(This article was updated August 21st, 2024, to include recent court rulings impacting this evolving issue.)
Long a standard part of the physician contract, noncompete clauses restrict employees from working for competitors within a certain geographic area for a specific time period after leaving a job. These agreements are designed to protect the interests of employers by preventing employees from taking sensitive information, skills, and in the case of physicians, patients, to competitors.
In April of 2024, the Federal Trade Commission issued a final rule on noncompete clauses, banning them as “unfair method(s) of competition” under Section 5 of the FTC Act (Skadden). Since this ruling, plaintiffs in multiple states have filed suits claiming the rule is unjust. The most recent opinion, issued by a federal judge in Texas, struck down the rule, finding the FTC lacks the authority to issue it (Reuters). It’s a significant victory for those who oppose the ban, but it’s likely the FTC will appeal. Whatever the outcome, the debate about noncompetes has started a conversation about the fairness of current practices and exploring alternatives.
If the FTC were to implement a ban on noncompetes, how would it impact physicians, healthcare organizations, and the patients they serve? This article provides an overview of what physicians should know about noncompetes in healthcare and the potential implications of the FTC’s proposed ban.
The Current Ruling on Noncompetes
The FTC’s rule would have invalidated existing noncompete clauses (with a few exceptions) and prohibited new noncompete clauses between employers and employees. As noted, the most recent ruling prevents the rule from taking effect. Earlier this month, however, in response to a different suit, a federal judge in Pennsylvania declined to block the FTC’s noncompete ban, saying the plaintiff failed to prove that a noncompete ban would cause irreparable harm to the business. These differing outcomes suggest more legal challenges ahead, with some speculating the case could reach the Supreme Court (Washington Post).
The FTC rule is the first attempt to ban noncompetes across the nation, however, several states already have bans in place and at least 23 others have imposed restrictions, most often related to noncompetes for lower-wage workers (Managed Healthcare Executive). State-level noncompetes are not impacted by the recent ruling.
Impact on Physicians
Noncompete clauses vary in their stringency, but they often mean that relocation, or perhaps long commutes, are the only options for physicians who want to change jobs. For Dr. E, a gastroenterologist working in St. Louis, the strict noncompete in his contract meant he would need to relocate his family to another city if he wanted to leave an employer with whom he felt increasingly misaligned. Knowing the impact a relocation would have on his wife and school-age children, he began to seriously consider commuting to other cities for work. A 100-mile commute seemed more appealing than the status quo, but he feared the havoc it would wreak on his work-life balance. Fortunately, he was referred to Vice President of Recruitment Tara Osseck, who was able to find a creative workaround to his problem. Her client, a major health system in St. Louis, had a satellite office outside of the noncompete radius that could serve as the hiring organization.
Tara’s creative recruitment strategies worked for Dr. E, but most physicians are not as lucky. Violating a noncompete can result in significant financial penalties, so physicians may opt to remain in jobs where they are unhappy or simply take periods of unemployment until their noncompetes have expired. For this reason, many physicians viewed the FTC’s new rule as a positive change that would allow them to change jobs more freely. There was also the hope that it might result in employers doing more to build a positive work culture and retain physicians through better compensation, enhanced benefits, and recognition programs.
Back in April, the President of the American Association of Family Physicians (AAFP) issued a statement expressing satisfaction with the FTC’s ban and its potential to level the playing field and give physicians more choices. “We are hopeful that the elimination of noncompete clauses will encourage employers to pursue more collaborative ways to retain physicians and become employers of choice, while preserving long-term, meaningful patient-physician relationships.”
Potential Implications of the Ban
Not everyone was happy about the ban, however. The American Hospital Association (AHA) opposed the ruling, citing its potential to upend health care labor markets and exacerbate the shortage. The American Medical Group Association (AMGA) also opposed the ban. In an article for RevCycleIntelligence, an AMGA representative explained that noncompetes protect the significant investment healthcare organizations make each time they bring on a physician. An article for Chief Healthcare Executive further explored the clash between physicians and healthcare organizations on the matter. Some healthcare leaders went so far as to say the ban will threaten access to care for millions of patients.
Those in favor of a ban on noncompetes due to its impact on physicians’ job mobility might say these organizations were catastrophizing the potential implications. However, it’s fair to say a ban on noncompetes could have some concerning ripple effects such as:
Increased competition for providers. The elimination of noncompetes would no doubt increase job mobility for physicians. They would have the freedom to move between jobs without the fear of legal repercussions or financial penalties, leading to increased competition for providers.
Higher operational costs. In their efforts to attract and retain talent, healthcare organizations might face higher operational costs, specifically increased labor costs if a noncompete ban were implemented. Expenses associated with recruiting, hiring, and training new staff would likely rise. Enhanced retention strategies, which might involve hiring more support staff for physicians and increasing salaries and bonuses, could also increase labor costs–which could drive up the cost of care.
More consolidation and fewer choices for patients. Smaller healthcare organizations that are unable to compete could lose providers, resulting in disrupted care for patients–if they are able to keep doors open at all. In the aforementioned article for RevCycleIntelligence, a legal expert suggests that larger hospitals with bigger budgets would have an advantage over smaller groups, leading to even more consolidation in the industry and fewer choices for patients.
Questions about nonprofit hospitals. Accounting for more than half of hospitals across the country, nonprofit organizations fall outside of the FTC’s jurisdiction, leaving some to argue they would have an unfair advantage in retaining talent if the ban were to take effect. On the other hand, physicians might be less likely to accept jobs with nonprofits, knowing they’d be subject to noncompetes. It could be moot, however, as the commission suggested some tax-exempt organizations could fall under the regulation. Fierce Healthcare reports that the gray area could mean a new level of scrutiny on tax-exempt organizations.
Uncertainty around equity and sale transactions. Noncompetes have traditionally been used to ensure that key staff remain with the practice post-acquisition, maintaining the value of the investment. So, the absence of enforceable noncompetes could cause private-equity backed groups to have second thoughts about some acquisitions. (Holland & Knight)
Contract changes. Employers could seek alternative contractual arrangements to mitigate the impact of a noncompete ban. Longer-term employment agreements with extended notice periods for termination could become more common. Additionally, non-solicitation and non-disclosure agreements would likely be used more frequently to protect business interests without restricting employment mobility.
Takeaways for Physicians
For now, healthcare organizations can legally continue to use noncompetes to discourage physicians from leaving their jobs. However, healthcare leaders are increasingly aware of the importance of improving physician retention and are looking beyond noncompetes and finding other ways to make physicians want to stay. The employers succeeding in this realm are implementing physician wellness initiatives, offering more flexibility, alleviating administrative burdens, and more.
Regardless of the presence or absence of a noncompete, an physician employment contract is not one to be taken lightly. Physicians must use the interview process to evaluate for cultural alignment and make certain that this is an employer you can see yourself with for the long-term. The debate about noncompetes in healthcare may continue for some time, so stay informed and seek professional advice in order to navigate this evolving issue.
If you are considering a new physician job search, the recruitment team at Jackson Physician Search can share insight into the current market and advise on opportunities in your area. Reach out today or search physician jobs online now.
