Noncompete covenants for physicians in Pennsylvania have been somewhat limited by 2024 legislation. This Act applies to physicians, CRNAs, CRNPs, and physician assistants. These categories are all lumped together and termed “health care practitioners” in the Act. Although the Act refers to health care practitioners throughout, I have used the term “physicians” in this article, because that is who generally reads this blog.
The need for limits on noncompete covenants for physicians in Pennsylvania
On July 17, 2024 the Pennsylvania Governor signed the “Fair Contracting for Health Care Practitioners Act, effective January 1, 2025.
The Act lists eight reasons why covenants not to compete for physicians in Pennsylvania needed to be constrained:
- Patient access to health care in Pennsylvania often depends on geography, transportation and availability of practitioners;
- 75% of the physicians in Pennsylvania are employed by hospitals, health care systems or corporate entities;
- Consolidated Hospital systems increasingly stretch over broad geographic regions, meaning that a hospital network’s noncompete clause can prevent physicians (and other health care practitioners) from practicing in large areas of Pennsylvania, well beyond their initial employment location;
- Noncompete covenants in health care inhibits competition that benefits employees and patients and can deter needed physicians from wanting to practice in Pennsylvania;
- Physicians constrained by noncompete covenants have less freedom of practice for fear of losing employment and being unable to work in their profession;
- Most rural areas of Pennsylvania can be considered health care deserts and which patients must travel two or three hours for their basic health care needs;
- Continuity of care is a fundamental public policy goal that can help patients achieve their health care goals and build trust with their physicians; and
- Pennsylvania cannot afford to continue losing physicians to surrounding states and must do more to attract and retain them.
It is hard to argue with any of those reasons!
Definition of noncompete covenants for physicians in Pennsylvania
A noncompete covenant for physicians in Pennsylvania is defined in the Act as an agreement that is entered into between an employer and a physician in Pennsylvania which has the effect of impeding the ability of the physician to continue treating patients or accepting new patients, either practicing independently or in the employment of a competing employer after the term of employment.
The legislature seems to have nailed it in that definition. At this point, you may be expecting great things from this new legislation. However, although the Act is a definite improvement over the current state of the law, it can hardly be called a panacea for physicians in Pennsylvania.
Limits on noncompete covenants for physicians in Pennsylvania
Having laid out why restrictions were sorely needed for noncompete provisions for physicians in Pennsylvania, the Legislature then proceeded to impose somewhat wimpy restrictions on these covenants.
At first blush, the language seems promising: “Except as provided under subsection (b), a noncompete covenant entered into after the effective date of this subsection is deemed contrary to the public policy and is void and unenforceable by an employer.” Then they hit you with the exception, which is that a one-year noncompete covenant is perfectly OK.
They have another, somewhat odd exception to enforcement: a noncompete covenant for physicians in Pennsylvania cannot be enforced if the physician was dismissed by the employer. It has always been the case that courts were unlikely to enforce a restrictive if the employer dismissed the physician without cause. But the new wrinkle imposed by the law implies that if the physician is terminated for cause, a noncompete cannot be enforced. Although I would not advise walking into the CEO’s office and mooning them, I am dying to see if someone tries that to escape a covenant not to compete!
The employers also got their pound of flesh
Unless the physician has been dismissed, employers are still permitted to recover “reasonable expenses” from the physician. The expenses that can be recovered are not what everyone would call “reasonable”, however. The employer can recover expenses that are:
- directly attributable to the physician and accrued within 3 years of the separation (unless separation is caused by dismissal of the physician)
- related to relocation, training and establishment of a patient base
- amortized over a period of up to 5 years.
Ouch! So in effect there is a three-year sentence term of the agreement that the physician must endure to maybe avoid penalties upon departure. What I find outrageous is that the employer can recoup expenses related to establishment of the patient base. That seems like the employer can recoup the costs of growing its practice from the physician. Note that the physician will generally be prohibited from competing for a year, so those expenses seem to mostly benefit the employer. And it appears that any advertising or promotional expense of the employer “attributable” to the physician can be recouped, if accrued within 3 years, no matter how long the physician has worked there.
Also, amortizing expenses for up to 5 years leads me to believe that the employer could demand the entire payment upon separation. Another oddity in the legislation is that it is silent on recoupment of a signing bonus. Surely if the employer can recoup relocation expenses and even advertising expenses, it can recoup a signing bonus?
Less controversial (at least in my mind) is the clarification that if a physician is involved in a sale or other transfer of a business entity, then a restrictive covenant may be enforced. If Dr. Smith sells you her practice, obviously you should be permitted to prevent her from opening up across the street and taking back all her patients. However, this exception only applies if the physician was a party to the sale. If Megahealth buys the local community hospital, this provision would not impact general prohibitions against a covenant not to compete for the physicians employed by the hospital.
What the Act doesn’t limit is the mileage requirements of noncompete covenants for physicians in Pennsylvania. One of the friendly local healthcare assembly lines hospitals around us has had a 35-mile restrictive covenant radius for years. I don’t know if it was in response to this Act, but I was recently told that it had been increased to 60 miles. Of course, all of the current caselaw concerning physician covenants not to compete remains in place, so you have to wonder if that is enforceable.
But, as I noted in my book on physician employment agreements, the market will enforce a restrictive covenant that a court never would. A potential employer will not want to be sued for intentional interference with contractual relations, even if their attorney assures them that they will (eventually) “win.”
Unanswered questions about restrictive covenants for physicians in Pennsylvania
As noted above, the Act affects physician covenants not to compete for physicians in Pennsylvania “entered into after the effective date” of the Act, which is January 1, 2025. It’s clear enough that the new law does not affect restrictive covenants in Pennsylvania contained in existing contracts.
But a lot more clarity would have been desirable. If a physician employment agreement was entered into before 2025 but renews in 2025 or thereafter, was the restrictive covenant “entered into” after the effective date (I suspect the answer is no, but I’m sure there will be a case or 20 to test it). What about an amendment to an existing agreement in 2025 or thereafter? Again, I suspect the answer is that the covenant not to compete is not affected, but there is likely to be a spate of litigation to test that question.
Other aspects of the new Pennsylvania law on covenants not to compete for physicians
The Act also requires employers to notify every patient who has been seen by the physician in the past year of the physician’s departure within 90 days of separation. The notice must inform the patient of the departure, and how to transfer the patient’s records if desired. Naturally, the notice must also inform the patient that they may be assigned to a different provider if the patient chooses not to move his or her care.
The notice must only be sent to patients that the physician has had an ongoing relationship for at least two years. Significantly, the employer is not required to provide the new address of the departing physician or describe how the physician’s new employer may be contacted if the patient wants to follow their physician.
In addition, within three years of the effective date of the Act, the Pennsylvania Health Care Cost Containment Council is directed to perform a study on the effects of the Act and report it to the Pennsylvania House and Senate.
The bottom line on the new Pennsylvania law on restrictive covenants for physicians
The new Act is better than nothing and improves the conditions for physicians in Pennsylvania a little bit. It isn’t as good as the total prohibition against restrictive covenants contained in the federal proposed rule that has been stayed by a federal court. It also isn’t as good as the total prohibition against physician covenants not to compete enacted by some states.
However, it does give some relief for physicians who are getting Pennsylvania physician contract reviews.
If you have a Pennsylvania physician employment agreement you would like us to review, you can start your review here. We can also provide a free consultation to talk about how we can help.
