Should Physicians be Exempt from Covenants Not to Compete?

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Sarah Simon, Associate Member, University of Cincinnati Law Review

I. Introduction

By 2033, the United States will have a shortage of between 54,100 and 139,000 physicians.[1] There are many ways to deal with this problem, but continuing to subject doctors to covenants not to compete is not the answer. Covenants not to compete (“CNC”) restrict where an employee can work after leaving their employer to protect the employer’s business. Hospitals and practice groups have doctors sign a CNC to prevent them from practicing medicine in the vicinity where the hospital or practice group operates.

In states that allow CNCs against doctors, courts will enforce these covenants if they are “reasonable” and protect an employer’s “legitimate interest.” [2] To determine reasonableness, courts look at several factors.[3] One important inquiry in analyzing CNCs against physicians is: Does the agreement violate public policy? Part II will discuss a case where the court refused to enforce a practice group’s CNC for violating public policy. Part III will discuss the shift across states to ban CNCs against doctors. Part IV argues that CNCs against doctors should not be enforced for several reasons, including the future shortage of doctors. Part V concludes by recommending that Congress or the Supreme Court prohibit CNCs.

II. CNC Invalid for Violating Public Policy

In Valley Medical Specialists v. Farber, a medical practice sued to enforce a former employee’s CNC after he started practicing in an area prohibited by the CNC.[4] The CNC prevented the pulmonologist from practicing within a five mile radius of any of the employer’s offices for three years—a total of 235 square miles.[5] The Arizona Supreme Court held that the agreement was unenforceable because it was contrary to public policy and overbroad for the practice’s interest.[6]

First, the court emphasized the American Medical Association’s (“AMA”) aversion to CNCs.[7] The AMA disapproves of CNCs because they hinder a patient’s right to choose their doctor and prevent “free competition among physicians [which] is a prerequisite of optimal care and ethical practice.”[8] The court noted that the American Bar Association forbids CNCs for lawyers because they restrict the client’s right to choose their representation and limit the lawyer’s “professional autonomy.” CNCs for physicians raise similar concerns.[9] Furthermore, the doctor-patient relationship is more personal than the typical employee-client relationship in CNCs, so it merits special protection.[10]

Second, the court asked if the practice’s interest in its patients justified the public policy concerns of the CNC.[11] Since the doctor learned his skills in medical school and not from the employer, the court held that the employer’s interest did not outweigh the public’s interest in the doctor-patient relationship.[12] Therefore, the court declined to enforce the CNC against the doctor.[13]

III. CNCs Across States

There is an increasing shift against CNCs for physicians. Several states fully ban CNCs against doctors: California, Delaware, Massachusetts, New Hampshire, North Dakota, Oklahoma and Rhode Island.[14] Other states construe antitrust laws as forbidding CNCs for physicians.[15] Lastly, state supreme courts can choose to ban CNCs for doctors, as the Tennessee Supreme Court did in Murfreesboro Medical Clinic, P.A. v. David Udom.[16]

IV. Discussion

The AMA’s discouragement of CNCs for infringing on a patient’s right to choose their doctor should be sufficient to ban CNCs for doctors, but there are several other reasons that are becoming increasingly relevant.[17] First, the anticipated shortage of doctors makes CNCs unnecessary. If there are not enough doctors to treat patients, there is no need to restrict where a doctor can practice. The former hospital or practice group’s interest in protecting their client base does not apply if there is a surplus of clients. Additionally, CNCs could make the shortage worse by limiting where a doctor can practice.

A counter point is that the shortages of doctors may not be in the same areas that the hospitals are located, so CNCs that force doctors to practice in another area could help if there is a shortage of doctors in that area. However, this neglects the doctor’s current patients who would have to drive further to their doctor or find a closer doctor.

Second, patients are already confined in their choice of care by insurance companies. CNCs add another unnecessary layer of restriction. Insurance companies have in-network and out-of-network providers. In-network providers contract with the insurance company to provide patients lower rates and can only charge the agreed upon price.[18] Out-of-network providers typically cost more and the patient has to pay for what their plan does not cover.[19] Most patients will not visit out-of-network providers because of the cost. If a patient’s primary care doctor has to leave the county, the patient has to find a new provider and the provider must be approved by their insurance company. By forbidding the doctor from practicing in a certain area, CNCs add another unnecessary roadblock.

Lastly, the prevalence of telehealth makes CNCs less necessary. Telehealth allows patients to see their doctor remotely using a phone or computer. COVID-19 increased the need for virtual visits. If doctors are seeing patients remotely, the employer does not need to restrict where the doctor can practice to protect its client base.

V. Conclusion

The shortage of doctors in the future, along with insurance companies that already restrict a patient’s choice of provider, and the increase of telehealth make CNCs impossible to justify. Additionally, the national shift away from CNCs for doctors suggests that more states agree: whether or not a doctor is subject to a CNC should not depend on what state he practices in. These reasons, along with the AMA’s disapproval of CNCs, justify a Congressional or Supreme Court ban on CNCs for doctors.

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[1] Patrick Boyle, U.S. Physician Shortage Growing, Association of American Medical Colleges (June 26, 2020) https://www.aamc.org/news-insights/us-physician-shortage-growing.

[2] Valley Med. Specialists v. Farber, 194 Ariz. 363, 367 (1999).

[3] (1) The covenant must be reasonably necessary to protect the employer; (2) the time limit of the covenant must be reasonable; (3) the geographic scope of the covenant must be reasonable; (4) the covenant must not be unreasonable to the employee; and (5) the covenant must not be unreasonable to interest of the public. Wis. Stat. Ann. § 103.465 (West).

[4] Valley Med. Specialists, 194 Ariz. at 366.

[5] Id. at 365-366.

[6] Id. at 370.

[7] Id. at 368.

[8] Id.

[9] Id. at 369.

[10] Id.

[11] Id. at 370.

[12] Id.

[13] Id. at 372.

[14] Jesse M. Ehrenfeld, Restrictive Covenants of Large Health Care Systems, Report of the Board of Trustees(May 1, 2019) https://www.ama-assn.org/system/files/2019-09/i19-bot05.pdf.

[15] Murfreesboro Med. Clinic, P.A. v. Udom, 166 S.W.3d 674, 681 (Tenn. 2005). See See Odess v. Taylor, 282 Ala. 389, 211 So.2d 805 (1968); Bosley Med. Group v. Abramson, 161 Cal.App.3d 284, 207 Cal.Rptr. 477 (1984); Bergh v. Stephens, 175 So.2d 787 (Fla.Dist.Ct.App.1965); Gauthier v. Magee, 141 So.2d 837 (La.Ct.App.1962); W. Montana Clinic v. Jacobson, 169 Mont. 44, 544 P.2d 807 (1976); Spectrum Emergency Care, Inc. v. St. Joseph’s Hosp. & Health Ctr., 479 N.W.2d 848 (N.D.1992).

[16] Id. at 683.

[17] Valley Med. Specialists, 194 Ariz. at 368.

[18] Cigna, In-Network vs. Out-of-Network Providers, Cigna https://www.cigna.com/individuals-families/understanding-insurance/in-network-vs-out-of-network (2020).

[19] Id.