OLR Bill Analysis

sSB 351 (File 557, as amended by Senate "A" and "B")*

AN ACT CONCERNING MATTERS AFFECTING PHYSICIANS AND HOSPITALS.

SUMMARY:

This bill:

1. sets specific limits on physician non-compete agreements, such as (a) restricting them to no more than one year and a 20-mile radius from the physician's primary practice site and (b) prohibiting hospitals from restricting a physician's ability to leave for private practice;

2. expands which entities may employ physicians by allowing independent practice associations and certain other entities not owned by a hospital to establish for-profit or nonprofit medical foundations, and makes other changes concerning medical foundations;

3. expands an existing definition of “captive professional entity,” that applies to the medical foundation provisions and existing notice requirements for material changes to physician group practices;

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

5. changes the required information providers must give to patients when referring them to certain affiliated providers; and

6. allows the Health Care Cabinet to study and report on the possible licensure of urgent care and limited service health clinics.

*Senate Amendment “A” replaces the original bill (File 557). It removes certain provisions from the underlying bill, such as those that would (1) prohibit any entity formed to render professional services from being a captive professional entity of an insurance company; (2) require the Department of Social Services commissioner to submit a plan to procure, rather than establish, a statewide health information exchange; and (3) require neutral binding arbitration for disputes regarding physician non-compete agreements.

It makes various other changes to the underlying bill, such as (1) changing certain effective dates; (2) applying certain provisions on non-compete agreements to only agreements entered into, changed, or renewed on or after July 1, 2016; (3) allowing the Health Care Cabinet to conduct a study on the possible licensure of certain entities, rather than requiring the Department of Public Health (DPH) commissioner to conduct the study, and expanding the scope of the study; (4) adding a provision on the medical foundation law's relationship to other laws; (5) modifying the definition of “independent practice association”; and (6) various minor and clarifying changes.

*Senate Amendment “B” specifies that an employer who terminates a physician's employment for cause may enforce a non-compete agreement against that physician.

EFFECTIVE DATE: October 1, 2016, except the provisions on (1) the Health Care Cabinet study are effective upon passage and (2) non-compete agreements and referral notices are effective July 1, 2016.

1 — PHYSICIAN NON-COMPETE AGREEMENTS

The bill sets statutory limitations on physician covenants not to compete. It defines such a covenant as any provision of a partnership, employment, or other contract or agreement that creates or establishes a professional relationship with a physician and restricts the physician's right to practice medicine in any geographic area of the state for any period of time after the end of the partnership, employment, or other professional relationship.

Under common law, courts consider various factors when assessing whether a challenged non-compete agreement is reasonable and thus enforceable (see BACKGROUND).

Allowable Scope and Restrictions

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

1. necessary to protect a legitimate business interest;

2. reasonably limited in time, geographic scope, and practice restrictions as needed to protect that interest; and

3. otherwise consistent with the law and public policy. (These factors are similar to those under the common law.)

The bill sets more specific restrictions for such covenants that are entered into, amended, or renewed on or after July 1, 2016. It prohibits these covenants from restricting a physician's competitive activities (1) for longer than one year and (2) beyond 20 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). It also provides that these covenants are unenforceable against the physician if (1) the employment contract or agreement expires and is not renewed or (2) the employer terminates the employment or contractual relationship without cause.

The bill sets an additional restriction for such future covenants not to compete between physicians and (1) hospitals, health systems, or medical schools or (2) medical foundations formed by any of these entities. It allows these covenants to restrict a physician's right to practice only with another such entity or medical foundation.

If a covenant is rendered void and unenforceable under the bill, the remaining provisions of the contract remain in full force and effect. This includes provisions requiring the payment of damages for injuries suffered due to the contract's termination.

The bill specifies that the party seeking to enforce a physician covenant not to compete bears the burden of proof at any proceeding.

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 through its employees or agents who are physicians, chiropractors, optometrists, or podiatrists (“providers”) and (2) prohibits a medical foundation from operating for profit (even if organized by a for-profit entity).

The bill allows an independent practice association of physicians to organize and join a for-profit or nonprofit medical foundation for this same purpose. Under the bill, an “independent practice association” is an organization:

1. having owners or members that consist entirely of independent providers or that is owned by a tax exempt state-wide professional medical membership association and controlled by independent providers and

2. that provides services to and on behalf of its members or owners, which may include practice management and administrative services such as accounting, payroll, billing, human resources, and information technology.

The bill provides that only a physician may be an owner or member of, or otherwise own or control, directly or indirectly, an independent practice association.

The bill also allows certain other business entities to form or join a for-profit or nonprofit medical foundation for this purpose. This authority applies to an entity that:

1. is registered to do business in Connecticut under applicable state law;

2. has its principal place of business in the state; and

3. has at least 60% of its ownership and control held individually or jointly by (a) an independent practice association, (b) a provider, or (c) a professional partnership, professional corporation, or LLC that is not a “captive professional entity” (as defined in section 2, see below), and that is formed to render professional services.

Each partner, shareholder, or member of the partnership, professional corporation, or LLC must be a physician.

Under the bill, an independent practice association or other business entity as described above organizing a medical foundation must not be owned or controlled by a hospital, health system, medical school, or medical foundation organized by any of them.

As under existing law, any entity may organize and join no more than one medical foundation.

Current law provides that the non-stock corporation law applies to medical foundations, 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 these entity laws apply but 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 at least as many providers as non-provider employees on 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 business entity 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 currently required, 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 the physicians employed by or acting as an agent of the medical foundation and the locations where they practice;

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

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

Under current law, this annual reporting must include 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.

Relationship to Other Laws

The bill specifies that the medical foundation law does not (1) modify, impair, supersede, or create an exemption from any state antitrust law or (2) authorize conduct in violation of the state antitrust act, state unfair trade practices act, or any other state or federal law.

2 — CAPTIVE PROFESSIONAL ENTITIES

The bill expands an existing definition of “captive professional entity” that applies to notice requirements of certain material changes to physician group practices (see BACKGROUND). This definition also applies to the bill's provisions on medical foundations (see above).

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 a 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 organizations, whether through ownership, governance, contract, or otherwise.

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.

The bill eliminates a requirement that the notice include the website and toll-free phone number of the patient's health carrier from which to obtain information on in-network providers and estimated out-of-pocket costs for the referred service. Instead, it requires the notice to advise the patient to contact his or her carrier to obtain information on other in-network providers and such estimated costs.

4 — HEALTH CARE CABINET STUDY

The bill allows the Health Care Cabinet to study the licensure of urgent care and limited service health clinics. If the cabinet completes such a study, it may report on the study's results to the Public Health Committee. Any such report, if submitted, must include recommendations for legislation to establish licensure categories for these clinics.

BACKGROUND

Common Law Regarding Non-compete Agreements

In Connecticut, courts currently consider the following factors to evaluate whether a particular employment non-compete agreement is reasonable:

1. the length of time the restriction operates;

2. the geographical area covered;

3. the fairness of the protection accorded to the employer;

4. the extent of the restraint on the employee's opportunity to pursue his or her occupation; and

5. the extent of interference with the public's interests (Robert S. Weiss & Associates, Inc. v. Wiederlight, 208 Conn. 525, 529 n. 2 (1988) (citing an earlier state Supreme Court case)).

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 (CGS 19a-486i).

COMMITTEE ACTION

Public Health Committee

Joint Favorable Substitute

Yea

18

Nay

10

(03/21/2016)

Judiciary Committee

Joint Favorable

Yea

18

Nay

13

(04/15/2016)