medical practice, and with narrower geographical reach and duration to avoid destroying physician-patient relationships.

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