Getty Images/iStockphoto
Breaking down the FTC noncompete ban, its impact on healthcare
The FTC recently prohibited noncompetes, a popular clause used in healthcare employment agreements, but legal challenges and clarifications are on the horizon.
On April 23, the Federal Trade Commission (FTC) announced a final rule that prohibits employers from entering into noncompete agreements with workers, including employees, independent contractors and interns. The ban on noncompetes is far-reaching, stopping nearly all types of these post-employment agreements between employers and workers across all types of industries, including healthcare.
A noncompete agreement is a provision in an employment contract that prevents a former employee from working for an organization that competes with their former employer. The agreements last for a specific period, across a specific geographic area, and/or in a particular market. To maintain their competitive advantage, employers have used noncompetes to protect confidential information, such as trade secrets, specialized training and intellectual property.
Noncompete agreements are popular in the healthcare industry. The American Medical Association (AMA) reports that the agreements affect between 37%-45% of physicians. The agreements have become more common as hospitals and health systems employ more physicians. Additionally, noncompetes are very common in private equity, which affects healthcare more and more as private equity firms rapidly acquire healthcare organizations.
There has been debate about using noncompete agreements in healthcare, with critics arguing that the agreements stifle competition and patient access to care. Healthcare organizations, however, are trying to protect their investments in the clinicians and care teams they employ.
Whether you agree with the noncompetes or not, the FTC’s ban will have a major impact on the healthcare industry. But employers and employees alike still face a lot of uncertainty around the ban as policymakers determine how to enforce it.
What the FTC’s noncompete ban says
The FTC’s final rule bans almost all types of noncompete agreements nationwide and across all industries. At the time of publication, five states—California, Minnesota, North Dakota, Nebraska and Oklahoma—have already prohibited noncompetes.
Under the final rule, existing noncompetes for most workers will no longer be enforceable after the rule’s effective date, which is currently Sept. 4, 2024. After that date, market participants can report information on suspected rule violations to the Bureau of Competition.
The major exception is senior executives who earn more than $151,164 and are in a policymaking position; employers can enforce existing noncompetes with these senior executives. However, the final rule stops employers from entering into or attempting to enforce any new noncompetes, even for senior executives.
The FTC says the rule adopts a stance that noncompetes are “an unfair method of competition” and, therefore, violate section 5 of the FTC Act. The final rule states that the FTC finds that agreements “tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers.”
The final rule will affect about one-fifth of the US workforce, or 30 million people. However, without these agreements, the FTC estimates new business formation to grow by 2.7% each year, increasing estimated earnings by $524 for the average worker.
Additionally, the FTC projects healthcare costs to fall by $74-$194 billion over the next decade under the noncompete ban.
The healthcare industry reacts to the noncompete ban
The healthcare industry’s reaction to the FTC’s noncompete ban has been a mixed bag, depending on which side of the fence you sit on. For example, the American Hospital Association (AHA), representing almost 5,000 hospitals and health systems, opposed the final rule.
AHA’s General Counsel Chad Golder said in a statement, “[T]he FTC’s final rule banning non-compete agreements for all employees across all sectors of the economy is bad law, bad policy, and a clear sign of an agency run amok. The agency’s stubborn insistence on issuing this sweeping rule — despite mountains of contrary legal precedent and evidence about its adverse impacts on the health care markets — is further proof that the agency has little regard for its place in our constitutional order.”
In particular, the AHA objected to the FTC’s attempt to regulate non-profit organizations.
On the other hand, the American Academy of Family Physicians (AAFP) was pleased with the FTC’s final rule and its potential extension to non-profit organizations since the FTC technically does not have jurisdiction over non-profit organizations.
“We are also encouraged to see that the FTC intends for this ban to extend to many nonprofit entities. Nonprofit health systems often have significant financial assets and employ a large portion of physicians and clinicians. They should not be permitted to continue to restrict patient access and physician choice in employment,” AAFP President Steven P. Furr, MD, FAAFP, said at the time.
“The AAFP remains committed to creating a level playing field for family physicians who work in all practice settings, including small and independent practices, who may not have the resources to recruit and retain new physicians,” Furr continued.
AMA has also criticized noncompetes, with its House of Delegates voting in June 2023 to oppose the agreements for physicians in clinical practice employed by for-profit and nonprofit healthcare organizations.
The potential to upend care teams
The end of noncompetes in healthcare will have significant consequences, according to Darryl Drevna, MA, senior director of Regulatory Affairs at the American Medical Group Association (AMGA).
AMGA objects to the FTC’s final rule banning the agreements, arguing that their elimination in healthcare will negatively impact patients, clinicians and the organizations the association represents. AMGA represents more than 175,000 physician practices in medical groups and integrated systems of care.
“[The final rule] is really going to upend how a lot of our members put together their care teams and what sort of investments they make in getting practices staffed, developed, and ultimately functioning as part of a larger system,” Drevna explained to RevCycleIntelligence.
Leaders at healthcare organizations sympathize with the desire of an individual clinician to move to a different practice, and the ban makes a lot of sense from an individual perspective. However, more clinicians are employed by medical groups, hospitals, health systems, and other types of healthcare organizations now. From an organization’s perspective, noncompetes can protect their investments in clinicians and what the practice builds around them for quality care.
“What might get lost in why healthcare entities might use noncompetes is the investment and time that it takes to recruit, train, and on-ramp a new physician,” Drevna said. “Talking to AMGA members, I've heard it takes anywhere from $300,000-$500,000 just to recruit that new physician, and physicians don't come in with a practice right away.”
Healthcare organizations must absorb the costs of building a physician’s patient base and care team for one to two years after they hire them. Drevna also stressed that it's not just the physician a practice invests in; healthcare organizations may also include nurse practitioners, medical technicians, and support staff to build a care team or service line around a particular physician. Depending on the physician’s specialty, the practice may also buy technology or equipment to complement the care.
“All of a sudden, if someone like a neurosurgeon up and leaves, now you've got this whole care team or surgical suite sitting idle until that physician can be replaced,” Drevna said. “That’s a sunken cost for the AMGA member organization, but it can also be an access issue depending on where the organization is in the country.”
The legal implications and challenges ahead
The FTC’s noncompete ban does not go into effect for 120 days after the final rule’s publication. However, the date will likely be pushed out as the legal system sorts through the challenges of the ban. Already, there is at least one lawsuit seeking a stay of the ban, with hopes of a permanent stop to its enforcement, according to Daniel Frier, Esq., founding partner at Frier Levitt and chair of the firm’s Healthcare Group.
One of the major issues that must be sorted out through the legal system before the ban gets implemented is its impact on nonprofit organizations like hospitals.
“Theoretically, the FTC has no ability to apply this final rule on any not-for-profit hospital, and most hospitals are not-for-profit,” Frier explained to RevCycleIntelligence. “What that means is hospitals with existing employment agreements — most of which have non-competes in them — will remain in effect, and we would have to rely upon state law to ban them. Now, states do have the ability to ban all non-competes, not just for for-profit organizations.”
The FTC, however, seems to indicate that just because a hospital considers itself a nonprofit organization does not mean that the FTC will consider all its noncompetes exempt from its ban, Frier continued.
“It's a little confusing what they meant by that,” Frier admitted. “But the example they gave is if a hospital pays a for-profit physician member of the hospital, then that could bring the hospital's transaction outside of the protection afforded by their non-for-profit status.”
Banning noncompetes across the board also raises a big question about competition in healthcare, which is notoriously lacking as the industry consolidates rapidly. According to Frier, practices may be disadvantaged because of the ban. Hospitals will be able to poach their best staff without noncompetes in place, but most practices won’t be able to compete with the compensation and benefit packages offered by larger, resource-rich organizations.
“It may create an uneven playing field that the FTC may not have considered,” Frier stated.
Healthcare organizations will have to wait to see how legal issues are resolved within the courts. However, employers across industries may want to reconsider their noncompete strategy now and try to make their agreements as narrow and enforceable as possible.
“Even the presence of this discussion, whether the final rule ultimately gets passed in its current state form or not, will impact the way judges view the enforceability of noncompetes,” Frier explained.
For healthcare organizations, in particular, leaders may also want to look at some relationships between hospitals and physicians as the noncompete debate continues. For example, hospitals can make money off of referrals from the physicians they employ.
“This is a traditional relationship that has evolved over the years, but hospitals may want to start questioning whether they’re going to be looked at,” Frier said. Any practice that gives hospitals a potential unfair competitive advantage versus private practice may be up for debate, according to Frier.
In the meantime, there may be a cultural change on the horizon. In a world without noncompetes, healthcare organizations should prioritize workforce culture. Keeping employees content through compensation, benefits, and recognition will go a long way when organizations can no longer prevent employees from moving from employer to employer.
