Type: Law Bulletins
Date: 05/06/2022

Non-Competes in Health Care M&A: Emerging Threats

In the years since the enactment of the Affordable Care Act, private equity investment in the health care industry has seen massive growth. It’s easy to see why health care may be an attractive sector for investment, as annual health care spending in the U.S. reached $3.8 trillion in 2021, accounting for $11,582 per U.S. citizen, or 17.7% of the national GDP. Annual private equity deal values have grown in recent years from an estimated $41.5 billion in 2010 to an estimated $119.9 billion in 2019.

Due to Corporate Practice of Medicine (CPOM) laws in each state, which essentially prohibit persons other than licensed professionals from owning, controlling, or deriving profits from a professional health care practice, private equity firms often use a management or administrative services organization, commonly referred to as an “MSO.” An MSO is paid a fee for providing non-professional services to a medical practice, but does not interfere or otherwise exert control over the professional aspects of the health care practice.

Crucial to these MSO arrangements, and a frequent point of negotiation in M&A health care transactions, is the non-competition provision. As the MSO cannot perform the professional services, the private equity investor is reliant on the continued practice of the seller, i.e., the health care professional providing the professional services, following the closing. To protect their investment, private equity firms require some form of a non-competition provision setting forth the duration and geographic scope of the restriction, to prevent the seller from taking the money, quitting, and opening up a shop across the street.

While the non-competition provision remains essential from the perspective of the private equity purchaser, recent developments, both legal and societal, have made it increasingly challenging to craft non-competition provisions that are enforceable and fully protect the private equity purchaser’s investment.

In particular, President Biden issued an executive order on July 9, 2021, directing the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” While it remains unclear the extent to which the FTC will act in accordance with the executive order, they are far from the only interested party. The Department of Justice, many state courts, and numerous state attorneys general are also placing an increased emphasis on both compliance with CPOM laws and examination of non-competition language. In addition, as private equity investment in health care and MSO arrangements becomes more common, the specter of legislation to regulate health care M&A and non-competition arrangements in the health care space looms larger.

The practice of medicine is also changing. Accelerated by the COVID-19 pandemic, the prevalence of telemedicine and telehealth have made it easier for health care practitioners to practice medicine from their homes – without having to move themselves and their families outside the geographic scope of a non-competition provision. Many state courts have long been suspicious of non-competes, particularly in health care, and a prohibition on telemedicine – effectively a nationwide restrictive covenant – runs the risk of a court finding it unenforceable.

While M&A activity in the health care space continues to grow, buyers and sellers will need to stay aware of the legal and societal developments impacting the enforceability of the non-compete arrangements that are part of nearly every deal.

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