Tuesday, August 28, 2007

CMS loosens restrictions on restrictive covenants in physician employment agreements

Bob Coffield notes at the Health Care Law Blog that the Centers for Medicare and Medicaid services released their final Stark III Physician Self-Referral Rule (PDF), which will be published in the September 5 Federal Register.

I was glad to see some clarification of one provision that appeared to ban all sorts of restrictive covenants in physician contracts. Under the existing regulation, 42 CFR §411.357(e)(4)(vi), a physician practice that receives remuneration from a hospital to assist with recruiting a new physician to the area is prohibited from imposing "additional practice restrictions on the recruited physician other than conditions related to quality of care."

The only specific example of a practice restriction that the CMS gave in its previous commentary to the Phase II rules was a noncompete agreement. While this gave clear guidance that covenants not to compete were no longer permitted in employment or other agreements between the physician practices and new physicians (where the hospitals were providing financial recruitment support), there was considerable uncertainty as to what other types of practice restrictions were impermissible. Physicians practices argued that the provision made them less likely to hire new physicians and, as a result, hospitals would be hindered in their abilities to attract new physicians to meet the their communities health care needs.

CMS listened, and is revising §411.357(e)(4)(vi) to read: "(vi) The physician practice may not impose on the recruited physician practice restrictions that unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital." The latest round of commentary (see pages 245-249 of the PDF) provides some much-needed clarity:

Comment: We received many comments concerning the requirement in §411.357(e)(4)(vi) that a physician practice may not impose additional practice restrictions on the recruited physician other than conditions related to quality of care. Commenters (including hospital associations) that addressed the issue of the allowability of non-compete agreements were uniformly opposed to prohibitions on them. They also stated that the restriction limited the utility of the exception and was contrary to State laws permitting such restrictions.

Several commenters suggested that § 411.357(e)(4)(vi) be revised to prohibit only restrictions that prohibit the physician from practicing in the hospital’s geographic service area. The commenters asserted that non-compete agreements are a standard business practice between physician groups and physicians. They stated that, without the ability to enter into non-compete agreements, physician practices would be less likely to take on new physicians and, as a result, hospitals may be unable to attract new physicians, and certain health care needs of the surrounding communities could go unmet. Other commenters questioned whether the following were permitted--

● Restrictions on moonlighting;
● Prohibitions on soliciting patients and/or employees of the physician practice;
● Requiring that the recruited physician treat Medicaid and indigent patients;
● Requiring that a recruited physician not use confidential or proprietary information of the physician practice;
● Requiring the recruited physician to repay losses of his or her practice that are absorbed by the physician practice in excess of any hospital recruitment payments; and
● Requiring the recruited physician to pay a predetermined amount of reasonable damages (that is, liquidated damages) if the physician leaves the physician practice and remains in the community.

Response: We indicated in Phase II that we considered a non-compete clause to be a practice restriction and not a condition related to quality of care (69 FR 16096-16097). Although we did not list other examples of such practice restrictions, we intended to include only such restrictions placed on the recruited physician by a physician practice that would have a substantial effect on the recruited physician’s ability to remain and practice medicine in the hospital’s geographic service area after leaving the physician practice or group practice. We do not consider the restrictions, prohibitions, and requirements that are specifically mentioned in the bulleted points above as falling into the category of having a substantial effect on the recruited physician’s ability to remain in the hospital’s geographic service area. (We note that we may consider a liquidated damages clause requiring a significant or unreasonable payment by the physician leaving the physician practice to have a substantial effect on the recruited physician’s ability to remain in the recruiting hospital’s geographic service area.) Our purpose in prohibiting practice restrictions such as noncompete clauses was to avoid frustrating the purpose of the exception. That is, we intended to discourage physician practices that recruit physicians using hospital funding from making it difficult for a recruited physician to remain in the community and fulfill his or her commitments under the recruitment agreement with the hospital. Allowing a physician to remain in the community not only furthers the health care needs of the community, but also obviates the need for the hospital to enter into a new recruitment agreement to replace the physician.

Upon review of the comments, however, we are persuaded that categorically prohibiting physician practices from imposing non-compete provisions may have the unintended effect of making it more difficult for hospitals to recruit physicians. We are concerned that physician practices and individual physicians may be unable or reluctant to hire additional physicians, regardless of the receipt of financial assistance from hospitals, unless they are able to impose a limited, reasonable non-compete clause. Therefore, we are amending §411.357(e)(4)(vi) to state that physicians and physician practices, may not impose on the recruited physician any practice restrictions that unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital. Although we are not per se conditioning payment for DHS on compliance with State and local laws regarding non-compete agreements, we believe that any practice restrictions or conditions that do not comply with applicable State and local law run a significant risk of being considered unreasonable. (Nothing in §411.357(e)(4)(vi) should be construed, however, as prohibiting a hospital that provides financial assistance to the hiring physician practice from entering into an agreement with the practice that prohibits the hiring physician practice from imposing a non-compete agreement or other practice restriction.)

Thus, under the new rule (assuming it becomes effective), physicians practices will be permitted to bargain for confidentiality agreements, non-solicitation provisions, and reasonable liquidated damages clauses in their employment contracts with new physicians.

1 comment:

Anonymous said...

Under Stark III laws, can State institutions receiving medicaid/medicare money impose noncompete cluases in their contracts for new physician hires? What if they insist on placing that clause, is that illegal under Stark III?