healthlaw reference

- Spring 2003 -

Supreme Court Rules on Assignability of Noncompetition Agreements

By Scott R. Leah, Esq.

A large number of medical practices in Western Pennsylvania have been sold in the last few years. However, many practices do not realize that a recent decision by the Pennsylvania Supreme Court may have a substantial impact on the value of that practice.

Imagine this scenario. You are preparing to sell your practice, but the buyer is concerned that you were the glue that held it together. Without you, she fears that while she may buy your hard assets (equipment, furniture, computers etc.), she may lose all the key employees and, as a result, most, if not all, of your patients. That buyer is unlikely to offer you what you consider to be the fair value of your practice.

You, however, are not worried about this scenario, because you had the foresight to have all of your key employees sign Employment Agreements that contained a covenant not to compete. You will simply include those Employment Agreements among the assets that you are selling, allowing the buyer to enforce the covenant not to compete and allowing you to receive top dollar for your practice.

According to the Pennsylvania Supreme Court, your solution to the above problem may not work, and could cost you thousands of dollars in lost value of your practice. In Hess v. Gebhard, 808 A.2d 912 (Pa. 2002), the PennsylvaniaSupreme Court held, for the first time, that covenants not to complete (sometimes called noncompetition agreements) are not assignable to another company unless the agreement itself specifically states that it is assignable.

In that case Hess, an employee of an insurance company, had signed an Employment Agreement that contained a covenant not to compete, preventing him from competing with the company for five years after the termination of his employment. The agreement was silent as to whether it was assignable. Hess' employer later sold the insurance portion of the business to Gebhard, specifically including all of the then-existing employee and customer contracts and agreements among the assets sold. Because Gebhard had no similar position available for him, Hess declined the lower positions that were offered to him and went to work for a competitor.

The Trial Court and the Superior Court both ruled that the restrictive covenant was enforceable by Gebhard. However, the Supreme Court reversed, holding that a covenant not to compete in an employment agreement is not assignable in the absence of a specific clause in the agreement stating that it is assignable. The Court reasoned that assigning a restrictive covenant is amaterial change to the agreement itself, which must be consented to by all parties. Moreover, the Court refused to assume that the parties intended the agreement to be assignable in the absence of such language, noting that employers could have easily included such clause in the agreement.

As the hypothetical at the beginning of this article shows, this case may have a profound impact on the value of your practice. If you are contemplating, or can foresee, the sale of your practice, it is imperative that you review the existing employment agreements to determine whether they contain a clause making them assignable without the consent of the employee. Without such a clause, you may be unable to get full value for the practice should you decide to sell it.
 

What should you do if the existing noncompetition agreements don't contain an assignability clause? There are several options. One is to place such a clause in all new employment agreements. Over time, due to the natural attrition of employees, more and more employees will have covenants that are assignable. If a sale is contemplated in the near future, however, you must seriously consider drafting new employment agreements for all of the key existing employees, including an assignability clause, and providing those employees with an incentive to discard their old agreement and agree to the new one. Only by making sure that all of the Employment Agreements are assignable can you ensure that you will get full value for your practice should you decide to sell it.

Scott Leah is an attorney in the firm's Litigation Department and is a member of the Health Care and Labor and Employment Practice Groups. If you would like more information on this topic, or have questions about any employment issue, please contact Scott at 412-594-5551 or via e-mail at sleah@tuckerlaw.com.

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Malpractice Insurance Premium Subsidies by Hospitals

By Michael A. Cassidy, Esq.

We are all aware of the turmoil created by the malpractice
insurance situation. Insurance costs in many states have risen dramatically. The availability of insurance in some states has declined or has become almost non-existent. Physicians who cannot obtain or afford insurance in some states are retiring early or joining in a mass exodus to more favorable locations. Tort reform legislation has been introduced on both the state and federal levels.

One short-term remedy proposed by a national hospital chain is to subsidize physicians for the increased cost of medical malpractice insurance. The Office of Inspector General of the Department of Health and Human Services (OIG) recently responded to such a proposal. In a letter dated January 15, 2003, OIG was careful to emphasize that its letter did not constitute an advisory opinion, because the hospital request was not made in accordance with the appropriate federal regulations. However, the OIG letter was helpful in defining the government's position on this issue.

The OIG acknowledged the need for assistance to "forestall disruption in the provision of medical services" and of the "current disruption in the medical malpractice liability insurance markets in some states." Furthermore, OIG recognized the impact on both access to healthcare and quality of care.

The hospital malpractice insurance subsidy proposal contained six main points:
1. it would be a temporary or interim program;

2. assistance would be available only to current active or new
members in the medical staff;

3. the amount of subsidy would be limited to the increase to the physicians' current malpractice costs;

4. the amount of the subsidy would not be related to the value or volume of any physician services or referrals;

5. the subsidy would not be dependedent upon any physicians' office locations or other hospitals; and

6. the physician would be required to perform certain services and waive certain litigation rights in order to participate in the plan, and the hospital represented that this exchange constitute fair market value for the subsidy.

As previously noted, the OIG did not issue an advisory opinion. The OIG did assure the hospital that "we will take these considerations into account in evaluating temporary financial arrangements designed to help assure continued access to care and will exercise our enforcement discretion accordingly."

The OIG did identify the existing safe harbor available under the existing Anti-Kickback Safe Harbor Regulations, i.e. 42 CFR 1001.952: (i) malpractice insurance costs for employees, (n) malpractice subsidy as part of the recruitment package for a new practitioner, and (o) malpractice subsidies for OB services in primary care health shortage areas. The OIG also noted that the Department of Justice has separate jurisdiction over the enforcement of the anti-kickback statute and that CMS has primary jurisdiction over the enforcement of the Stark Act and regulations.

Michael Cassidy is Co-Chair of the firm's Healthcare Practice Group. For more information on this topic, please contact Mike at 412-594-5515 or via e-mail at mcassidy@tuckerlaw.com.

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To Plan Or Not to Plan?
That Should NOT Be the Question

By Charles J. Vater, Esq.

A great deal has been written about the possibility of a
permanent repeal of the federal estate tax law. Under
current law, the federal estate tax "exemption" amount is $1 million. This exemption amount increases to $1.5 million in 2004, $2 million in 2006 and $3.5 million in 2009. In 2010, the federal estate tax law will be repealed. That's the good news. The bad news, however, is that because of Congress' budgetary procedure rules, the repeal lasts for only one year. In 2011, the federal estate tax law will be reinstated in its current form and the exemption amount will be reduced to $1 million.

It is widely believed that Congress will not allow this uncertainty to continue. Most commentators who have addressed this unusual situation believe that Congress will do one of three things: (1) keep the current exemption increase schedule and make the repeal permanent in 2010; (2) accelerate the exemption increase schedule to a higher amount sooner, say $3.5 million and then "freeze" the exemption at that amount and not repeal the law; or (3) keep the current exemption increase schedule until 2010, and in 2010 "freeze" the exemption amount at $3.5 million and not repeal the law.
    
Among these alternatives, the permanent repeal of the estate tax law has received a lot of attention, particularly with the election of a Republican Congress. Unfortunately, the repeal of the federal estate tax was not part of President Bush's recent tax package. He did propose the acceleration of certain income tax rate cuts and the making permanent of certain other income tax benefits that were scheduled to be introduced during the next decade, but he did not propose either a repeal of the federal estate tax law or the acceleration of the estate tax exemption amounts.
    
What does all of this mean? It means that not since the institution of the federal estate tax law in 1916 has estate tax planning been more uncertain. It also means that estate planning has never been more important. Because of all of the uncertainty, it is easy for clients to become "frozen in the headlights" or simply to take the position that until there is certainty with respect to the federal estate tax law, planning is a waste of time and money.
    
You need to fight these urges. For even if the federal estate tax law is repealed, the most important decision with respect to estate planning, namely what you want to happen to your assets, must still be addressed. Particularly, if no estate planning is done, the law of the state in which a person lives will make a will for that person, and those results can be disastrous. They involve the distribution of assets to persons that you may not want to benefit. And even if the state laws do pass property to the intended persons, those laws may pass that property at ages which you would consider totally inappropriate under the circumstances.

In Pennsylvania, for example, if a person were to die without a will, the first $30,000 of a person's estate would pass to his or her spouse, and the balance of the estate would be divided 50/50 between the surviving spouse and children. In a situation in which the surviving spouse is not the parent of the surviving children, then that split is 50/50 for all assets. In addition, the distribution which passes to the children will be paid to them upon reaching age 18 rather than being held back until the children have reached more appropriate ages to receive large sums of money.

Estate planning also deals with a person's assets which have a beneficiary designation, the most common of which are life insurance policies and retirement accounts. If the beneficiary designations of these assets are not properly done, then large sums of money might end up being paid to the person's estate with extremely unfortunate estate and income tax consequences.
 
With all the uncertainty surrounding the federal estate tax law, we strongly urge you to meet with us to discuss your estate planning needs. More than ever, you need to plan your estate in order to make certain that the assets which you have worked so hard to accumulate are in fact passed to the persons who are intended to receive them at a time when you want them distributed in the most tax-advantaged method possible.

Chuck Vater is Chair of the firm's Estates and Trusts Practice Group. If you would like more information about estate planning, please contact Chuck at 412-594-5556; cvater@tuckerlaw.com

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As Reserve Troops Are Called to Duty,
Employers Ask "What Now?"
 

The U.S. Military, preparing for possible war with Iraq, has
activated additional reserve troops, swelling the total to the
biggest since the Gulf War. What if one or more of your employees was among the reservists called to active duty?
You have to let him or her report to active duty, of course.
But do you have to take your employee back? Can you replace your employee? What happens to your employee's benefits while he or she is gone or when he or she returns?
 

You need to be familiar with the Uniformed Services Employment and Reemployment Rights Act of 1994, commonly referred to as "USERRA." All employers, public or private, large or small, are subject to USERRA. USERRA is a federal law which gives a member of the armed services certain job protections and guarantees if he or she is called to active duty.

If you work in Pennsylvania, you also need to be familiar with the Pennsylvania Military Leave of Absence Act, or the "Pennsylvania Law." All Pennsylvania public and private employers and their successors-in-interest are subject to the Pennsylvania Law. USERRA provides that if state law, including the Pennsylvania Law, gives a veteran greater rights than USERRA, the state law, including the Pennsylvania Law, overrides USERRA and must be followed by the employer. In other words, the employee called to active duty receives the best rights and protections available under either USERRA or state law, including the Pennsylvania Law.

The employee does have certain requirements and responsibilities if he or she wants to obtain the protections offered by USERRA, as follows:

• The employee must give his or her employer notice that he or she is leaving his or her job to serve on active duty. USERRA allows an employee to give this notice orally. Note that the Pennsylvania Law does not require any notice to the employer, so USERRA's notice provisions would not apply to Pennsylvania employees.
   
• The employee's civilian job must not have been a temporary position.
   
• The employee must promptly return to work upon discharge from active duty. "Promptly" means within 14 days of discharge if the employee has been absent on active duty from 31 to 180 days. For absences of 181 or more days, "promptly" means within 90 days of discharge. "Return to work" means a written application from the employee for work as well as an actual physical return by the employee to the worksite. The Pennsylvania Law provides that an employee's military leave of absence ends 90 days after (i) the end of the period for which the employee was drafted or (ii) the end of the period for which the reserve member was activated, which may be longer than the periods specified in USERRA.
   
• The employee cannot be absent for more than five years on active duty. Periodic and special Reserve and National Guard training generally does not count towards this five-year period. The Pennsylvania Law does not specify any maximum period of service, so the five-year limit does not apply to Pennsylvania employees.
   
• The employee must have received an Honorable or General discharge. If the employee remains in the reserves and so is not discharged, the employer can still require some proof from the employee's unit that his or her period of service was honorable, such as a letter from the employee's commander.
   
• The IRS has taken the position that the loss of coverage under an employer health plan as a result of military service (i.e., reservists being called to active duty) is a qualifying event requiring COBRA continuation health coverage to be offered to the employee and any qualifying beneficiary (i.e., the employee's spouse or dependents.) USERRA itself separately requires that the employee can elect to continue health plan coverage for himself or herself and any dependents during a period of absence for uniformed service, for a maximum of 18 months from the date the absence begins, or if shorter, from the date on which the person fails to apply for or return to a position of employment within the time allowed by USERRA, at 102% of the cost of coverage calculated in the same manner as COBRA. However, USERRA does not provide for notice,election or premium payment procedures. As a practical matter, therefore, the employer should treat a loss of coverage due to military service in the same manner as any other COBRA qualifying event, following the election ,notice and premium payment procedures it follows for other COBRA qualifying beneficiaries who lose health care coverage due to termination of employment.
   
• The employer must re-hire the employee and give him or her the same status, seniority and pension rights as if the employee had never left. If the employee's peers received promotions and/or raises while the employee is on active duty, the employer must promote or increase the employee's pay in the same manner as his or her peers upon the employee's return to employment. When the employee is re-hired, the employee cannot be treated as having incurred a break in service under the employer's pension plan (which includes both defined contribution and defined benefit pension plans) as a result of the employee's period of active duty. Also, upon re-employment, an eligible employee must have his or her period of active duty credited as service under the pension plan for both vesting and benefit accrual purposes. The employee must also be given the opportunity to make up any elective deferrals (401(k) contributions) or other employee contributions he or she did not make as a result of his or her period of active duty. Once these elective deferrals or other employee contributions are made up by the employee, the employer must contribute to the pension plan any contributions that are contingent upon or derived from such deferrals or contributions (e.g., matching contributions.)
   
• Once the employee is re-hired, the employer must train theemployee on any new equipment or techniques, refresh the employee's skills if necessary and accommodate any service-related disability.?? The employer cannot fire the employee for a "protected period" after the employee is re-hired unless the employer can prove that the employee's firing was not due to military service and long absence. If the employee was absent due to active duty for 30-180 days, his or her protected period is six months following his or her return to employment. If the employee's absence due to active duty is longer than 180 days, the employee's protected period is one year following his or her return to employment.
   
• The employer must immediately reinstate the employee and his or her family to coverage under the employer's health plan when the employee is re-hired, with no waiting period and no exclusion for pre-existing conditions (other than service-connected conditions determined by the Department of Veteran Affairs.)
   
• The employer must allow the employee to use accrued vacation time or annual leave while on active duty if the employee so requests. This means that an employee with eight weeks of accrued vacation can request to use this vacation during a period of active duty and the employer must pay the employee his wages during that vacation period.
   
• Both USERRA and the Pennsylvania Law generally prohibit discrimination in employment based on past, current or future military obligations, including hiring, firing, re-employment, retention in employment, promotion or any benefit of employment.

USERRA provides members of the armed services with substantial protections before, during and after their active duty service. Employers need to be familiar with their responsibilities under these laws.
 

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OIG Issues Advisory Opinion Rejecting
Hospital/Physician ASC Joint Venture

By Michael A. Cassidy, Esq.

OIG Advisory Opinion No. 03-5, issued February 6, 2003, analyzes a proposed hospital/physician ASC joint venture and concludes: "...the Proposed Arrangement could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions on [Company X] under Section 1128(b)(7) or 1128(a)(7) of the Act..."

Facts
     The proposed arrangement contemplated the creation of an ambulatory surgery center LLC (ASC) to be owned 51 percent /49 percent respectively by a Multi-Specialty Medical Group Practice (Group) and a Hospital. The ASC would maintain an open medical staff and the investment return would be directly proportional to capital investment. The advisory opinion does not state whether voting or governance interests were created in proportion to capital investment.

The OIG's concern regarding the kickback potential posed by the arrangement, and the arrangement's failure to satisfy the existing ASC Safe Harbor, arises from the Group's organizational structure. The Group has 52 physician shareholder/employees, plus other employed physicians and other health care professionals. The ASC has certified that "...salaries, bonuses and other forms of employment-related remuneration payable to Group Physicians will not take into account the physicians' referrals of patients to the Surgical Center or the volume of surgical procedures performed by the physicians at the Surgical Center or elsewhere."

The Advisory Opinion begins the legal analysis by repeating the fundamental principle of the anti-kickback statute, i.e. if in any arrangement, even one purpose of the arrangement is to pay or solicit remuneration in exchange for referrals, then the arrangement could violate the statute.
  
A Safe Harbor for investment interests in ambulatory surgery centers jointly owned by hospitals and physicians is provided in 42 C.F.R. §1001.952(r)(4). However, one requirement regarding investing physicians who are in a position to make referrals is that they meet certain investment restrictions. Since the Groups would invest as an entity, all of the Group physicians must meet both the 1/3 practice income test and the 1/3 practice test of 42 C.F.R. §§1001.952(n)(3)(ii) and (iii), respectively.

The intent is to limit safe harbor protection to "...physician investors who actually use the ASC on a regular basis as part of their medical practices or who practice the same specialty as other physician investors and are therefore unlikely to refer substantial business to "competing" physicians..."

In the proposed arrangement, the OIG concluded neither condition would be satisfied. Since few of the members of the multi-specialty group were surgeons who would actually use the ASC, there would be a substantial likelihood of cross-speciality referrals. Therefore, safe-harbor protection is unavailable, and the OIG concluded the arrangement could generate prohibited remuneration and risk administrative sanctions.

Mike Cassidy is Chair of the firm's Healthcare Practice Group. If you would like a copy of the Advisory Opinion or more information on this subject, contact Mike Cassidy at 412-594-5515 or via e-mail at mcassidy@tuckerlaw.com.

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News and Notes -- Tucker Arensberg Attorney Publishes Article for American Health Lawyers Association

In January 2003, Mike Cassidy's article, "Immunity for Credentialing Decisions Under Federal and State Law" was published as a Health Lawyers: Expert Series for the American Health Lawyers Association. The following is an outline of the article:

• Introduction to Peer Review
• Credentialing Models
• Immunity for Participation and Decisions in The Peer Review Process
• Confidentiality
• Bylaws as Contracts
• Data Bank Querying and Reporting
• Managing the Data Bank

For a copy of this article, please contact Mike Cassidy at 412-594-5515 or via e-mail at mcassidy@tuckerlaw.com.  Members of the American Health Lawyers Association may access the full article at www.healthlawyers.org/pg/cpr/briefings.cfm.

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