QUESTION:        Can a hospital pay a physician’s current employer to release the physician from a non-compete covenant in order to allow the physician to come to work for the hospital?

ANSWER:            This one isn’t hypothetical. It happens a lot. Assuming that the non-compete is valid and enforceable (in some states and situations they aren’t), it might be possible for the hospital to pay money to a prospective physician employee’s current group to be released from a non-compete. Like everything else, the devil is in the details. First of all, the amount paid must be fair market value. This is easier to determine if the physician’s current contract contains a “buy out” clause allowing the physician to pay liquidated damages in lieu of being subject to the non-compete. Liquidated damages in the range of one year’s salary have been upheld by courts as reasonable, so the hospital can often presume that this amount would be fair market value. If there isn’t a liquidated damages provision, a non-compete can be valued based on what the competition from the physician will cost the current employer, taking into account the physician’s contribution margin to the employer and the cost of replacing the physician. However, the value of the non-compete cannot be calculated based on how much more business the hospital will receive by being able to employ the physician. This could raise questions under the Stark law.

Since the release will also benefit the physician, the amount paid for the release should be considered along with the physician’s proposed salary in terms of whether the physician’s compensation going forward is at fair market value. This is especially important if the hospital is paying off liquidated damages which would otherwise be the obligation of the physician to pay. One way to handle this is to treat the non-compete release payment as a loan to the physician, which can be forgiven if the physician remains employed for a period of time (say, three to five years) and provides charity care or similar community services in the employ of the hospital. This way, the non-compete buyout will function as a retention incentive, and the income attributed to the physician will be spread out over the life of the loan as it is forgiven, both for fair market value determination and tax purposes.

That being said, don’t try this at home without close adult supervision. Call your lawyer.