(This article was updated July 10th, 2024, to include recent court rulings impacting this evolving issue.)
The healthcare industry is buzzing about the potential implications of the Federal Trade Commission’s (FTC) ban on noncompete agreements. 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. How will the ban impact physicians, healthcare organizations, and the patients they serve? This article provides an overview of what physicians should know about the FTC’s new rule and its potential implications.
The Current Ruling on Noncompetes
The proposed noncompete ban, in discussion for more than a year, was issued as a final rule on April 23, 2024, by a vote of 3-2, with those voting for the ban citing noncompete clauses as “unfair method(s) of competition” under Section 5 of the FTC act (Skadden). The rule already faces legal challenges, which will likely push back its effective date (or strike it down altogether). Just last week in Texas, a federal judge issued a preliminary order that prevents the FTC from enforcing the ban on the plaintiff bringing the suit, but stopped short of blocking the rule nationwide (Reuters). The judge’s decision cited the agency’s lack of authority to rule on the matter — a position likely guided by the Supreme Court’s recent overturning of the Chevron doctrine. The decision, published on June 28th, 2024, reverses a decades-old ruling that gave federal agencies the power to issue and enforce rules where the law is unclear (CNBC).
These recent rulings suggest the ban on noncompetes may not come to fruition just yet, but for now, as of September 4, 2024, the ban will invalidate existing noncompete clauses (with a few exceptions) and prohibit new noncompete clauses between employers and employees.
One of the noted exceptions to the ban on existing noncompetes is for senior executives earning more than approximately $150,000 annually. That is, existing noncompetes will remain enforceable for senior executives. While physicians earn more than the income specified for senior executives, they are not typically in “policy-making positions” and are, therefore, not considered senior executives (Nelson Mullins). Another exception — nonprofit healthcare organizations — comes by default due to the FTC’s lack of jurisdiction over nonprofits. This means noncompete clauses can still bind physicians and other employees who work for tax-exempt entities, though the FTC made clear they may enforce the rule on nonprofits that behave like for-profits. For example, if they are paying for-profit physician members, the nonprofit organization may be subject to the rule (RevCycleIntelligence).
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). While these states may provide some insights about what is to come, the unique impact of noncompete bans in healthcare is still largely conjecture.
Impact on Physicians
Noncompete clauses vary in stringency, but they often mean that relocation, or perhaps long commutes, are the only options for physicians wanting 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 noncompete has expired. For this reason, many physicians view the new rule as a positive change that will allow them to change jobs more freely. It may also result in employers doing more to build a positive work culture and retain physicians through better compensation, enhanced benefits, and recognition programs.
The President of the American Association of Family Physicians (AAFP) issued a statement expressing satisfaction with the ruling 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 is happy about the ban, however. The American Hospital Association (AHA) opposes the ruling, citing its potential to upend healthcare labor markets and exacerbate the shortage. The American Medical Group Association (AMGA) also opposes the ban. In an article for RevCycleIntelligence, an AMGA representative explains that noncompetes protect the significant investment healthcare organizations make each time they bring on a physician. An article for the Chief Healthcare Executive further explores the clash between physicians and healthcare organizations on the matter. Some healthcare leaders go so far as to say the ban will threaten access to care for millions of patients.
Those in favor of the ruling due to its impact on physicians’ job mobility might say these organizations are catastrophizing its implications. However, there are some likely ripple effects, such as:
Increased competition for providers. The elimination of noncompetes will no doubt increase job mobility for physicians. They will 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. Expenses associated with recruiting, hiring, and training new staff will likely rise. Enhanced retention strategies, which may involve hiring more support staff for physicians and increasing salaries and bonuses, will 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 will 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 will 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 will have an unfair advantage in retaining talent. On the other hand, physicians may be less likely to accept jobs with nonprofits, knowing they may be subject to noncompetes. It may be moot, however, as the commission suggested some tax-exempt organizations could fall under the regulation. Fierce Healthcare reports that the gray area implies a new level of scrutiny on tax-exempt organizations.
Uncertainty around equity and sale transactions. The current ruling makes exceptions on existing noncompetes at organizations involved in sale transactions, but transactions taking place after the effective date will have no such protection. 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 may cause private-equity-backed groups to have second thoughts about some acquisitions. (Holland & Knight)
Contract changes. Employers may seek alternative contractual arrangements to mitigate the impact of the noncompete ban. Longer-term employment agreements with extended notice periods for termination might become more common. Additionally, non-solicitation and non-disclosure agreements could be used more frequently to protect business interests without restricting employment mobility.
Takeaways for Physicians
Physicians should review their current employment contracts and follow the latest developments regarding noncompete agreements. Legal counsel can advise on how these changes might affect individual situations and help physicians navigate questions about leaving a job during this transitional period.
For those entering new contracts, it is crucial to understand the implications of alternative restrictive covenants that employers might introduce in place of noncompetes. Ensuring that these agreements are fair and do not unduly limit future employment opportunities will be key.
If the ban on noncompetes is implemented, physicians will certainly have more freedom. However, it is still wise to enter any employment agreement carefully. 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 absence of a noncompete alleviates the pressure to stay if you are unhappy, but it benefits everyone if the relationship begins on the assumption it will last.
While the ban on noncompetes may be seen as a positive change for physicians, it brings new challenges and considerations for both physicians and their employers. By staying informed and seeking professional advice, physicians can better 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.
