Category Archives: Post

By: Jan Yarborough

Contractual Indemnity clauses have no place in participating provider contracts. This is not news. Managed Care / Health Law continuing legal education presentations, position statements, and blog posts have been warning providers about this issue for decades.

For example, this February 10, 2012 Position Statement of American Academy of Emergency Physicians (“AAEM”):

Indemnification Clause in Emergency Medicine

Emergency physician contracts should not include indemnification or “hold harmless” agreements regarding the hospital or practice site. These agreements unfairly shift risk to emergency physicians and this risk is not generally insurable.

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Liability Coverage Policies Exclude CONTRACTUAL Indemnity Obligations

The “not generally insurable” phrase in the AAEM’s 2012 position statement reflects the fact that medical malpractice coverage policies expressly exclude coverage for contractual indemnity clauses. In discussions about this exclusion, liability carriers indicated that the exclusion does not apply to indemnity obligations enforced by common law (rather than under a contractual indemnity clause), so long as the coverage applied to the activity.

Not many years ago, managed care payors fully understood this issue facing providers and routinely deleted or allowed edits to the indemnity clause in their participation agreements upon request. Increasingly, however, payors react with horror and disbelief if the provider requests removal of contractual indemnity clauses. This growing reluctance appears to be because payors believe “indemnity” is a synonym for “damages” in a future breach of contract dispute. This belief is uninformed.

Indemnity Does NOT Mean Damages for Breach of Contract

If a party breaches its obligations outlined under a contract, courts assess damages for that breach of contract. This means that if a provider breaches a term in a participating provider contract, the payor may seek monetary or other relief for the damages to the payor resulting from the breach. This rule applies regardless of whether the contract includes an obligation for the provider to indemnify the payor.

Independent Actors Should Remain Responsible for Their Own Actions or Omissions

Participation agreements are neither agency nor employment agreements (and most of these agreements affirmatively so declare). Rather, these agreements require each party to meet its own obligations and responsibilities.

The common law of indemnity generally applies when parties are in unique relationships such as agent and principle, joint venturers, or employer and employee. The common law of indemnity does not apply to arrangements, where independent parties each have their own obligations. Participation agreements do not create the unique relationships where common law of indemnity routinely applies. In fact, those agreements routinely declare the providers to be independent contractors of, and not the agent of, the payor.

Public policy favors not shifting risk from one actor to another in circumstances when each party has its own obligations; each party will thus endure the consequences of failure to correctly perform its obligations. If a participating provider agreement obligates the provider to indemnify the payor, that means the provider essentially insures the payor’s risk for the payor’s own wrongful actions or omissions. Liability policies rightfully exclude contractual indemnity provisions to avoid covering the wrongful actions of a third party the carrier has never met and vetted.

Note, mutual indemnity clauses typically create, without clearly resolving, confusion between which party is actually assuming a given risk. A typical indemnity clause in a participation agreement likely will broadly obligate the provider to indemnity the payor for losses related to the provider’s “actions or omissions.” (Notably, this common language holds the provider responsible for any action or omission without regard to whether or not the action or omission is otherwise wrongful or negligent). Whether or not the contract also requires the payor to indemnify the provider for the payor’s actions or omissions, the provider’s liability coverage policy’s exclusion clause still applies. Furthermore, adding a mutual indemnity clause in these types of agreements – where each party has its own tasks under the contract and neither is agent of the other – leaves many questions as to how to apply the indemnity clause to shift risk between independent contractors.

Possible Tools

Commentary and articles consulted in the preparation of this article are unanimous in alerting providers to the unreasonable risk of contractual indemnity clauses. However, the several payors with these clauses in their participation agreements remain unconcerned (or unconvinced). Many payors claim (maybe correctly) that thousands of providers in North Carolina have voiced no objection to the clauses. Thus, if an informed provider requests complete deletion of the clause, the payor may accuse the provider of being an unreasonable, uninformed outlier.

Alternative approaches may be more effective. The provider could request his or her med mal carrier to review and provide a statement to the carrier outlining the unreasonable risk to the provider for contractual indemnity clauses. Alternative language deleting the indemnity clause, while stating that each party is responsible for its own actions or omissions may be accepted by the payor, especially if followed by a provision that states that either party may seek indemnification as available under North Carolina law.

Conclusion

Expenses and liability related to contractual indemnity clauses are expressly excluded in liability insurance policies such as medical malpractice coverage. This means attorneys’ fees and damages must be paid out of the provider’s own assets in the event of a dispute under contractual indemnity clause in a participating provider agreement.

By: James D. Wall, Esq.

How could a physician have any risk in being “friendly”? In this context, “friendly physician” refers to a particular type of arrangement where a physician-owned practice is managed by a management services organization, often referred to as an “MSO.” The term originates from the fact that the “friendly physician” is deemed to be friendly to the objectives of the MSO.

Basic Structure Involving a Friendly Physician

In North Carolina, a medical practice, with few exceptions, must be owned by those who are licensed to practice medicine in North Carolina. Certain businesses such as med spas and urgent care centers often have the need to practice medicine but are managed by entities that are not owned by physicians, and therefore cannot provide medical services. So, for example, if a med spa wants to provide certain injections that would constitute the practice of medicine, it must do so through a person who is licensed to provide the injection. Further, the licensee cannot be employed by the med spa to provide the injection; he or she must be employed by a practice that is licensed to provide the injection.

This conundrum is often addressed by the “friendly physician model” whereby a physician establishes a medical practice that is then managed by an MSO, which has expertise in financial, marketing and other non-clinical aspects of running a medical practice. The basic tenet is to leave to the medical providers the practice of medicine, and allow everything else to be managed by the MSO.

The risk is that MSOs overstep their boundaries and the relationship is viewed as only a “relationship on paper,” where the MSO actually usurps many of the obligations and responsibilities of the physician-owner. Our experience is that when these relationships run awry, the licensing board is much more interested in its licensee (in this case the physician) than it is the MSO. Physicians who may be willing to serve as a friendly physician need to understand certain obligations that may be endemic to being a friendly physician.

Read Everything

When I first started practicing law, I had a mentor who had sage advice on which I have relied over the thirty plus years I have practiced: “read everything.” In this context, it is important for the physician to read all of the documents involved in the relationship, which would include the organizational documents for the physician practice as well as the documents that memorialize the relationship with the MSO (primarily a management services agreement, often referred to as an “MSA”). Given the nature of the relationship and the stakes, it is often advisable for a physician to employ counsel. (Analogous to your barber or hairdresser telling you that you need a haircut, so it is that an article penned by a lawyer suggests that you obtain legal advice).

All Decisions Cannot be Turned Over to the MSO

While the MSO provides certain valuable services to the medical practice (marketing, receivables management, and human resource assistance), certain obligations cannot be turned over carte blanche to the MSO. For example, licensing boards will typically want licensees and not laypersons to counsel other licensees about failures to meet practice norms. Thus, an employee of the MSO should not counsel a physician on how the physician should practice medicine. If the practice relies on advanced practice providers “APPs”, then the collaborating and supervising physicians should also have a line of communication to the physician-owner and if not, to a person licensed to handle communications from licensees. It is important that there is no lay control over clinical decision-making. The issue of who is in control could become murky if there is a non-licensee in the chain of command regarding clinical issues.The physician-owner should either take an active role in counseling providers, or hire another licensee to assist in that endeavor.

Keep the Fees Flat

Further, our medical board has specific rules about fee-splitting, and would prohibit a fee based on a percentage of revenues or profits in this context. Fees to the MSO should be flat and not based upon the volume or value of referrals. Fees may be renegotiated periodically, but again, should not be based on the volume or value of referrals but should be based on the value of the managerial services provided by the MSO.

Take Care of Charts

Physicians have a special relationship with patients and the information that is generated by a patient visit. All physicians have (or at least should have) a working knowledge of the requirements of the Health Insurance Portability and Accountability Act and regulations adopted thereunder (HIPAA). If the MSO has access to the charts for billing or other purposes, the practice should have a HIPAA-compliant business associate agreement with the MSO. Additionally, the ownership of charts should be maintained by the physician practice.

Follow the Agreements

We have seen more than once situations in which the agreements establishing the friendly physician model were compliant, but the parties did not follow the agreements. It is basic. The physician should periodically review the agreements he or she signed to make sure the parties are adhering to their terms.

Act Like an Owner

In short, the friendly physician should act as if he or she owns the medical practice, because he or she does. This would include periodically reviewing financial reports as well as handling any complaints regarding providers (or delegating the handling of such complaints to someone who holds an appropriate license). Ultimately, the licensing board would look to the physician-owner to see if he or she “acted like an owner” in handling these issues.

By: James D. Wall, Esq.

In July, President Biden issued an executive order at least signaling his administration’s disdain for covenants not to compete for physicians (often referred to as “non-competes”). The Executive Order (EO) encourages the Federal Trade Commission to ban or limit non-competes, including in health care. While the EO did not ban non-competes in the health care setting, it is perhaps instructive about the stance the administration may take in the future.

Are Covenants Not to Compete Enforceable Against Physicians?

In some states, covenants not to compete are unenforceable for physicians. In North Carolina, courts continue to enforce covenants not to compete involving physicians, even when doing so forces hundreds of patients to find a replacement physician. Valid covenants must be narrowly tailored to protect the “legitimate business interest” of the employer.

What is a Covenant Not to Compete?

A non-compete restricts a physician from participating in certain job-related activities in a geographic region for a specific period of time, which often extends post-termination of employment.

Issues Regarding Enforceability

While courts in North Carolina enforce non-competes, there are certain restrictions. First, a covenant not to compete must be in writing. Thus, while an agreement of employment can be oral, a covenant not to compete must be in writing.

Second, the covenant must be supported by adequate consideration. Our courts have held that an offer of employment is deemed adequate consideration to support a covenant. Interestingly, our courts have held that mere continued employment is not adequate consideration to support a covenant. For example, if a physician has worked for an employer for several years, and the employer decides that it wants all of its providers to sign covenants not to compete, the employer must provide the employed physician consideration (e.g., a raise or bonus) to support the covenant. If the employer simply says, “sign this or you will be fired” and the physician signs, the covenant would be attacked for lacking supporting consideration. That is, the physician’s continued employment is not adequate consideration to support the covenant.

Third, the restrictions contained in the covenant must be “reasonable” to protect the “legitimate business interest” of the employer. Reasonableness, like beauty, is in the eyes of the beholder, or in this case, the trial judge. Arguments regarding reasonableness usually gravitate to the three restrictions: activity prohibited, geographic scope, and temporal scope. The stakes are high; if any provision is deemed unreasonable by a North Carolina court, the judge is authorized to strike the unreasonable provision, but not re-write it.

Activity Prohibited

Generally, the activity prohibited should be the activity that the physician performs for the employer. Thus, to prohibit a physician from “working for another medical practice” might be too broad, since this would ostensibly prohibit the physician from, say, mopping floors. The “practice of medicine” is tighter, and, the “practice of cardiology” even narrower.

Temporal Restriction

Generally, most of the covenants we draft or review are between six (6) months and twenty-four (24) months post-termination. Again, if a covenant restricts a physician for three years post-termination, and a court finds that only two years is necessary, the court will strike the three year provision, and not rewrite the covenant to two years.

Geographic Restriction

This is often the hardest to evaluate, especially concerning employers that have multiple offices and with physicians who perform some administrative functions for all offices, or who float from office to office providing professional services. A practice probably has a good idea, by the zip codes of its patients, on the territory from which it draws most of its patients. If the restriction goes beyond that territory, it could be struck as unenforceable.

Public Policy Exception

Finally, even if a covenant passes the first three tests (in writing, supported by consideration, and reasonable), it can still be struck as being against public policy. If the court determines that if the covenant were enforced, the public would be deprived of a much-needed service. This is often an argument posited in cases involving sub-specialists.

What’s Next

While the EO has not really changed things in North Carolina, it is instructive that President Biden’s administration is concerned with competition in health care. President Biden has attempted to require vaccines for those working for health care facilities that receive Medicare dollars. It does not stretch the imagination that the administration could similarly direct CMS to prohibit restrictive covenants for those who receive Medicare dollars.