PA 16-95—sSB 351

Public Health Committee

Judiciary Committee

AN ACT CONCERNING MATTERS AFFECTING PHYSICIANS, HEALTH CARE FACILITIES AND MEDICAL FOUNDATIONS

SUMMARY: This act:

1. sets specific 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 ( 1);

2. expands the list of entities that may employ physicians by allowing independent practice associations and certain other business entities to establish for-profit or nonprofit medical foundations, and makes other changes concerning medical foundations ( 6-8);

3. expands an existing definition of “captive professional entity,” that applies to the medical foundation provisions and to existing notice requirements for material changes to physician group practices ( 2);

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

5. changes the information providers must give to patients when referring them to certain affiliated providers ( 3);

6. allows the Health Care Cabinet to study and report on the possible licensure of urgent care and limited service health clinics ( 4); and

7. makes technical and conforming changes.

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

Under existing 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

General Provisions. Under the act, 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. )

Covenants Entered Into on or after July 1, 2016. The act sets more specific restrictions for such covenants entered into, amended, extended, or renewed on or after July 1, 2016. It prohibits these covenants from restricting a physician's competitive activities for longer than one year and beyond 15 miles from the “primary site where the physician practices. ” It defines this latter term as (1) the office, facility, or other location from where a majority of the revenue from the physician's services is generated or (2) any other office, facility, or location where the physician practices and the parties identify as the primary site by mutual agreement in the covenant.

The act further provides that such physician covenants are unenforceable against the physician if the:

1. employer terminates the employment or contractual relationship without cause or

2. employment contract or agreement was not made in anticipation of, or as part of, a partnership or ownership agreement and the contract or agreement expires and is not renewed, unless before the expiration the employer made a bona fide offer to renew the contract on the same or similar terms.

The act also requires each covenant not to compete entered into, amended, or renewed on and after July 1, 2016, to be separately and individually signed by the physician.

Other Contract Provisions and Burden of Proof

If a covenant is rendered void and unenforceable under the act, 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 act specifies that the party seeking to enforce a physician covenant not to compete bears the burden of proof at any proceeding.

2 — CAPTIVE PROFESSIONAL ENTITIES

The act 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 act's provisions on medical foundations (see below).

Prior law defined a captive professional entity as a professional corporation, limited liability company (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 act (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 act 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 entities, whether through ownership, governance, contract, or otherwise.

3 — NOTICE OF REFERRAL TO AFFILIATED PROVIDERS

By law, health care providers generally must notify patients in writing 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 act eliminates a requirement that the written 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 these estimated costs.

4 — HEALTH CARE CABINET STUDY

The act 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 must include recommendations for legislation to establish licensure categories for these clinics.

5 — COST-TO-CHARGE RATIO ON HOSPITAL BILLS

The act 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. (Cost-to-charge ratio generally refers to a hospital's total expenses divided by its revenues. )

6-8 — MEDICAL FOUNDATIONS

Authority Extended to Independent Practice Associations and Other Specified Entities ( 6 & 7(a)-(b))

Existing law authorizes a hospital, health system, or medical school to organize and join a medical foundation to practice medicine and provide health care services through its employees or agents who are physicians, chiropractors, optometrists, or podiatrists (“providers”). Such a medical foundation is prohibited from operating for profit, even if organized by a for-profit entity.

The act allows additional entities to organize and join a medical foundation for this same purpose, and allows these medical foundations to be for-profit or nonprofit. This authority applies to (1) independent practice associations of physicians and (2) certain other business entities. Under the act, an “independent practice association” is an organization:

1. having owners or members who are independent providers, or that is owned by a tax exempt state-wide professional medical membership association and controlled by independent providers;

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

3. with only physicians as the owners, members, or persons otherwise who own or control the association, directly or indirectly.

The act's authority to form or join a for-profit or nonprofit medical foundation also applies to a business entity that:

1. is legally registered to do business in Connecticut;

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 2), 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 act, 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, an entity may organize and join only one medical foundation.

Board of Directors ( 7(d))

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 act 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 already 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.

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

Annual Reporting Requirements ( 7(g))

Existing law requires medical foundations to file specified information annually with the Department of Public Health's Office of Health Care Access (OHCA). The act (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 already required, the act 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 agents 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, medical foundations must already file a copy of their certificates of incorporation with OHCA. )

By law, this annual reporting must include a description of the medical foundation's services. The act 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 act, OHCA must make this information available to the public and accessible on its website.

Relationship to Other Laws ( 7(j) & 8)

The act 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.

Under existing law, 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. Under the act, new medical foundations are subject to other business entity laws, but the medical foundation law controls in the case of a conflict.

BACKGROUND

Common Law Regarding Non-Compete Agreements

In Connecticut, courts currently consider the following factors in evaluating 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 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 (1988)).

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) public health 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).

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