Pennsylvania Bans Certain Health Care Related Noncompetes

IMPORTANT LEGAL UPDATE

On July 17, 2024, Pennsylvania enacted House Bill (HB) 1633 into law, known as the Fair Contracting for Health Care Practitioners Act (Act 74).  Among other provisions, Act 74 prohibits specific noncompete covenants for health care practitioners in Pennsylvania.

The Act takes into account multiple public policy grounds, including patient access to health care, the availability of practitioners, the leverage of hospitals, health care systems, or corporate entities in employing physicians, the negative impact of noncompetes on the delivery of health care, the lack of health care in much of rural Pennsylvania, the benefits of continuity of care, and the Commonwealth’s interest in retaining health care practitioners.

Act 74 is effective on January 1, 2025.

WHAT YOU NEED TO KNOW

To whom does Act 74 apply?

Licensed medical doctors, osteopaths, nurse anesthetists, registered nurse practitioners, and physician assistants each fall within the definition of “Health Care Practitioner” within Act 74.

What limitations are placed on Noncompete Covenants?

 For purposes of Act 74 a “noncompete covenant” is an agreement between an employer and a Health Care Practitioner that limits the health care practitioner’s ability to continue treating patients or taking on new patients independently or with a competing employer after the practitioner’s employment term.  As a foundation of Act 74, only certain noncompete covenants entered into after January 1, 2025, are permitted.  Act 74 deems all others as “contrary to public policy and void and unenforceable by an employer.”

What kind of Noncompete Covenants are permitted under Act 74?

 A Health Care Practitioner may be bound by their employer’s noncompete covenant if the covenant is limited to one year or less and the Health Care Practitioner terminated the employment relationship with the employer.  In other words, so long as the noncompete is for a year or less and the practitioner, not the employer, terminated employment, the noncompete is not prohibited. Of course, if the employer terminated the Health Care Practitioner or the noncompete covenant is for a year or more, it is not enforceable.

Act 74 also makes noncompete covenants permissible when part of (i) the sale of a Health Care Practitioner’s ownership interest in an entity, (ii) a sale of all or substantially all of the assets of the business entity, (iii) transactions resulting in the sale, transfer or change in control of the business entity, or (iv) an ownership interest in the business entity.

Are Preexisting Noncompete Covenants Affected by Act 74?

Yes. Preexisting noncompete covenants may be rendered void and unenforceable under Act 74 if a Health Care Practitioner is not a party to the sale, transfer, or other disposition set forth above.

How is Patient Notification addressed by Act 74?

 Act 74 requires that employers notify certain patients of the practitioner (i) of the fact that the Health Care Practitioner has departed, (ii that the patient has the right to choose to be assigned to a new practitioner within the existing employer, and (iii) with instructions on how to transfer health records if they choose to continue treating with the departing practitioner.  This notification to patients must be made by the Employer within 90 days after the departure of a Health Care Practitioner and applies to patients the practitioner has “seen within the past year” and with whom the practitioner had an “ongoing outpatient relationship” for at least two years.

Does Act 74 permit other restrictions on Health Care Practitioners?

 Yes.  Act 74 allows employers to contract for the recovery of reasonable expenses from a Health Care Practitioner that are: (i) directly attributable to the healthcare practitioner and accrued within three years prior to separation (unless separation is caused by the employer’s termination of the practitioner), (ii) related to relocation, training and establishment of a patient base, and (iii) amortized over a period of up to five years from the date of separation by the Health Care Practitioner.

What’s Next?

Noncompete agreements are under attack in most States and broadly by the Federal Trade Commission, as we reported in a Client Alert in April of this year.  Act 74 continues the stripping away of an employer’s leverage to contractually limit an employee’s right to compete post-employment relationship.  Both employers and Health Care Practitioners will be challenged to enforce and negotiate under Act 74.  Clarity in contractual terms will be essential, to supplement the broad strokes, and just as broad shortcomings, of Act 74.  Further, both employers and Health Care Practitioners now bound by employment agreements containing noncompete covenants must consider the effect Act 74 will have in 2025 on those existing contracts.

If you have a question concerning Act 74 or the effect of Act 74 on your medical practice, please contact Eric B. Smith, Esquire, 215-540-2653 or esmith@timoneyknox.com.

Mr. Smith, a partner of Timoney Knox, LLP, serves as Chair of the Firm’s Litigation Group and has been consistently recognized by Super Lawyers and Best Lawyers.   In 2017 he served as President of the Montgomery Bar Association.   For more information about Mr. Smith, please click here.

About The Author(s):

Eric B. Smith

Mr. Smith, a partner of Timoney Knox, LLP, serves as Chair of the Firm’s Litigation Group and has been consistently recognized by Super Lawyers and Best Attorneys since 2005.  In 2017 Mr. Smith served as the President of the Montgomery Bar Association.  His commercial and real estate litigation practice spans across the Commonwealth of Pennsylvania.

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