Expect the Expected: Contracting for and Navigating Health System Affiliations
In an era of consolidation, physicians can often feel lost in the shuffle. Multi-million dollar deals occur every day, but many times, those providing the care are the last to know of significant changes impacting its delivery. There are various vehicles for affiliation in the modern health care market, including mergers, acquisitions, joint ventures, joint operating agreements and clinical co-management agreements, among others. Each type of transaction at the facility level can impact physicians differently, and there may be further differences depending on whether the physician is employed versus under contract to provide services as an independent contractor.
With respect to the medical staff, the size and sophistication of the parties to a transaction will likely determine the resultant governance structure and composition. Where a stand-alone hospital becomes part of a larger, regional system, the larger organization’s policies and procedures, including medical staff bylaws, will typically be put into place following closing. If the larger system does not own or operate a competing facility in the service area of the stand-alone hospital, the composition of medical staff may not immediately change, but those providers failing to meet the credentialing and performance standards put into place by the larger system may be pushed out. Further, culture changes within the organization are likely to directly impact physician staff, particularly where the transaction was not a merger among equals.
At a local level, where competing hospitals join together, there may be a consolidation of services or allocation of specialties between the two facilities in order to increase efficiencies and improve overall quality of care. It may be the case that those efficiencies and improvements were the overarching business objectives for the transaction, especially as quality and outcome metrics increasingly drive reimbursement rates and, in turn, the financial health of hospitals. Similarly, if the contemplated transaction is a joint operating or clinical co-management arrangement, the core service lines are likely to experience material personnel changes in order to maximize the benefits and strengths each party brings to the table. As markets continue to consolidate, physicians must be attuned to the developments communicated by management as discussions progress with potential affiliation partners.
On the other hand, where the integration is system wide, there may be duplicate arrangements in place that will need to be reconciled after closing the deal. For example, if two hospitals affiliate and each has an exclusive provider agreement for diagnostic radiology services for the same or similar geographic areas, only one will likely remain in place unless the volume of patient care dictates that both arrangements should remain. Sometimes, the hospital or health system will encourage the two exclusive providers to merge to form a single provider group, which will provide the services under the new exclusive contract. However, often times, the consolidated system may wait to directly employ the most productive and qualified providers, which may have a market disrupting effect to both radiology practices.
These possibilities reflect a calculated business decision that health system administrators must weigh and consider, including which physicians and medical staff have minimal control. Although employed physicians and independent contractors may be impacted differently by a particular transaction, maintaining a thriving practice is a common concern to both categories. Accordingly, it is important to understand the protections and limitations of the applicable employment or services contract in effect when these situations occur. This article will identify a few of those relevant contract provisions, provide general guidance as to their meaning and applicability and ultimately provide tips on protections that can be negotiated into these agreements that anticipate and protect against hospital transactions.
Most agreements, whether employment contracts or independent service provider agreements, will address the ability of the parties to assign the contract, in whole or in part, with consent, without consent and/or upon the occurrence of certain events. The definition of an “assignment” is not always clear. Typically, the right to assign without consent will include a situation in which the “buyer” agrees to be bound by the agreement to the same extent as the “seller” – so in the case of a hospital that is acquired by another hospital, it is legally important whether the sale is a merger or an asset sale. In the case of the latter, the “buyer” may choose not to accept assignment of a particular contract as part of the sale. Because of the interest in preserving the continuity of care, it would be unusual for a buyer to singularly exclude physician contracts as part of the transaction. This does not, however, preclude the possibility of termination following the sale as part of system synergy efforts or targeted efficiencies initiates. We will discuss the relevant considerations with termination below.
Sometimes the assignment provision will also reference assignment “by operation of law” which would implicate a situation in which the hospital or health system entity bound by the contract legally merges “with and into” another legal entity. As illustrated, when Hospital A merges into Hospital B, everything owned by Hospital A is now owned by Hospital B (e.g. equipment, facilities, supplies, etc.), and similarly, all of Hospital A’s liabilities become liabilities of Hospital B (e.g. amounts due under contracts, malpractice claims, etc.). Hospital A ceases to exist. In this situation, the “assignment” process happens automatically based on the applicable state statute that permits corporate entities to merge, and there is no ability of the “buyer” (i.e. Hospital B above) to pick and choose which contracts to assign and which to leave behind. Unless expressly prohibited without consent, the hospital or health system will likely take the position that an assignment by operation of law is not an assignment subject to prior consent and will generally provide notice of the merger after the closing has taken place informing the physician party of the new owner.
While similar to assignment, a change of control provision deals with ownership changes at the ownership level above the contracting party. For example, the hospital is party to a personal services agreement with a neurology group and the corporation that owns the hospital is undergoes a change of control. In that instance, the parties to the agreement do not change, but the entity that controls the hospital or health system entity are changing, which may be relevant to the physician party to the contract. If, for instance, the controlling entity changes its structure as a religiously affiliated organization to a secular organization, the physician contracting party may be concerned with the changes in the scope of services following the transaction. Typically, such a provision will require either party to notify the other party of a change of control within a certain period of time either before or after the effective date and, if drafted favorably to the physician, will permit such party to terminate the agreement without penalty if not pleased with the new owner.
Term and Termination Clauses
Every contract should address the rights of the parties to terminate the arrangement. Termination rights are important to keep in mind when anticipating the potential effects of a transaction, as well as when weighing options after the arrangement goes into effect. Further, physicians should always be aware of the “term” of their agreement. While many times there will be a set term during which the parties anticipate the relationship will run (i.e. one year, two years, etc.) with options to renew, the right to terminate the agreement without any reason generally negates such a term. If the agreement permits the hospital or health system entity to terminate, for example, upon 30-days notice to the physician or physician group for any reason or no reason at all, the true “term” of such arrangement is 30 days. The important fact to keep in mind is that the time period in which the hospital or health system must provide notice may be the total time period in which the physician must seek an alternative source of income.
Conversely, the physician may have the right to terminate the agreement without stating a reason, which may be advantageous where the physician no longer wishes to practice with the new owner or post-affiliation health system. Typically, the parties should have equal rights in this regard, but the physician may be required to wait a longer period of time for the termination to be effective in order to minimize the disruption of care to patients. If asked to wait such a longer period of time, it may be advantageous to require in the contract that the hospital or health system wait equally as long before such termination is effective in order to provide the physician greater opportunity to seek alternative sources of income. Further, there may be additional restrictions on the physician’s ability to practice and seek alternative employment or contracts if the physician elects to exercise this right, as discussed in the section following below. All of these should be taken into consideration when determining whether exercising this right is an appropriate step.
Where state law permits physicians to be bound by restrictive covenants, the decision to terminate an agreement prior to the end of its stated term may result in restrictions being placed up the physician’s right to practice medicine within a certain geographic area for a certain period of time. Each state law varies as to the enforceability of non-competition provisions, but as a general requirement, the geographic area and duration must be reasonable in order to be enforceable. For example, if the physician decides to quit, he or she may have to relocate his or her practice a distance of 10 miles to continue practicing without violating a covenant not to compete. Typically, a covenant not to compete is limited to employees, whereas independent contractors, by definition, are providing services to multiple competitors. However, in any situation in which such a provision is included within the contract, it is important to understand under what circumstances it applies or does not apply.
As discussed above, most of the decisions impacting physicians are made at the administrative level based on business objectives and resource allocations. Accordingly, building in certain protections at the time of contract negations can maximize the ability to seek alternative income and provide flexibility as circumstances can change quickly. Specifically, consider:
- Addressing both assignments and assignments by operation of law and requiring notice of either before the change takes place, allowing ample time to consider the new business partner;
- Building in the right to receive notice of change of ownership prior to the effective date and to have a certain period of time to terminate the agreement without penalty if the business relationship with the new owner falters;
- Requiring notice of changes in key personnel who might be integral in a decision to remain with a hospital or health system; and
- Prohibiting the applicability of restrictive covenants where the hospital or health system exercises its right to terminate without reason.
In addition to the aforementioned contract protections, there may be certain rights and remedies available under the law where a contract is prematurely terminated or an employee is fired; however, those rights and remedies are outside the scope of this article. The foregoing is intended to serve as general guidance for navigating health system transactions and is not intended to be legal advice. The laws and requirements of each state pertaining to physician employees and independent contractors and the contracts, therefore, vary greatly. Physicians are encouraged to seek the advice of local counsel to determine the permissiveness of contract terms and any rights or remedies available in the applicable state.
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