Chester County Medicine Magazine Article by Lamb McErlane PC Health Law Attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.

On April 17, 2024, House Bill 1633 (“HB 1633”) was passed by the Pennsylvania House of Representatives (the “House”) and referred to the Senate. Introduced on August 29, 2023, HB 1633 (as amended) prohibits the enforcement of certain noncompete covenants entered into by health care practitioners and employers. If passed, this will be the first Pennsylvania law expressly limiting noncompetes in the health care industry.

A noncompete covenant, or restrictive covenant, generally prohibits a former employee from competing against his/her former employer within a particular geographic area for a specified period of time. When used in the health care field, these covenants are often onerous in both geography and duration, which can result in significant negative impacts such as forcing patients to break long-term relationships with their health care providers and/or exacerbating the ongoing staffing shortage in the health care industry.

Consolidated hospital systems increasingly stretch over broad geographic regions, meaning that a network’s noncompete clause can prevent healthcare practitioners from practicing in large areas of the Commonwealth, well beyond their initial employment location. Given that seventy-five percent of physicians are employed by hospitals, health care systems or corporate entities, noncompete covenants in healthcare (i) inhibit competition that benefits employees and patients and (ii) can deter needed healthcare practitioners from wanting to practice within the Commonwealth. It is the position of the House that continuity of care is a fundamental public policy goal and therefore the Commonwealth cannot afford to continue losing health care practitioners to surrounding states and patients should not lose their local doctors.

Accordingly, pursuant to HB 1633, the Fair Contracting for Health Care Practitioners Act (the “Act”) provides that a noncompete covenant entered into or amended prior to the effective date of the Act is void and unenforceable upon the renewal of a health care practitioner’s license, registration or certification within the Commonwealth. A noncompete covenant entered into or amended after the effective date will be deemed contrary to public policy and void and unenforceable by an employer. The Act provides an exception to this rule if: (i) the primary health care facility or office where the health care practitioner is employed is located in a county of the sixth, seventh, or eighth class[1]; (ii) the geographic restriction is less than a 45-mile radius from the primary health care facility or office; and (iii) the length of the noncompete covenant is no more than two years. The Act makes it clear that its provisions do not prohibit the enforcement of a contract provision that allows an employer to recover reasonable expenses from a health care practitioner, subject to certain conditions.

Additionally, within ninety (90) days of a health practitioner’s is departure from an employer, the Act requires an employer to notify the health care practitioner’s patients (that were seen within the past year) of: (i) where the health care practitioner will be rendering services in the future (if known); and (ii) how the patient may continue as a patient of the health care practitioner, or be assigned with a new health care practitioner within the existing employer. The notification requirement is to apply to a physician, certified registered nurse practitioner (“CRNP”), or physician assistant (“PA”) with an ongoing outpatient relationship with the patient.

If passed, the Act will take effect immediately with the notification requirement to take effect 30 days thereafter.

Interestingly, one week after HB 1633 was passed by the Pennsylvania House of Representatives, on April 23, 2024,  the Federal Trade Commission (“FTC”) approved a final rule broadly banning all employee noncompete clauses, subject to a few exceptions, to be effective September 4, 2024. Specifically, the final rule will not apply to noncompete agreements for senior executives (i.e., workers earning more than $151,164 annually who are in a “policy-making position”) that are already in existence. The final rule will also not apply to noncompetes (i) entered into pursuant to a bona fide sale of a business entity, (ii) by a franchisor and franchisee, or (iii) restricting a worker’s ability to compete outside of the United States. The final rule will not affect trade secret laws, non-solicitation agreements or non-disclosure agreements which may serve as alternatives to noncompetes. Further, the rule will not apply to nonprofit companies outside of the FTC’s jurisdiction, which includes many of the hospitals and some of biggest health insurers in the United States. Though the final rule is already facing numerous challenges, with more expected to come, if not overturned, the final rule will preempt HB 1633.

A physician may be considered to be a senior executive only in limited circumstances. A policy-making position means a business entity’s president, chief executive officer or the equivalent, or other person who has the ability to make decisions that control a significant aspect of the business entity. Here, a physician owner of a medical practice may be considered to be a senior executive only if he or she serves in these identified roles or has policy-making authority over the entire business (as opposed to a specific division or department). Therefore, whether a physician will be considered to be a senior executive will require a deeper legal analysis.

Further, a non-competition clause may be enforceable if it relates to a scenario where a physician owner sells his or her ownership to an independent physician practice because it is pursuant to a “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

Regardless of the exceptions enumerated by the FTC, the FTC has taken the position that if a noncompete clause is so broad that it effectively functions to prevent a worker from seeking or accepting work or operating a competing business in the United States after the conclusion of employment, the clause may be unenforceable under other laws, including antitrust, even if it would be exempt from the FTC’s final rule.

With regard to the applicability to nonprofits, the FTC has stated that it has no jurisdiction over most nonprofits, and therefore a nonprofit health system may still be able to enforce its noncompetes with physicians and other employees. However, it is currently unclear which entities and/or nonprofits will fall within and outside of the FTC’s jurisdiction. Because both judicial decisions and FTC precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside the FTC’s jurisdiction, the FTC left open the possibility of enforcing the final rule against some tax-exempt entities that effectively operate as for-profit enterprises in the future. This may include hospitals and/or health systems. Until this is explicitly clarified as otherwise, these entities may remain immune from the noncompete ban.

However, if Pennsylvania passes HB 1633, it will permit for a stronger ban on noncompetes in Pennsylvania. Because HB 1633 is narrower (or stricter) in scope, it will not be preempted as it relates to nonprofit hospitals and health systems. Given that the General Assembly noted its intent to have the noncompete covenant apply to hospitals and health care systems with overly broad geographic regions, it may be possible to expand the reach of the FTC’s noncompetes to include such health systems and hospitals within the Commonwealth of Pennsylvania. Whether or not HB 1633 is passed, employers should be sure to adhere to required obligations, such as providing notice to covered workers, under the FTC’s final rule.

Stay tuned!

Read the article online in Chester County Medicine Magazine.

*This article is for educational purposes only and is not intended to be legal advice. All information provided in this article is current through May 15, 2024. Should you require legal advice on this topic or any other health law topic, or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.

[1] A summary of each Pennsylvania County Class can be found on the Pennsylvania Courts website at https://www.pacourts.us/news-and-statistics/research-and-statistics/dashboard-table-of-contents/resources/WebHelp/General_Information/County_Classes.htm.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.