A Quick Overview of Covenants Not to Compete

 

In recent years, states have been split on the treatment of covenants not to compete in physician employment agreements. The vast majority of jurisdictions continue to apply a general “reasonableness’ standard often applied in other commercial contexts. Under a “reasonableness analysis, courts primarily look at two components of the restriction: (1) the time duration of the restriction; and (2) the geographic scope of the limitation. The greater the area covered and the time duration of the restriction on a physician’s ability to practice medicine, the greater the likelihood the entire covenant not to compete will be declared invalid. However, a growing minority of states have put further constraints on the enforceability of restrictive covenants in physician employment contracts. Three states, Colorado, Delaware and Massachusetts, have passed legislation that invalidates contractual provisions restricting a physician’s right to practice medicine after termination. 

 

Some states have also judicially tightened the restrictions on covenants not to compete in physician employment contracts. For example, the Supreme Court of Tennessee recently invalidated most restrictive covenants regarding physician employment contracts. The court noted that in Tennessee restrictive covenants are not allowed for attorneys because attorneys have an ethical duty to provide their services to the public, and to restrict to whom an attorney can provide services would be injurious to the public. The court then examined the doctor-patient relationship and noted that covenants not to compete were equally injurious in physician employment contracts. The court reasoned that covenants not to compete restrict a patient’s freedom of choice, restrict the patient’s right to maintain an ongoing relationship with a trusted physician, and result in the lost public benefit of having an increased number of available physicians practicing in the community. The court reasoned that an increased number of available physicians results in greater competition and a higher quality of care.

 

The harmful effects covenants not to compete can potentially create for patients have also been examined by the American Medical Association. The AMA has taken the view that “restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation to a patient’s choice of physician.”

 

When drafting a covenant not to compete, or similar restrictions in an employment agreement for a physcian, the scope of the restrictions must be carefully considered as to prevent the terms of the agreement from being invalidated judicially. Attempt to provide too much protection to the remaining physicians and you may be left with no protection at all.

 

 

© 2009 Parsonage Vandenack Williams LLC 

 For more information, contact info@pvwlaw.com

Ten Key Principles for Physicians Contracting with Third-Party Payors

  1.  Not signing an agreement can be okay.  Many practices and related endoscopy centers have gone bankrupt by signing contracts due to worrying that if they don’t sign, they will be left out of the network.  Physicians must understand the overall value of the contract.  When the reimbursement rates are below the cost, it is usually better not to sign and refrain from providing services to payors that are not profitable.© 2009 Parsonage Vandenack Williams LLC 

  2.  Do not sign agreements that are at a low rate just because it represents a small percentage of your business.  It is becoming more common for payors to rent their networks to other payors.  Practices may sign an unfavorable agreement without pause because it represents a small percentage of business, assuming it is not an important payor and trying to hastily get an agreement signed.  However, practices can later find out that they signed up for a contract that lowers their rate of reimbursement with other payors that are renting their network and, suddenly, the volume of business flowing through the rental network payor is much greater than expected at lower reimbursement rates.  Therefore, instead of just signing the agreement, it is better to not sign at all if it does not provide sufficient reimbursement.

 3.  Practices must understand which procedures drive 80% to 90% of their revenues.  In most practices, a small number of procedures and services generate the greatest percentage of revenues.  When negotiating agreements, efforts should be focused on these high-revenue-generating procedures and codes.  Do not get stuck on codes that represent low volume and may not be at desired rates of reimbursement if they can be used as leverage to negotiate high rates on the codes that represent the most volume.  Basically, you can give a lot on other codes if you focus mainly on these key codes that will increase the overall value of the agreement, resulting in increased levels of productivity.

 4.  Understand your revenues.  Each practice should understand what they are currently receiving in terms of revenues for each procedure.  Useful information systems and the ability to understand the current reimbursement per procedure is important for benchmarking expected reimbursement per procedure when entering into a new agreement.  If the overall net revenue per procedure turns out to be below the total cost per procedure, you may not want to sign the agreement.

 5.  Long-term vs. short-term agreement.  When an agreement provides for sufficient reimbursement, the practice should be better positioned to negotiate for long term agreements with escalators, such as two years, three years, five years, or more.  On the other hand, where reimbursement is not sufficient, the practice should look into entering a shorter terms agreement or no agreement whatsoever.

 6.  Understand what percentage of reimbursement will be paid by the payor versus the patient.  More often, payors are able to shift significant amounts of the payment rates to the patients.  Thus, increases in reimbursement increase the amount due from the patient.  Although on paper the agreement may look great, it may also require a lot more effort to make certain you are collecting from patients to insure that you actually see the increase that has been promised.

 7.  Withholds and quality bonuses can be toxic.  There has been talk of increased bonus opportunities based on quality.  But over the last 10 to 15 years, the experience of physicians was most universally bad with withholds and bonuses from payors.  Basically, payors did not pay must on withhold amounts, and bonuses were rarely if ever seen.

 8.  Cost control and understanding your costs is important.  It is very important that practices manage their own businesses extremely efficiently as reimbursement becomes tighter from payors and employers try to reduce provider costs.  Finding ways to reduce your costs and manage your own costs allows you to retain a greater percentage of the revenues and reimbursement.

 9.  Merging practices can solve problems reaching agreement.  Oftentimes, practices view merger situations as a way to allow themselves and another practice to operate together and thus take advantage of better managed care rates in one practice or the other.  Before agreeing to merge, practices need to really have a strong idea of whether or not this is likely to be successful.  For instance, is the payor likely to extend the rates from one practice to the other?  Lots of times, payors are no longer willing to just allow the second practice to tie into the payment rates of the first practice of the merged or surviving practice.

 10.  Utilizing your attorney.  Attorneys can help you handle your managed care contracts.  Some attorneys have great experience in this area and a very strong understanding of where a payor can move towards in terms of reimbursement for a practice.  It often makes sense to use an attorney when negotiating your managed care contracts.  The impact economically can be very substantial.

  

 © 2009 Parsonage Vandenack Williams LLC

  For more information, contact info@pvwlaw.com