Renaissance Healthcare Partners

Sunday, June 04, 2006

Are Non-Compete Clauses Illegal?

The NAPR Pulse, May 2006

If the courts holdings in selected states regarding non-competes are adopted by other jurisdictions, the physician recruitment industry could be impacted.

Courts in Pennsylvania and Tennessee have held that the public’s interest in specialty care was superior to the business interest of a hospital system.

In Wellspan Health v. Bagless (2005), a physician joined the above captioned health system as an employee. In the physician’s employment agreement, restrictive covenant provisions prevented him from practicing in four contiguous counties for two years after his employment for any reason. The physician resigned from the health system and immediately started a private practice. The health system obtained a court order prohibiting the physician from practicing in two of the hour counties stated in his non-compete clause. The health system appealed to the Superior Court which held against the health system.

The Superior Court based its decision on legal precedents in the Pennsylvania courts that have held non-compete clauses are, “unreasonable restraints on competition”. The burden of proof is placed on the person seeking to enforce a non-compete provision in the state of Pennsylvania. The standard used by Pennsylvania Courts states, “A party seeking to enforce a non-compete clause, must show that its’ enforcement is reasonably related to the protection of a legitimate business interest.” The courts held that Wellspan had to have a “legally protectable interest” before its non-compete clause could be upheld. The courts held that under Pennsylvania law, a patient base is a legally protectable interest under non-compete agreements. The courts also compared a medical care referral base to a physician’s relationship with his/her patients, both of which were held to be “protectable interests”. The courts in the Wellspan case noted the impact on the community enforcing the non-compete would have on depriving the community of the specialty care provided by the physician whose case was before the court. The court held that the interest of the patient was paramount. The Wellspan holding will have a precedential impact in other jurisdictions, specifically those deemed “underserved.”

Other states such as Tennessee and California have ruled against restrictive covenants for similar public policy reasons as held in the Wellspan case. The Supreme Court in medical clinic (P.A. v. David Udom). The courts held patients had a right of freedom of choice in choosing a physician and have a right to continue an ongoing relationship with their physician.

Non-compete clauses are generally illegal in California. Many businesses are not aware of this fact. The California business and professionals code 16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void”. The California statue does allow for some exceptions as handed down in (Morris v. Harris, 1954 127 cal. app. 476) and (Diodes, Inc v. Franzen (1968) 260 cal. app. 2d 244). The holdings in these cases prevent former employees from accepting work from any of the employer’s clients. The business and professions code 16601 also has an “exception permitting lawful non-compete agreements for company owners.” The state of Georgia also had some litigation pertaining to non-compete clauses.

The Tennessee Appeals Court also held that restrictive covenants are illegal. The courts held in (Murfreesboro Medical Clinic, P.A. v. David Udom) that “due to public policy considerations implicated by physician’s covenants not to compete along with the ethical problems raised by them, and state legislatures decision not to statutorily validate all such covenants,” are inimical to public policy and unenforceable. The state legislatures in Tennessee followed precedents of the American Medical Association (AMA). The AMA stated non-compete provisions were contrary to AMA standards which view non-competes as violative of AMA ethical standards because they “restrict competition”, disrupt continuity of care and potentially deprive the public of medical services. The courts in Tennessee held non-competes unenforceable against physicians with some exceptions.

We can see a definite trend nationwide in the courts’ rulings that non-competes are unlawful. It is anticipated that other states will adopt the laws that have been mandated by the courts in this article. The recruitment industry could be impacted by this legal trend. I interviewed an attorney in the state of Tennessee for this article. I questioned him regarding the case making non-compete clauses illegal. The attorney stated he felt the ruling in the case was unique to the facts in that case. He further stated his belief that making non-competes illegal would not result in other jurisdictions following the courts decision in Tennessee. I respectfully disagree. The holdings cited in this article is evidence of a trend that I believe will continue. If this trend does continue, medical groups will be forced to protect their business interest in ways that could impede the recruitment of new physicians. For example, groups may bring new physicians in as independent contractors. Such arrangements would not be favorable to newly recruited physicians. First, their legal exposure could be greater. Next, they could be impacted financially.

Agreements between a medical group and a physician contracted with on an independent basis would not have a non-compete provision. These types of agreements would most likely have a “non use - non disclosure” clause. These types of agreement would not prohibit the physician from practicing within a certain geographic parameter for a specified period of time. These agreements would prohibit the Independent Contractor physician from taking the groups patients and or other confidential information. This type of contractual relationship could complicate the negotiation process which might foster the excessive use of legal counsel which could impact our industry. Finally, physicians who are seeking practice opportunities may restrict themselves regarding the types of practices they pursue.

We can only speculate as to what the impact will be. We can though to a reasonable certainty anticipate that our industry will be impacted. Only time will determine if the legal trend discussed in this article will have a negative impact on the recruitment industry.

Thursday, March 16, 2006

NAPR/NALTO Legislative Watch

House Commerce Committee Chair to Focus on Physician Reimbursement

House Energy and Commerce Committee Chair Joe Barton (R-Texas) announced that he plans to focus on physician reimbursement reforms and reauthorization of the National Institutes of Health during this second session of the 109th Congress. In 2005, Congress adopted a one-year fix to address a planned cut in Medicare physician reimbursement. More permanent reforms are needed, however.

The 2005 budget reconciliation bill – S.1932 – found savings to offset the 4.4% scheduled reductions in physician payments, changing the system to allow 2006 physician Medicare reimbursements to remain at their 2005 levels. Burton stated that "Every year that we don't reform the program for determining how to reimburse our physicians," cuts can occur, and "these cuts are cumulative." He added that a system that is "fair to physicians and taxpayers" is needed.

During his testimony before the Energy and Commerce Committee to discuss the president's FY 2007 health care budget, Department of Health and Human Services Secretary Michael O. Leavitt said the best way to reform the Medicare physician reimbursement system is "to assign a value on performance," not just paying doctors based on quantity. The HHS secretary agreed to work with the Energy and Commerce committee to devise a strategy for reforming physician reimbursement system for Medicare before Congress adjourns this year. The president is proposing nearly a $700 billion budget for HHS in FY 2007, and aims to reduce Medicare spending by $36 billion and Medicaid spending by nearly $12 billion.

State Action on Medical Malpractice Reform

Malpractice Ballot Measure Unlikely in Arizona – UPDATED REPORT
A group formed by the Arizona Medical Association, Arizonans for Access to Health Care (AAHC) has decided not to pursue a constitutional amendment to create new limits on medical malpractice lawsuits. According to polling conducted by AAHC, the state’s residents are unlikely to approve such an amendment. Furthermore, a group supported by Arizona attorneys has been raising money to defeat a potential ballot measure.

Cap Bill Introduced in Iowa – UPDATED REPORT
In mid-February Iowa House Republicans launched a new attempt to limit the cost of medical malpractice awards proposing a $500,000 cap on non-economic damages. Two years ago, Iowa Governor Tom Vilsack (D) vetoed a bill that would have set a $250,000 cap on non-economic damages. In response to reporters' questions regarding this new attempt, Vilsack said lawmakers need to find a better solution than capping damages.

Caps Bill on Life Support in Kentucky – UPDATED REPORT
After failing to win passage the last three years, a tort-reform measure that could lead to a cap on jury awards in Kentucky medical malpractice lawsuits again failed in the Senate after contentious debate on March 1, 2006. The bill – Senate Bill 1 – fell two votes short of the 60% majority needed to approve measures to amend the state Constitution. However, the bill does remains on life support because of a parliamentary maneuver by its sponsor, Senate President David Williams, R-Burkesville.

Approval of the bill could lead to a $250,000 cap on jury awards for pain and suffering. The bill does not itself impose caps, but it would pave the way for them by placing on the ballot a constitutional amendment allowing legislators to cap awards for punitive damages and pain and suffering. The caps could be no lower than $250,000, and they would not apply to awards for economic damages, such as medical expenses. The amendment also would let legislators require that malpractice claims go before “a system of alternate dispute resolution” before they are taken to a jury.

WA Malpractice Reform Bill Heads to Governor – UPDATED REPORT
On February 28, a compromise on medical malpractice regulations cleared its final hurdle when the Washington House agreed to it on an 82-15 vote. It now goes to Governor Chris Gregoire (D), who will sign the bill she personally helped negotiate.

The bill addresses several areas:

* Allows doctors to apologize to injured patients with legal immunity if they do so within a 30-day time frame.
* Places a $1 million cap on non-economic damage awards in malpractice cases that go to arbitration instead of trial.
* Requires lawyers to file certificates of merit when filing suit against health care professionals.
* Gives the insurance commissioner expanded powers to regulate the rates doctors pay for malpractice insurance and collect data on malpractice payouts for analysis.
* Increases the kinds of mistakes hospitals must report to the state.
* Adds members of the public to the doctor disciplinary board.

Wisconsin Proposal Calls for $750,000 Limit – UPDATED REPORT
Republican lawmakers have unveiled a proposal for a cap of $750,000 on pain-and-suffering damages in medical malpractice cases. Lawmakers have been working to establish a new set of limits on damages for pain, suffering and loss of companionship after a July state Supreme Court ruling struck down the previous caps. Although Republican leaders said they expect to see more bipartisan support for the higher limits, it is still unclear whether Governor Jim Doyle (D) would sign the measure.

Tuesday, February 28, 2006

Americans for Insurance Reform's New report on Mal-practice Coverage

Americans for Insurance Reform released a new report on medical malpractice insurance. Read the PDF here.

Monday, January 16, 2006

Year-end Update on Medical Malpractice Reform from the NAPR

The NAPR (National Association of Physician Recruiters) posted a wrap-up on medical malpractice reform on January 12th. The report follow:

Florida Court Seeks Rules on Waiving Fee Caps – UPDATED REPORT
The Florida Supreme Court has asked the Florida Bar to draft rules that would enable lawyers to continue to bypass a state constitutional amendment that limits their share of medical malpractice awards. The justices have not made a final decision on the issue, but on December 14 unanimously ordered the bar to propose a procedure for clients to waive the fee limitations. In ordering the bar to draft proposed rules, the justices suggested it include oversight or reviews by judges to ensure clients' rights are protected.

The amendment, approved by voters last year, was initiated by the Florida Medical Association as a way to reduce malpractice costs. Amendment 3 limits lawyers to no more than 30% of the first $250,000 of an award and 10% of anything above that amount.

Lawyers have been avoiding the caps by getting clients to sign waivers of their rights under the amendment. The Medical Association responded by asking the Supreme Court to adopt a professional rule that would require lawyers to abide by the amendment's limits.

The Florida Justices appeared deeply skeptical about the doctors' requests, which suggest that any citizen has a right to waive a constitutional right. Justices also questioned why the Florida Bar, which is responsible for regulating attorneys, had not submitted guidelines for medical malpractice cases when professional rules cover other contingency fees, including procedures for waivers.

Hawaii Considers Doctor-Apology Law – UPDATED REPORT
The Hawaii State Bar Association and the Honolulu County Medical Society have recommended that the state enact a law to allow physicians and hospitals to apologize for medical errors without increased liability risk. The groups plan to form a committee to examine similar laws in other states, such as Arizona, Colorado, Florida, Illinois, Missouri, North Carolina, and Oregon.

Caps off the Table in Iowa
According to members of a legislative panel studying Iowa's malpractice system, lawmakers will not be spending time next session debating whether to impose limits on damages that can be collected by injured patients. Explaining his opposition to such limits, Senator Keith Kreiman (D-Bloomfield) said, "They don't lower the cost of malpractice insurance, and they take away the rights of injured Iowans." On the opposite side, Senator Bob Brunkhorst (R-Waverly) favors setting the limits, but he acknowledged that the votes to make such a change simply are not there. Both sides agreed that, while lawmakers are likely to debate other medical malpractice issues when the Legislature convenes in January, capping damages will not be part of that debate.

Other proposals recommended by the panel for the Legislature's consideration include: prohibiting the use of physician apologies for medical errors as evidence in malpractice lawsuits; requiring medical experts to confirm the validity of malpractice lawsuits earlier in the litigation process; providing state funds to help specialists cover the cost of malpractice insurance; and requiring physicians and hospitals to report medical errors to the public.

Kentucky Governor Calls for Medical Malpractice Reform – UPDATED REPORT
Kentucky Governor Ernie Fletcher (R) has stated that he will push for a constitutional amendment on medical malpractice lawsuits as part of his 2006 legislative agenda. Although attempts at offering voters a proposed constitutional amendment have failed in previous attempts, Fletcher said it is necessary to help keep doctors in Kentucky. He has not offered any specifics for his plan.

Oregon Bill Clarifies Malpractice Reporting Requirements
Oregon State Senator Ginny Burdick (D-Portland) and Representative Wayne Krieger (R-Gold Beach), leaders of the Interim Judiciary Committee, are preparing a bill clarifying that malpractice claims against all Oregon doctors must be reported to the state. The bill is in response to a series of articles published in The Oregonian that described how Kaiser Permanente Northwest and Oregon Health & Science University (OHSU) avoided reporting malpractice claims for more than a decade.

Kaiser and OHSU argued that existing reporting requirements did not apply to them. Now, however, both are turning over to the Oregon Board of Medical Examiners the records of past malpractice claims against their doctors, helping fill a gap of more than 10 years in the state's ability to track malpractice records. Malpractice reports triggered about one in 10 of the Board's 313 investigations of doctors last year. Such reports accounted for less than 3% of disciplinary actions.

Virginia Lawsuit Data – UPDATED REPORT
According to data released this month by the Virginia Bureau of Insurance, about three-fourths of malpractice lawsuits filed in the state over the past three years resulted in no payments to plaintiffs. With more than 1,200 claims filed against physicians annually, payments to plaintiffs in malpractice lawsuits over the past three years totaled $70 million annually. The average malpractice settlement among all physicians totaled about $22,000; and the average settlement among obstetricians and general surgeons totaled $383,500 and $391,000, respectively. The amount malpractice insurers paid to plaintiffs over the past three years totaled $221 million, although 60% of those payments totaled less than $600,000 and only 33 totaled more than $1 million.

WA Voters Reject Malpractice Initiatives – UPDATED REPORT
In a bitterly rancorous campaign leading up to the November 8 election in Washington, doctors and trial lawyers spent a record $14 million attacking each other over their competing medical malpractice initiatives. Voters, however, were not persuaded by either group; they resoundingly defeated both the doctors' initiative, I-330, and the lawyers' initiative, I-336.

I-330 would have limited plaintiffs' attorney fees and capped pain-and-suffering awards in medical malpractice cases at $350,000. It also would have allowed providers to deny treatment to patients who refuse to sign agreements to resolve malpractice claims through arbitration rather than in court. I-336 would have revoked the license of doctors who lost three malpractice verdicts in 10 years and required public hearings on malpractice insurance rates.

Some see the defeat as a mandate for a legislative fix, and House and Senate Democratic leaders said they will try another run at an alternate plan they floated earlier this year. Their proposal includes pieces from both of the initiatives, with a heavy emphasis on provisions aimed at improving patient safety. It does not include any damage caps or limits on attorney fees, which may be a stumbling block for the two groups' reconciliation. While the doctors have said that such elements must be part of any compromise, the trial lawyers have made it clear that they will continue to fight any push for damage caps.

Caps Bill Passes Wisconsin Legislature – Veto Stands – UPDATED REPORT
In Wisconsin, the Assembly and the Senate passed AB 766, a bill that would cap noneconomic damages in malpractice lawsuits at $450,000 for adults and $550,000 for minors. The bill also would require that recommendations be submitted every two years on how those limits should be increased. But because the state Supreme Court ruled in July that a similar law enacted in 1995 was unconstitutional, Governor Jim Doyle (D) vetoed AB 766 on December 2. Since the Senate's party-line vote on AB 766 (all 19 Republicans voted for the bill and all 14 Democrats voted against it) is short of the two-thirds majority required to override a veto, Doyle's veto will likely stand, and it appears that the whole debate on caps will have to start over.

Wisconsin first established a limit on damages in malpractice lawsuits in 1975, when the state enacted a $1 million cap on noneconomic damages. That cap expired in 1991, and in 1995 the state enacted a law that treated both adults and children the same and called for a $350,000 cap to be adjusted annually for inflation. In July 2005 the state Supreme Court struck down the current cap which – with the annual adjustments – had risen to $445,755.

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