The Problem with Physician Non-Competes

The market for health care services in the U.S. is consolidating at a breakneck pace. A total of 1,498 health care mergers and acquisitions were announced in 2015—a new record for health care M&A deal volume. (The previous record-holder was 2014, with 1,318 deals). Spending on M&A transactions in 2015 reached $563.1 billion, another new record.

These mergers have resulted in dramatically increased concentration in the industry, at multiple levels. Hospitals are acquiring other hospitals. (San Francisco, for example, now has only three significant hospital chains). 

In turn, bigger hospitals are buying up specialty medical practices, turning previously-independent physicians into employees. The number of independent physicians has declined, from 57% in 2000 to 37% in 2013, according to a study published by Accenture last summer. By the end of this year, Accenture predicts that the percentage of independent physicians will drop to 33%.

More than 200,000 physicians in the U.S. are now employees, and three in four medical residents will start their career as employees of a medical group, hospital or faculty plan. In 2000, one in 20 specialists were hospital employees; by 2012, the ratio was one in four. By the end of this year, that ratio will likely be lower still.

Meanwhile, the number of physicians, relative to demand, is shrinking. The Association of American Medical Colleges (AAMC) predicts a national shortage of between 124,000 and 159,300 physicians by the year 2025. This trend leaves big institutional health care providers in a race to hoover up a diminishing supply of doctors to meet the demand for health care services of a growing and aging population. They are using covenants not to compete in employment agreements to fortify their competitive positions not only against doctors, but against each other.

Big employers can use their superior bargaining power to extract big concessions from employed physicians. The fewer the number of employers of physicians, the fewer employment options for physicians. Naturally, this has detrimental effects on a physician’s career and family.

But it also harms patients, as well. Physician non-competes frustrate the right of patients to choose their own physicians. Geographic restrictions in non-competes are there in order to make it so burdensome on the patient to visit a departing physician’s new practice that the patient will simply give up and continue seeing the physician’s former employer instead, even if that isn’t what the patient prefers.

Non-competes don’t only frustrate patients’ freedom of choice: they also disrupt continuity of patient care--a critical ingredient to good treatment outcomes. Patients who receive care from a physician whom they know and trust are more likely to comply with that doctor’s recommendations, such as by losing weight and taking medications regularly. Patients are also more likely to seek out preventive care from doctors with whom they have a long-standing relationship. Continuity of care has also been shown to reduce emergency room visits and hospitalizations, and to reduce the cost of healthcare generally--especially for seniors.  

And, of course, less competition among health care providers in a geographic area means higher costs in that area. Higher cost means less accessibility – and less care – overall. In this light, it’s hardly irrational to view physician non-competes as a threat to public health.

Courts Often Aren’t Much Help

Courts typically view the doctor-patient relationship as a business asset of the doctor’s employer, just like any other customer relationship. This leads them to look primarily at market concentration as the measure of public harm that could result from enforcing a non-compete, rather than the harm that would be visited upon any of the departing physician’s individual patients as the result of the covenant’s enforcement.

Courts have been known not to enforce a non-compete if the loss of a physician’s services in a particular geographic area would result in the complete loss of services of that kind in the area, or if it would result in a monopoly over services of that kind in the area. Some courts have struck down non-competes where enforcement would deprive a community of the availability of a doctor at all times for emergencies.   

But other courts have been far less enlightened. For instance, the Supreme Court of Illinois has ruled that a shortage of physicians resulting from non-competes in any particular geographic area within that state would be self-correcting, because it would encourage “young doctors” from outside to relocate to that area. (One must ask: if Mr. Market is really this good at allocating physicians, then how come there are such things as Health Provider Shortage Areas, Medically Underserved Areas and Medically Underserved Populations?)

Fortunately, not all courts are this casually dismissive toward patient welfare and choice. Courts in a number of states will consider the unique nature of the doctor-patient relationship and the harm that can result when that relationship is severed purely for commercial gain by a non-compete. The Arizona Supreme Court, for one, has observed that the “doctor-patient relationship is special and entitled to unique protection,” and has ruled that covenants not to compete involving physicians in that state must be strictly construed in light of their effect on that relationship.

But unless you live in one of the few states that prohibit physician non-competes as a matter of law, whether or not a particular physician non-compete is enforceable will depend on the unique facts and circumstances of the case. That makes the outcome of any dispute over its enforceability difficult to predict in advance. This lack of predictability – and the typically high cost of challenging a non-compete in court – can make even a facially unenforceable non-compete a burden on a physician’s career prospects.

The AMA Isn’t Much Help

Non-competes between attorneys violate lawyers’ rules of professional conduct throughout the United States. This is because the American Bar Association (ABA) has incorporated a general prohibition against non-competes in its Model Rules of Professional Conduct. Most states model their rules of conduct for attorneys on the ABA’s Model Rules.

The relationship between attorney and client is an intimate and confidential one, much like the relationship between physician and patient. One would assume that the American Medical Association (AMA) would have adopted a strong ethical stance against non-competes in physician employment agreements comparable to the ABA’s position on non-competes among lawyers. But one would be wrong.

Certainly, the AMA has challenged the ethics of physician non-competes over the years. In 1933, the AMA resolved that restrictive covenants which prevented free choice of physician were unethical. 
However, when the AMA’s Judicial Council revisited the issue in 1960, it backed away from that position, ruling that a “reasonable agreement not to practice within a certain area for a certain time, if it is knowingly made and understood,” wouldn’t be unethical. Then, in 1980, the AMA reversed itself again with a Judicial Council opinion which flatly declared that physician non-competes were not in the public interest.

The AMA’s current position on this issue, which it adopted in 1996, can be found in Opinion 9.02 of the AMA’s Code of Medical Ethics. This Opinion condemns non-competes for their tendency to restrict competition, disrupt continuity of care and deprive the public of medical services. And it discourages them generally— except insofar as they are reasonable in duration and geographic scope, and reasonably accommodate patients’ choice of physician. This rule essentially tracks the “rule of reason” test which most state courts employ to determine the enforceability of non-competes.

Thus, the AMA has largely left it for each state to decide for itself what is reasonable when it comes to physician non-competes. In cases where physicians have argued that enforcement of a non-compete would violate the AMA’s ethics rules, courts have usually refused to adopt that argument, reasoning (in essence) that if the AMA’s ethics rules are not binding on its own members, why should the courts take these rules seriously.

Legislation Helps, But Are Legislatures Willing?

State legislature can take the proverbial bull by the horns and outlaw the use of non-competes in physician employment agreements. Several states—namely Colorado, Massachusetts, Delaware, Arkansas and Alabama—prohibit physician non-competes outright. California, Montana, North Dakota, and South Dakota prohibit the enforcement of employee non-competes generally, not just with respect to doctors.  And while Virginia, Tennessee and Texas do not ban enforcement of physician non-competes, they do limit the conditions under which they can be enforced.

But while state legislatures may be able to strike a blow against anti-competitive practice in medical care, surprisingly few have been willing to do so.

Just last month, the state of West Virginia took legislative action to preempt the Federal Trade Commission (FTC) from blocking the merger of two large hospitals in the state. In the FTC’s view, this merger would create a near monopoly over acute-care, inpatient hospital services and outpatient surgical services in and around Huntington, West Virginia—leading to higher health care costs and reducing the hospitals' incentives to improve quality of care in that community. Nevertheless, in a move characterized by detractors as a case of “special interest politics,” West Virginia lawmakers decided to shield this and other hospital mergers from all antitrust scrutiny.

West Virginia's misguided efforts will likely fail. (State legislation can't be used to prevent federal enforcement agencies from enforcing federal law). But, if anything, this case illustrates the difficulty of fighting the consolidation wave among big hospitals on the legislative front. Can employed doctors, hoping for legislative relief from the competitive restraints big hospitals have placed on them, expect to fare better than the FTC?     

What May Help: Collective Bargaining

Maybe the best way for employed doctors to resist the imposition of non-competes is to rely on a tried-and-true technique first perfected in the industrial sector: Collective bargaining. The National Labor Relations Act (NLRA) protects the rights of employees, including doctors employed by healthcare facilities, to engage in “concerted activity,” even if they are not members of the union. “Concerted activity” is when two or more employees take action for their mutual aid or protection regarding terms and conditions of employment.  A single employee may also engage in protected concerted activity if he or she is acting on the authority of other employees, bringing group complaints to the employer’s attention, trying to induce group action, or seeking to prepare for group action.

It is important to know that the NLRA does not cover employees who are “supervisors,” as that term is defined under the statute. (Basically, a “supervisor” is any employee having the authority to hire, fire discipline other employees on behalf of the employer). But it does protect supervisors who refuse to violate the NLRA against employer retaliation.

One physician may not be able to negotiate a non-compete out of his or her employment agreement all alone. But a substantial segment of a large employer’s physician workforce – acting in concert under the NLRA – may be able to. When it comes to non-competes, big employers commonly use concerted action against the interests of employees. Why shouldn’t employees do the same?

David M. Briglia is an employment lawyer who represents physicians and other healthcare professionals in negotiating their employment, non-compete and practice acquisition contracts with hospitals, health systems and group practices, and in litigating breach of contract, non-compete and employment law claims. The Law Office of David M. Briglia serves doctors and other healthcare professionals in Washington, D.C. and Maryland. The article above is for informational purposes only, and is not intended, nor can it be relied upon, as legal advice. It is also not intended as an advertisement, solicitation or invitation to enter into an attorney-client relationship.