Tennessee’s corporate practice of medicine statute has historically prohibited hospitals and their affiliates from imposing general post-employment covenants not to compete on physicians employed independently of a bona fide practice purchase. Rather, hospitals and their affiliates have been limited to prohibiting only the direct solicitation (and sometimes treating) of former patients. However, on May 23, 2011, the Tennessee legislature amended the state’s corporate practice of medicine statute. As discussed more fully below, the amended statute, in conjunction with an existing Tennessee statute on physician covenants not to compete generally, appears to allow hospitals to elect, with respect to physicians employed independently of a practice purchase, either a covenant not to solicit or a more general covenant not to compete.

Like many states, Tennessee prohibits the corporate practice of medicine. However, both the Tennessee corporate practice of medicine statute and a separate section of the Tennessee Code addressing physician non-competes generally except from the prohibition hospitals’ and their affiliates’ employment of physicians, with the exception of radiologists, anesthesiologists, pathologists and certain emergency physicians, if several conditions are met. Included in these conditions is the requirement that any restrictions placed by hospitals on an employed physician’s right to practice medicine upon the termination or conclusion of the employment relationship must comply with certain limitations. Previously, the nature and extent of the limitations varied depending on whether the physician was employed in connection with a bona fide practice purchase and, for physicians employed independent of a practice purchase, how long the physician has been practicing in the community.  

Physicians Employed Following a Practice Acquisition

The May amendment did not change the post-employment practice restrictions for those physicians whose practices have been purchased by hospitals or hospital affiliates. For physicians whose practices have been purchased, hospitals may still only restrict physicians’ right to practice medicine as follows:

  1. The hospital may impose reasonable geographic restrictions, provided that the maximum non-compete area is the greater of the county in which the primary practice site is located or a 10-mile radius from the primary practice site.
  2. The duration of the restriction must be 2 years or less, unless the parties agree in writing that a longer period not to exceed 5 years is necessary to comply with applicable law.  

In addition, the physician must be allowed to buy back the physician’s medical practice, and, following a buyback, the restriction must be void. The purchase price must be the original purchase price, or if the parties agree in writing, a price not to exceed the fair market value of the practice at the time of the buyback. The physician may not be required to give more than 30 day’s notice to exercise the repurchase option, provided that this requirement does not otherwise affect the contract termination notice requirements. If the buyback provision is dependent upon a determination of the fair market value of the practice, the contract must specify the method of determining fair market value by independent appraisal, in the event that the parties cannot agree as to the fair market value. The contract must also include certain language for resolving valuation disagreements between the parties.

Physicians Employed Without a Practice Acquisition

The May amendment does, however, present a significant change for those physicians employed by hospitals and hospital affiliates whose employment did not arise from a practice acquisition. Prior to the change, the language of both statutes governing post-employment practice restrictions was identical. Under both statutes, if physicians were employed independently of a practice purchase and had practiced medicine for more than five years in the county in which the hospital or primary practice site was located, the hospital could restrict the physician’s right to treat for compensation or to directly solicit by telephone or mail any patients the physician treated during the course of the employment relationship. The restrictions could run for a maximum of one year following the termination or conclusion of the employment relationship. For physicians employed independently of a practice purchase who had practiced medicine in the county in which the hospital or primary practice site was located for fewer than five years, the hospital could only restrict the physician’s right to directly solicit by telephone or mail the patients treated during the course of the employment relationship. The hospital could not restrict the physician’s right to treat former patients in any way. Solicitation restrictions on physicians with less than the five years’ experience, likewise, could not exceed a one-year term.

The May 23rd amendment replaced the limitation on postemployment practice restrictions contained in one statute but left the other unchanged. The result is a two-track system that appears to create more options for hospital employers.  

In place of the corporate practice of medicine statute’s postemployment restrictions, the legislature included by reference Tenn. Code Ann. § 63-1-148, entitled “Restrictions on Health Care Provider Practice.” Like the language contained in the previous version of the corporate practice of medicine statute, and the unchanged hospital employment statute, § 63-1-148 limits a physician employer’s ability to control post-employment behavior. Specifically, § 63-1-148 provides that restrictions on the right of an employed or contracted healthcare provider to practice the provider’s profession upon termination or conclusion of the employment or contractual relationship will be permitted if the following conditions are met:

  1. The restriction is set forth in an employment agreement or writing between the parties;
  2. The duration of the restriction is two years or less; and
  3. Either—
    1. The geographic restriction of the practice limitation is the greater of (1) a ten-mile radius from the primary practice site of the healthcare provider while employed or contracted or (2) the county in which the primary practice site of the healthcare provider while employed or contracted; or
    2. The practice limitation is limited to those facilities at which the employing or contracting entity provided while the provider was working for the entity.  

BABC Commentary

The net result of the change is increased flexibility for hospitals to impose non-compete restrictions on physicians employed independently of a practice purchase. By amending one statute and leaving the other unchanged, the legislature appears to have given hospitals the choice of following either, but not both, statutory schemes. Hospitals are therefore left with two post-employment alternatives for physicians who have not sold their practices to the hospital. The first option is for hospitals to restrict the physician from soliciting—and, in the case of physicians practicing for more than five years in the county in which the hospital or primary practice site is located, accepting compensation for treating—former patients without any geographic limitations. The other option is for hospitals to restrict all post-employment physician practice for two years within limited geographic boundaries or certain facilities. An additional benefit to hospitals of the amended statute is that hospitals electing this new, general non-compete are not obligated to give the physician the option to remove the noncompete restriction by purchasing his or her practice assets, if the physician was employed independently of a practice purchase.

The legislature’s actions preceding the amendment are also noteworthy. On May 20, 2011, prior to amending the corporate practice of medicine statute as described above, the legislature amended the general physician non-compete statute found in§ 63-1-148. Before the amendment, § 63-1-148 contained a provision that limited the ability of an employing or contracting entity to impose a non-compete on a physician who had been employed by, or under contract with, the employing or contracting entity for at least six years. These limitations have now been eliminated so that § 63-1-148 applies in the same manner to all physicians, regardless of the duration of their employment.