|
healthlaw reference
- May 2004 -
Protecting Your Patient Base:
The Role of Restrictive Covenants
By Scott R. Leah, Esq.
Unlike some businesses, whose customers may only patronize that business
once, a medical practice is often dependant on its repeat “customers.”
It is that existing patient base which gives the practice value and it
is often critical that it be protected.
There are three primary methods of protecting your patient base from an
employee who leaves to join another practice or open up a competing
practice: noncompetition agreements, nonsolicitation agreements and
nondisclosure agreements. These are not mutually exclusive, as they
provide different types of protection to the employer. It is therefore
wise to have all three types of protection in employment contracts.
A noncompetition agreement restricts
where a former employee can practice. This is typically defined in terms
of a geographic area, such as a set number of miles from the employer’s
place or places of practice. The duration of a noncompetition agreement
must be reasonable, typically one to three years.
A nonsolicitation agreement
prohibits the former employee from directly or indirectly soliciting the
patients of the practice. This prevents the former employee from setting
up a practice just outside the geographic area set forth in the
noncompetition agreement and then actively soliciting the patients to go
over that imaginary line to his or her new practice.
A nondisclosure agreement can
prohibit the former employee from disclosing the names of the patients
of the practice to any other person or entity. This prevents the former
employee from getting around the above prohibitions by providing patient
names to a third party to solicit.
Medical practices should consider whether they need all three types of
protection. If you do, and your current employment contracts do not
contain all three provisions, you may want to consider adding them to
future employment contracts. You also should consider whether you should
replace existing employment contracts to include those protections.
Scott Leah is an attorney in the firm’s Health Care Practice Group
with a concentration in employment law. For more information on this
topic, please contact Scott at 412.594.5551 or
sleah@tuckerlaw.com.
Physicians Owning Real
Estate
By William T.
Harvey, Esq.
Many physicians have an opportunity to own the real estate occupied by
their practice. How should such real estate be owned? This article
explains the alternatives.
Three types of ownership arrangements should be rejected immediately.
First, the real estate should not be held in the name of the practice
for a number of reasons, the most important of which is to protect the
real estate from malpractice claims against the practice. Second, the
real estate should not be owned in the individual names of the
physicians or in a general partnership owned by the physicians, since
individual or general partnership ownership will subject the physicians
to personal liability for any obligations that may arise in connection
with the real estate (for example, asbestos and other environmental
liability, uninsured or under-insured liability for fire or accidents
related to the real estate. Third, the real estate should not be held in
a regular “C” corporation because (1) the owners can’t deduct any losses
generated by the real estate on their personal tax returns and (2)
income distributions are subject to taxation twice, once at the
corporate level and again at the individual level.
The real estate should be held in one of three types of ownership: in a
limited partnership, in a limited liability company or in an “S”
corporation. All of these types of ownership would be considered “pass
through entities” for income tax
purposes—that is, all of the tax consequences of owning and operating
the real estate would be “passed through” to the individual owners and
would not be taxed at the “entity” level. This avoids the double
taxation of a “C” Corporation.
Set forth below is a brief outline of the major consequences of
acquiring and holding the real estate in each type of entity. At the end
of the discussion of each consequence is an evaluation of whether such
consequences would have a positive or negative effect on the entity.
Limited Partnership
1. How is it taxed? A limited partnership for tax law purposes is
taxed as follows: each category of income or loss would be reported by
the partner-ship, and the partnership will inform each partner of his or
her allocable share of such category of income or loss. The individual
partners would then report his or her share of the partnership’s income
or loss on his or her individual return — a positive consequence.
2. How difficult/expensive is it to form? Fairly expensive and
difficult to form. Two entities must be formed—a limited partnership
entity and a corporation or limited liability company to act as the
general partner of the limited partnership. Both require the filing of a
certificate with the State and the creation of an agreement similar to,
but generally more complicated than, a general partnership agreement —a
negative consequence.
3. How difficult/expensive is it to operate? Once formed, it
would not be too difficult to operate. However it is important that the
general partner (whether a limited liability company or a corporation)
keep accurate books and records and minutes of meetings so that it is
viewed as a separate entity from the individuals and the limited
partnership — a neutral consequence.
4. Are there limits on the liability of the individual participants
for the obligations of the venture? None of the individuals will have
any personal liability for any of the obligations of the limited
partnership unless they specifically agree to guaranty the partnership’s
obligations — a positive consequence.
5. How easily can the creditors of the individual participants
interfere with the ownership of the real estate? The creditors
cannot obtain any interest in the real estate other than a charging
order against a partner’s interest to receive whatever distributions the
partner is entitled to. As further protection, a creditor executing on a
partnership interest of a partner could be listed in the partnership
agreement as grounds for the buyout of the partner’s share — a
positive consequence.
6. How hard is it to transfer interests in the venture to others or
adjust ownership percentages? It is fairly easy to transfer
interests and to bring on new partners—as long as it is provided for in
the limited partnership agreement — a positive consequence.
Limited Liability Company
1. How is it taxed? It is taxed like a partnership—see “Limited
Partnership,” above — a positive consequence.
2. How difficult/expensive is it to form? It is not too difficult
to form, although an LLC certificate must be filed with the State and an
operating agreement must be created — a neutral consequence.
3. How difficult/expensive is it to operate? It is fairly
expensive to operate. In addition to the requirement to make sure that
all meetings and decisions are documented and kept in a minute book, the
LLC is also liable for Pennsylvania capital stock tax —a negative
consequence.
4. Are there limits on the liability of the individual participants
for the obligations of the venture? Just as in a limited
partnership, the individual members of a limited liability company are
not liable for the obligations of the limited liability company —a
positive consequence.
5. How easily can the creditors of the individual participants get
ownership of the real estate? The creditors cannot obtain any
interest in the real estate other than a charging order against a
member’s interest, which would entitle the creditor to receive whatever
distributions the member is entitled to. As further protection, a
creditor obtaining such an order could trigger a buyout of the member’s
interest under the terms of the Limited Liability Company’s operating
agreement —a positive consequence.
6. How hard is it to transfer interests in the venture to others or
adjust ownership percentages? It is fairly easy to transfer
interests and to bring on new members—as long as it is provided for in
the operating agreement — a positive consequence.
“S” Corporation
1. How is it taxed? An “S” corporation is taxed in a manner
similar to a partnership, except that the “S” corporation shareholders
are more restricted as to the allocation of tax benefits than are the
other entities that are taxed like a partnership —a positive
consequence.
2. How difficult/expensive is it to form? Articles of
incorporation must be filed with the State and a minute book and bylaws
must be prepared. A shareholder agreement should also be prepared. The
cost is normally similar to the cost of the formation of a limited
liability company. An “S” election must be filed with both the state and
federal governments —a neutral consequence.
3. How difficult/expensive is it to operate? Minutes and consents
must be prepared for all corporate actions and officers and directors
should be elected annually. Although state or federal income taxes do
not apply, Pennsylvania capital stock tax applies — a negative
consequence.
4. Are there limits on the liability of the individual participants
for the obligations of the venture? Just as in a limited partnership
and limited liability company, the shareholders of a “S” corporation are
not liable for the obligations of the “S” Corporation — a positive
consequence.
5. How easily can the creditors of the individual participants
interfere with ownership of the real estate? The creditors cannot
obtain any interest in the real estate other than a levy to obtain the
shareholder’s shares in the corporation. For further protection, this
can be included as an event triggering a buyout of such shares under the
shareholder agreement —a positive consequence.
6. How hard is it to transfer interests in the venture to others or
adjust ownership percentages? It is fairly easy to transfer
interests and to bring on new shareholders under Pennsylvania corporate
law. The “S” corporation rules generally require that shareholders be
individuals and limit the number of shareholders to 75. None of those
limits would normally impact the physician ownership — a positive
consequence.
Once the entity is selected and the real estate transferred to the
entity, make sure the practice enters into a lease with the entity
owning the real estate.
In conclusion, physicians can choose one of several entities to hold
real estate related to their practice. The pros and cons of several
types of entities have been described above, but the description is not
complete. As you can see from the above, the decision may not be a
simple one. We suggest contacting your lawyer and your accountant to
help you make your decision.
Bill Harvey is a shareholder in the firm’s Health Care Practice
Group. For more information on this topic, please contact Bill at
412.594.5550 or via e-mail at
wharvery@tuckerlaw.com.
Key Components of Stark
II/Phase II Regulations
By Michael A. Cassidy,
Esq.
On March 26, 2004, CMS finally released the last portion of the Stark
Regulations, designated as Phase II of Stark II, which will be effective
July 26, 2004. These regulations come more than 11 years after the Stark
II legislation was passed. This article will review the highlights of
the new regulations.
Clarification of Important Terms and
Concepts
Physician Compensation
The issue of physician compensation appears in almost all facets of the
Stark Regulations, so there is no single regulation which completely
defines this concept. Phase II clarifies several issues that arise
throughout the regulations:
-
Set In Advance: Several of
the regulations require that compensation structures be “set in
advance”. There has been significant concern that any type of
compensation formula based upon volume, a volume of performed services
and not value or volume of referrals, could never satisfy the set in
advance requirements because the aggregate compensation would
ultimately fluctuate with the volume. Phase II regulations confirm
that unit-based compensation will not be deemed not to be set in
advance merely because the aggregate compensation will vary. There are
other fair market value standards imposed upon physician compensation,
but this issue does clarify the set in advance concept.
-
Fair Market Value: Phase II
Regulations provide a safe harbor for physician compensation.
Compensation will be deemed to satisfy fair market value standards if
it satisfies requirements defined by either the average of a number of
national physician compensation surveys or the hourly compensation
paid by local hospitals to emergency room physicians, if no other
information is available.
-
Incident to Bonus: Phase II
Regulations confirm that productivity bonuses based upon “incident to”
services will only be available in group practices. In all other
situations, productivity bonuses may be based solely upon services
personally performed by physicians.
Referral Definition
Phase II regulations also
clarify a number of important issues regarding referrals, as follows:
-
Compensation may be
conditioned upon referrals in bona fide employment relationships,
managed care and other contracts;
-
Physicians who personally
perform services that they order will not be deemed to be making
referrals; and
-
Physicians in sole
professional corporations will also not be deemed to be making
referrals to their professional corporations for services they
personally perform.
Early Termination
One requirement for the exceptions relating to equipment leases, office
leases and personal service arrangements is the existence of a written
contract with a term of at least one year. Phase II Regulations confirm
that premature termination of these relationships will not result in
failing to meet the requirement of the exceptions, so long as the
arrangement is not renegotiated during the first year of the original
term.
Mandatory Reporting
Mandatory reporting was eliminated by the Phase II Regulations. Instead,
physicians and other providers who engage in transactions intended to
satisfy the Stark exceptions must report on the existence of those
relationships only at the request of CMS, and must maintain records
relating to those transactions and relationships.
Same Building Requirement
The ancillary services exception originally required, as one of its key
conditions, that services will be performed either in the same building,
a centralized building or utilized by the practice for the provision of
designated health services. The definition of “same building” was
altered significantly to allow designated health services to be
performed in premises occupied part time by practices provided that the
practice was providing other physician services from the facility.
New Major Exceptions
Physician Recruitment
Remuneration provided by a hospital to recruit a physician which is paid
directly to the physician for the purpose of relocating his practice to
the hospital’s geographic service area will not be a prohibited
compensation arrangement if the agreement is a signed written agreement,
the arrangement is not conditioned upon referrals to the hospital, the
remuneration is not determined in reference to the value or volume of
anticipated referrals or other business generated, and the physician is
not prohibited from establishing medical staff privileges at other
hospitals (unless this is in accordance with the permitted employment or
service contract exception). The geographic service area is defined as
the area serviced by the hospital comprising the lowest number of
contiguous zip codes from which the hospital draws at least 75 percent
of its patients. Relocation requires that the physician move his
practice at least 25 miles or that the new practice derives at least 75
percent of its revenues from new patients not previously seen by the
physician for the prior three years, although there is a grace period
for the initial year if it is reasonably expected that these conditions
will be satisfied. Residents and physicians in practice for less than a
year are not subject to the relation requirements.
Retention Payment in Underserved Areas
Remuneration provided by hospitals or federally qualified health centers
paid to physicians to retain physicians in their respective practice
areas will not be a prohibited compensation arrangement if the area is a
designated healthcare professional shortage area, the physician has a
bona fide written offer from another hospital or FQHC, and the retention
payment is lower than the difference between the current compensation
and the new offer or the reasonable cost for the hospital or FQHC to
replace that physician. Retention agreements may not be entered into
with an individual physician any more frequently than once every five
years.
Temporary Noncompliance
Because of the technical and rigorous exceptions to the absolute Stark
prohibition regarding referral and billing by related entities, a major
concern for all healthcare providers has been assuring 100 percent
compliance for exceptions at all times. CMS has issued an exception for
temporary non-compliance, provided the arrangements satisfy the
exceptions for the 180 days preceding the date of the non-compliance and
the non-compliance issue is rectified within 90 days following the
inception of the noncompliance issue.
Community Wide Information Technology System
CMS is allowing entities to provide items or services to physicians that
allow access to and sharing of electronic healthcare records and related
information so long as the items or services are available to all
physicians in the area, are principally used by the physician as part of
the system, and are not provided in a manner that reflects the volume or
value of referrals or other business generated by the physician.
Academic Medical Centers
Services provided by academic medical centers will not violate the Stark
prohibition if the referring physician is a bona fide employee of the
medical center and has a bona fide faculty appointment, provides
substantial academic or substantial clinical teaching services or a
combination thereof. The total compensation paid by the academic medical
center is set in advance and does not exceed fair market value, and the
academic medical center itself meets a number of conditions relating to
its support of its academic medical center mission, the existence of
written agreements, and the limitation of the funds paid to the
referring physicians regarding bona fide research or teaching.
Miscellaneous Exceptions
CMS also issued a number of less significant exceptions, including
exceptions for charitable donations, referrals in rural areas to family
members, professional courtesy, obstetrical malpractice insurance
subsidies that satisfy the fraudulent abuse of safe harbors, and
non-monetary compensation from entities with an aggregate annual value
of less than $300.
Michael Cassidy is the Chair of the firm’s Health Care Practice
Group. For more information on this topic, please contact Mike at
412.594.5515 or via e-mail at
mcassidy@tuckerlaw.com.
Patent Pointers: “Prior
Art” Search
People often have ideas for new products or ways of doing things that
are better than currently exist, but they are unsure whether their idea
is patentable and, if it might be, how best to get that protection.
This article provides a basic overview if you think your product or idea
might be eligible for patent protection. Generally, patent protection
may be sought for new methods of doing things, new articles of
manufacture or new compositions of matter. The patent system was set up
to reward inventors for sharing their innovations with the world by
giving the patent owner the right to stop others from practicing that
which is taught in their patent. While patent protection generally lasts
only for twenty years from the date of first application, the right
patent in a hot industry can be quite lucrative for an inventor if
obtained and licensed properly.
To be eligible for patent protection, an inventor needs to come up with
an original and useful product or way of doing something that has not
been done before. In legal terms, this new article of manufacture,
composition of matter or process must be “new, useful and non-obvious”
in light of the current state of the art in the relevant field.
Prior to filing for patent protection, assuming your invention fits
within the statutory description of patentable things, you should
perform a thorough “prior art” search. For example, you will need to
know:
Is there anything similar to your idea on
the market already?
A good first step in determining whether your idea complies with the
novelty requirement under U.S. patent law
is to scour the marketplace to determine whether someone else is already
selling your product or using your process. We often counsel clients to
look at trade magazines and catalogs, but the internet is also a good
initial mechanism for determining whether your particular idea is new or
original. This so-called prior art market search, however, serves a dual
purpose. While you are looking to see if your invention is already being
sold, make a note of those companies that you believe manufacture
products that are either similar to yours or could be the predecessor to
your invention. These notes will come in handy later when you are trying
to license your invention.
Has your invention been patented already?
Assuming your initial market search shows that your product is not
already being sold, you should consider having a professional search
agency perform a review at the patent office to determine whether or not
there are any “prior art” patents which cover your invention.
Essentially, this search will turn up all patents that the search agency
deems relevant and/or similar to the process or design you disclose to
them.
Inventors are often surprised to find that an invention has been
patented by someone else, but does not exist in the marketplace. While
there are a host of reasons why this might be so, it does not nullify
the other party’s patent rights. Unlike trademarks and service marks,
patent protection is not dependent upon actual use in the marketplace.
Ownership of patent rights is sufficient to block others from practicing
the invention.
If your prior art search turns up something that is similar to your
invention, you should take careful note of the differences and consider
whether those differences produce a result that someone skilled in that
particular area of technology would consider surprising or unexpected.
Then, you should consider consulting a patent attorney to assist you in
evaluating your invention further. In our next newsletter, we will
explore the next steps in the patent process.
< Back
|
