OLR Bill Analysis

sSB 351

AN ACT CONCERNING MATTERS AFFECTING PHYSICIANS AND HOSPITALS.

SUMMARY:

This bill:

1. sets limits on physician non-compete agreements, such as restricting them to no more than one year and a 15-mile radius from the physician's primary practice site;

2. allows independent practice associations and other physician-controlled entities not affiliated with a hospital to establish a for-profit or nonprofit medical foundation and makes other changes concerning medical foundations;

3. requires the Department of Social Services (DSS) commissioner to submit a plan to procure a statewide health information exchange, rather than allowing him to submit a plan to establish an exchange, and makes related changes;

4. prohibits any entity formed to render professional services from being a “captive professional entity” of an insurance company and expands an existing definition of that term;

5. requires hospital bills to include the hospital's cost-to-charge ratio;

6. changes the required information providers must give to patients when referring the patient to an affiliated provider; and

7. requires the Department of Public Health (DPH) commissioner to study and report on the possible licensure of limited service health clinics.

EFFECTIVE DATE: October 1, 2016, except upon passage for the provisions on physician non-compete agreements and the DPH commissioner's study of limited service health clinics.

1 — PHYSICIAN NON-COMPETE AGREEMENTS

The bill sets limitations on physician covenants not to compete—i.e., contracts or agreements that restrict a physician's right to practice medicine in any geographic area of the state for any period of time. Such covenants that exceed what is allowed by the bill are against public policy and are void and unenforceable.

It appears that the bill applies to existing contracts. If so, it is unclear how the bill comports with the Contracts Clause of the U.S. Constitution (see BACKGROUND).

Allowable Scope and Restrictions

Under the bill, a physician covenant not to compete is valid and enforceable only if the covenant:

1. is necessary to protect a legitimate business interest and the covenant's geographic reach, time limitation, and other provisions are necessary to protect that interest, and

2. is otherwise reasonable and not contrary to public policy.

The bill prohibits any such covenant from restricting a physician's competitive activities (1) for longer than one year or (2) beyond 15 miles from the primary site where the physician practices (i.e., the office, facility, or location from where a majority of the revenue from the physician's services is generated).

The bill sets an additional restriction for covenants between physicians and (1) hospitals, health systems, or medical schools or (2) medical foundations formed by any such entities. It allows such covenants to restrict a physician's right to practice only with another such entity or medical foundation.

It also provides that a physician covenant not to compete is void if (1) it expires or (2) the employer terminates the employment or contractual relationship, unless that termination is for good cause.

If a covenant not to compete is rendered void and unenforceable under the bill, the remaining provisions of the contract remain in full force and effect.

Enforcement

The bill prohibits physician covenants not to compete from being subject to injunctive relief or specific enforcement in a court. Instead, a party alleging a violation of such a covenant may bring an action for actual damages suffered, subject to neutral binding arbitration conducted by a court-appointed arbitrator. The party bringing the action must pay the action's costs.

The party seeking to enforce the covenant must prove by clear and convincing evidence (1) that the covenant conforms to the bill's requirements, (2) that the covenant was violated, and (3) the actual damages suffered.

6-8 — MEDICAL FOUNDATIONS

Authority Extended to Independent Practice Associations and Other Specified Entities

Current law (1) authorizes a hospital, health system, or medical school to organize and become a member of a medical foundation to practice medicine and provide health care services as a medical foundation through its employees or agents who are physicians, chiropractors, optometrists, or podiatrists (“providers”) and (2) prohibits a medical foundation from operating for profit.

The bill allows certain other entities to form for-profit or nonprofit medical foundations. This applies to independent practice associations and certain other entities formed to render professional medical services.

For this authority to apply, the independent practice association or other business entity must:

1. be registered to do business in Connecticut under applicable state law and have its principal place of business in the state:

2. have at least 60% of its ownership and control held individually or jointly by an independent practice association, a provider, or a professional partnership, professional corporation, or limited liability company (LLC) that is not a “captive professional entity” (as defined in section 2);

3. be formed to provide professional medical services; and

4. not be owned or controlled in whole or part by a hospital, health system, medical school, or medical foundation organized by any of them.

Also, if the entity is a partnership, professional corporation, or LLC, each partner, shareholder, or member must be a physician.

Under the bill, an “independent practice association” is an organization of independent providers and other licensed health professionals that provides services to and on behalf of its members or owners, including (1) practice management and administrative services, such as accounting, payroll, billing, human resources, and information technology, (2) contract management and managed care organizations, and (3) collaborative efforts to implement value-based care models.

By law and the bill, an entity may organize and join no more than one medical foundation.

Current law provides that the non-stock corporation law applies to a medical foundation organized under the medical foundation law, except that any of the medical foundation law's provisions that conflict with the non-stock corporation law are controlling. The bill makes a conforming change for new medical foundations that are subject to other business entity laws, specifying that the medical foundation law controls in the case of a conflict.

Board of Directors

As under existing law, a medical foundation must be governed by a board of directors, with providers comprising at least half of the board.

The bill prohibits anyone who is employed by, represents, or owns or controls a hospital, health system, or medical school (whether nonprofit or for-profit) from serving on the board of a medical foundation organized by an independent practice association or other entity formed to render professional medical services as described above. Existing law prohibits anyone who is employed by, represents, or owns or controls a for-profit hospital, health system, or medical school from serving on the board of a medical foundation organized by such a nonprofit entity and vice versa.

Current law prohibits an individual from simultaneously serving on the boards of a medical foundation organized by a for-profit and nonprofit entity. The bill expands this by prohibiting anyone from serving on the board of more than one medical foundation, however organized.

Annual Reporting Requirements

Existing law requires medical foundations to file specified information annually with DPH's Office of Health Care Access (OHCA). The bill (1) extends this requirement to the new medical foundations it authorizes and (2) adds to the information that all medical foundations must report.

In addition to what is required by current law, the bill requires medical foundations to annually provide to OHCA:

1. the names and addresses of their organizing members,

2. the name and specialty of each physician employed by or acting as an agent of the medical foundation and the locations where he or she practices,

3. the name and employer of each board member, and

4. a copy of their governing documents and bylaws (under existing law and the bill, medical foundations must file their certificates of incorporation with OHCA).

Under current law, this required annual reporting includes a description of the medical foundation's services. The bill specifies that this must be a description of the services provided at each location where a physician employed by, or acting as an agent of the foundation, practices.

By law and under the bill, OHCA must make this information available to the public and accessible on its website.

9 — STATEWIDE HEALTH INFORMATION EXCHANGE PLAN

By law, DSS has administrative authority over the Statewide Health Information Exchange (which is not yet operational).

Current law establishes a procedure for the commissioner to enter a contract to establish the exchange without issuing a request for proposals. He may do so if (1) by January 1, 2016 and in consultation with the State Health Information Technology Advisory Council, he submitted a plan, consistent with the law's requirements for the exchange, to the Office of Policy and Management secretary and (2) the secretary approves the plan.

The bill instead requires the commissioner, by July 1, 2016 and with the council's approval, to submit a plan to the secretary to procure a statewide health information exchange consistent with the law's requirements. (This section does not take effect until October 1, 2016.)

The bill requires the commissioner, after the secretary approves the plan, to implement it and enter any necessary contracts to procure such an exchange. It prohibits the commissioner from acquiring assets intended for the exchange before entering such a contract.

2 — CAPTIVE PROFESSIONAL ENTITIES

The bill prohibits partnerships, professional corporations, LLCs, or other entities formed to render professional services from being captive professional entities of an insurance company.

For this purpose, it expands an existing definition of “captive professional entity” that applies to notice requirements of material changes to certain physician group practices (see BACKGROUND).

Current law defines a captive professional entity as a professional corporation, LLC, or other entity formed to render professional services in which a beneficial owner is a physician employed by or otherwise designated by a hospital or hospital system. The bill (1) specifies that a partnership may be a captive professional entity, (2) adds to the types of relationships the physician may have to the employing or similar organization, and (3) adds to the types of such organizations.

Thus, the bill defines a captive professional entity as any partnership, professional corporation, LLC, or other entity formed to render professional services in which a partner, member, shareholder, or beneficial owner is a physician directly or indirectly employed by, controlled by, subject to the direction of, or otherwise designated by:

1. a hospital, hospital system, or medical school, or medical foundation formed by a hospital, hospital system, or medical school; or

2. an entity that controls, is controlled by, or is under common control with any of these, whether through ownership, governance, contract, or otherwise.

This definition also applies to the bill's provisions on medical foundations (see above).

5 — COST-TO-CHARGE RATIO ON HOSPITAL BILLS

The bill requires hospitals to include their cost-to-charge ratio on bills to (1) patients and (2) third party payers unless provided to such payers already.

3 — NOTICE OF REFERRAL TO AFFILIATED PROVIDERS

By law, health care providers generally must give patients written notice when referring them to an affiliated provider who is not a member of the same partnership, professional corporation, or LLC as the referring provider.

For this purpose, current law defines “affiliated” as a relationship between two or more providers that permits them to negotiate, jointly or as members of a provider group, with third parties over rates for professional medical services. The bill specifies that this does not include participating in an accountable care organization or similar value-based collaborative care model where the participating providers do not jointly negotiate such rates with third parties.

The bill also eliminates a requirement that the required notice include the website and phone number of the patient's health carrier from which to obtain information on in-network providers and estimated out-of-pocket costs. Instead, it requires the notice to inform the patient that he or she may contact his or her carrier to obtain information on other in-network providers and such estimated costs.

4 — STUDY OF LIMITED SERVICE HEALTH CLINIC LICENSURE

The bill requires the DPH commissioner to study the licensure of limited service health clinics. By December 1, 2016, he must report on the study to the Public Health Committee, including on recommendations for legislation to establish a licensure category for these clinics.

BACKGROUND

Contracts Clause

The Contracts Clause of the U.S. Constitution (Article I, Section 10) bars states from passing laws that impair the obligation of contracts. When analyzing an alleged contracts clause violation, the threshold inquiry for a court is whether a state law has substantially impaired a contractual relationship. If so, in deciding whether to uphold the law at issue, the court must determine whether the (1) law has a legitimate and important public purpose and (2) adjustment of the rights of the parties to the contractual relationship was reasonable and appropriate in light of that purpose (Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411-413 (1983)).

Notice of Material Change to Physician Group Practice

By law, parties engaging in a transaction that materially changes a physician group practice must notify the (1) attorney general at least 30 days before the transaction takes effect and (2) DPH commissioner no later than 30 days after it takes effect. For this purpose, a material change includes any of the following transactions between a physician group and various entities, including a captive professional entity:

1. a merger, consolidation, or affiliation;

2. the acquisition of all or substantially all of the physician group's property and assets, capital stock, membership interests, or other equity interests;

3. the employment of all or substantially all of the group's physicians; or

4. the acquisition of an insolvent group practice.

COMMITTEE ACTION

Public Health Committee

Joint Favorable Substitute

Yea

18

Nay

10

(03/21/2016)