The Federal Trade Commission’s proposed ban on noncompete clauses in employment contracts is poised to dramatically alter the healthcare sector, which frequently relies on restrictive covenants to retain physicians and the patients they treat.
The FTC’s sweeping proposal would free physicians to work for a competitor, undermining the status quo in physician-employer relationships, healthcare attorneys told Healthcare Dive.
“It would really upset the apple cart in terms of in terms of the way they've always done business,” said Stu Vogelsmeier, an attorney who represents providers in the St. Louis region and chair of Lashly & Baer’s healthcare and business practices.
For years, hospitals and health systems have had noncompetes in place with their physicians. “It'd be a whole new world out there” if the draft rule goes into effect, Vogelsmeier said, noting the proposed rule is likely to face a legal challenge.
In a sweeping proposal released Jan. 5, the FTC said noncompete clauses depress worker wages and limit competition. The FTC’s proposal would bar future noncompetes and also invalidate existing ones.
“This will fundamentally alter the landscape when it comes to issues of unfair competition, and employees leaving an employer and joining a competitor,” said Michael Kass, a partner at the law firm Armstrong Teasdale. Kass represents clients on employment issues.
A typical noncompete bars a physician from practicing medicine for a certain period of time within a defined geographic area or specific mile radius.
These restrictive covenants are viewed as a way to keep physicians from walking across the street and going to work for a competing practice and taking patients with them, especially after an employer has invested in those physicians.
“Unless you’re willing to move hundreds of miles away or take a huge pay cut to restart your career from scratch, a noncompete can effectively lock you into a job. That’s a clear restriction of individual liberty,” FTC Chair Lina Khan said in an op-ed for the New York Times.
The FTC focused on several occupations in its draft rule, including physicians. The agency said as many as 45% of primary care physicians were bound to a noncompete, according to a prior study. The same study found that noncompete clauses were associated with higher earnings than those without the restriction.
The FTC said eliminating noncompetes may also increase physician earnings, and estimated the step would lower healthcare costs by as much as $148 billion annually. Regulators argued noncompetes stifle new entrants from taking on incumbents, and consumers face higher prices in markets that are highly concentrated like healthcare.
Still, there is potential to have meaningful restrictions on solicitation of patients and former colleagues, Kass said. The draft rule says it is lawful for employers to still have nonsolicitation agreements, which prevent physicians from soliciting former patients or colleagues from joining them if they leave their place of employment.
However, the proposed rule also states that if nonsolicitation clauses have the equivalent effect of a noncompete the FTC will consider them as such, Vogelsmeier said.
“That's one of the areas that I think the provider community's going to ask for some clarification,” Vogelsmeier added.
The proposal has raised questions over whether the FTC has the authority to draft such a rule.
One FTC commissioner spoke out against the noncompete proposal in a 14-page letter, arguing that the agency is unlikely to prevail against lawsuits challenging its legal authority.
Healthcare attorneys also question whether abolishing noncompetes is enforceable in nonprofit organizations, which are prevalent throughout the healthcare sector. The FTC does not have jurisdiction over most nonprofits.
“The FTC may not have the authority under the FTC Act to impose this rule on nonprofit organizations,” said Roger Strode, a healthcare attorney and partner at the law firm Foley & Lardner.