Impact of the Federal Trade Commission’s Healthcare Rule

The proposed rule

Last year, the Federal Trade Commission (FTC) issued a proposed rule to ban most non-compete agreements nationwide. With very limited exceptions, the sweeping rule prohibits any contractual provision between an employer and an employee that has the effect of preventing the employee from taking a job with a competitor or operating a competing business after the employee has been employed by the employer stepped. The proposed rule also includes an expanded definition of “employee” – including employees, independent contractors, interns and even volunteers – and does not include an exception for supervisors or highly compensated employees. The comment period for the rules ended on April 29, 2023, and the FTC is expected to issue its final rule – which may or may not be as comprehensive as the proposed rule – in April 2024.

The healthcare industry’s impact on the proposed rule

The FTC focused on health care and physicians in crafting the proposed rule, reportedly based on a 2017 article published in Administrative sciences titled “Screening Spinouts,” which evaluated the economic effects of non-compete agreements in healthcare. And according to FTC Chair Lina Khan, the healthcare industry has provided more feedback on the proposed rule than any other industry. Notably, the American Hospital Association (AHA) has criticized the FTC’s proposed rule, highlighting the negative impact it will have on retention in for-profit hospitals, while the American Medical Association (AMA) , the largest professional organization of physicians in the country, has adopted an official position in support of the rule.

The rise of non-compete agreements in healthcare

Why is the healthcare industry so concerned about this proposed rule? And what impact could this rule have within the industry? Because American physicians were typically self-employed, they historically typically practiced outside the realm of non-compete agreements. But massive consolidation of the healthcare industry has changed that. More than 7,000 medical practices were sold between 2020 and mid-2023 alone, and today the majority of physicians work for large employers. According to the AMA, between 37% and 45% of U.S. physicians are subject to non-compete agreements. Without any future regulation or legislation, that number will likely continue to grow as private equity firms – which now own about 40% of the country’s medical practices – continue to invest in the healthcare sector.

Hospitals, especially for-profit companies, have generally argued that non-compete agreements are important tools to protect investments in physicians and senior managers. Chad Golder, general counsel for the AHA, has previously pointed to rural hospitals, which often spend a lot of money on new doctors who are desperately needed by small communities. The AHA has argued that allowing such physicians to simply leave after a short time, once such a hospital has made that kind of investment, would negatively impact health outcomes in those smaller rural communities. On the other hand, physician groups like the AMA and the American College of Physicians argue that the opposite is true, and that non-compete agreements contribute to the physician shortage while disrupting the doctor-patient relationship. They point out that because non-competes typically restrict a physician from working within his previous employer’s territory, a physician must move if dissatisfied with his job, causing the same vulnerable communities to lose physicians. This can be very disruptive to individual patients, who lose access to their local doctor. The effects can be especially profound in small subspecialties.

Takeaways

While any final rule may ultimately change the healthcare landscape, it will certainly be subject to legal challenges once it is issued. Hospitals and physicians can reasonably expect enforcement of the rule to be suspended pending the resolution of any lawsuits. Ultimately, the rule may be dropped as an administrative overreach. Furthermore, the FTC has no jurisdiction over nonprofit organizations, which exist throughout the healthcare industry. Thus, any rule could only affect physicians within the for-profit sector.

As non-compete agreements have become increasingly common within the healthcare industry, so too have lawsuits seeking to enforce these non-compete practices or, alternatively, challenge them as illegal restraints of trade. Last September, a Michigan court granted a doctor a preliminary injunction, allowing him to avoid a non-compete agreement he signed with a local hospital system. In that case, a pediatrician specializing in critical care – or the sickest of all sick children – claimed he was subjected to an unmanageable workload after a number of doctors at his hospital were fired. More specifically, he claimed that he would have to work outside his specialty and instead work in general pediatrics, when it was widely believed that he would only work within pediatric intensive care. The doctor tried to leave and work for another employer, and the hospital tried to stop him, citing his non-compete agreement. The doctor fought back, claiming that the hospital materially breached his employment contract by expanding his duties and increasing his workload, and as a result, he was no longer subject to a non-compete agreement. The court ruled that the doctor had a reasonable chance of success on this argument. Further, the non-compete agreement restricted the physician to practice any form of medicine within the relevant field. The Michigan court found that this was an unreasonable restraint of trade and that the hospital had no legitimate interest in preventing the general practitioner from practicing medicine in the area.

As both the FTC and the courts increasingly examine non-compete agreements within the healthcare industry, it is important that employers ensure that these agreements are carefully tailored and compliant with the laws of their jurisdiction. Some courts may be skeptical of non-compete agreements that restrict physicians who are important to the community from providing medications within the community. Thus, it is important that hospitals and healthcare employers continually evaluate their restrictive covenants.