Like many businesses, medical practices have an interest in retaining their customers (which is to say, patients) when a physician leaves the practice. In Texas (unlike some other states), medical practices can protect that interest by entering into non-competition agreements with their doctors, restricting them from practicing medicine within a defined geographic area for a period of time after leaving the practice.
Because physician non-compete agreements can impact doctor-patient relationships, Texas law establishes special requirements for those agreements. These requirements are in addition to the limitations that generally apply to all non-compete agreements under Texas law.
In this article, we discuss the general and special requirements applicable to a physician non-compete agreement in Texas, and why doctors and medical practices alike should consult with an experienced health care business lawyer before entering into one.
General Requirements for Texas Non-Competes
Physician non-compete agreements, or a restrictive covenant clause, protect health care organizations and the rights of individual practitioners at the same time. Non-competes allow hospitals and offices to safely invest in new doctors and specialists, while practitioners receive legal protections to continue practicing medicine after leaving their hospital or surgical center.
However, non-competes are only useful and beneficial if they are enforceable. Expertly-crafted non-compete agreements are reasonable in terms of scope, location, and length of time, while providing value to both parties. If a non-compete is not enforceable, then it has no effect—and it puts both parties’ revenues and rights at risk.
For medical professionals and their patients, the stakes are even higher. This is why physician non-competes are subject to stronger regulations—and why physicians and hospitals turn to medical law attorneys to review their employment contracts.
Under section 15.50 of the Texas Business and Commerce Code (the "BCC"), a non-compete agreement is only enforceable if:
- it is "ancillary to or part of an otherwise enforceable agreement" entered into at the same time (such as an employment agreement); and
- it only contains limitations on the scope of work, duration, and geographic area that are "reasonable" and do not "impose a greater restraint than is necessary to protect the goodwill or other business interest" of the employer.
A non-competition agreement generally restricts a person's ability to compete with her former employer by doing a particular type of work in a defined geographic area for a fixed period of time after her employment ends. Because this sort of agreement impacts a person's ability to earn a living, many states, including Texas, place general limitations on their enforceability.
Special Requirements for Texas Physician Non-Competes
In addition to the general requirements above, the BCC also imposes special requirements for physician non-competes. These extra rules are designed to protect a patient's right to receive care from the doctor of his choice, no matter where or by whom the doctor is employed.
The extra requirements for physician non-compete agreements under Texas law are:
- The non-compete must not deny a physician access to a list of the patients she has treated in the year preceding her separation from the practice.
- It must provide the physician reasonable access, upon patient consent, to her patient's medical records.
- Except upon mutual consent of the parties, it must allow for the patient lists and records above to be accessible to the physician in the format in which they are kept in the ordinary course of business of the medical practice.
- It must contain a provision allowing for the buyout of the non-compete at a reasonable price, or, upon mutual consent, for a price set by a neutral third party.
- It must permit the physician to continue treating any of her patients with acute illnesses even after her contract or employment has terminated.
Stark Law Considerations
In drafting physician non-competes, Texas medical practices must also take heed of the "Stark Law", a federal law that generally prohibits medical providers from referring Medicare and Medicaid patients to facilities/service providers with which the providers have a "financial relationship." The law has spawned a somewhat Byzantine set of federal regulations, one of which is of particular relevance to Texas physician non-competes.
The regulation in question states that payments made by a hospital to a physician to induce her to join a medical practice in the geographic area served by the hospital do not create a "financial relationship" under the Stark Law, so long as certain criteria are met.
Among the criteria are:
- a prohibition against the medical practice the physician is being recruited to join imposing restrictions that "unreasonably" limit her ability to practice medicine in the geographic area served by the hospital, and
- a prohibition against any violation of anti-kickback laws.
The first of these criteria, as interpreted by the federal Centers for Medicaid & Medicare Services("CMS"), appears to permit a medical practice to require a recruited physician to enter into a non-compete provided it complies with the provisions of applicable state law. It remains possible, however, that there could be a divergence between what federal and state laws treat as a "reasonable" non-compete restriction.
As for the second criterion, physicians and medical practices should be aware of its potential to conflict with the mandatory buyout provision required to be included in a Texas physician non-compete agreement. For example, a buyout substantially below market price could be interpreted as a future inducement for the departing physician to refer patients to the practice, in violation of anti-kickback statutes.
Experienced Health care Business Attorneys Can Help
As the discussion above suggests, physician non-competes in Texas involve complicated issues of state and federal law. Doctors and medical practices contemplating entering into such an agreement would be wise to consult with an experienced health care business attorney to ensure that the agreement is enforceable and avoids Stark Law pitfalls, among other considerations.
At Hendershot Cowart P.C., we specialize in counseling medical professionals about all aspects of their practices, including non-competes. Contact us today to learn more.