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Is FTC’s noncompete rule a concerning development for physicians?

Blog
Article
Medical Economics JournalMedical Economics June 2024
Volume 101
Issue 6

The rule has the potential to supersede state laws and raises legal and practical concerns for doctor contracts and health care practices.

Noncompete agreements questioned: ©Pitir2121 - stock.adobe.com

Noncompete agreements questioned: ©Pitir2121 - stock.adobe.com

In April, the Federal Trade Commission (FTC) issued a final rule prohibiting noncompete clauses, significantly impacting physicians across the nation. The rule has the potential to supersede state laws and raises legal and practical concerns for doctor contracts and health care practices.

As a health care attorney who exclusively represents physicians and health care practices, I see this rule as problematic due to the following reasons:

  • This rule is a potential overreach of federal authority.
  • The exceptions for allowing noncompetes are proving wide open to challenge.
  • This rule creates more of a divide than already exists between hospitals and employed doctors.

First, the FTC, without clear congressional backing, claims sweeping jurisdiction over employment contracts traditionally governed by state law. The FTC has clearly determined that noncompetes are an “unfair method of competition” and, in my opinion, has taken the position that it can now regulate any activity it deems unfair. Although the U.S. Constitution grants Congress the authority to regulate matters that affect interstate commerce, it does not grant such authority to one single branch to override state law and create national law on what it feels appropriate. The American Hospital Association criticized the rule by stating, “Congress has not granted [the FTC] the authority to regulate such an extensive portion of the American economy in one fell swoop.”

Second, the exceptions provided by the rule are not only vague but could lead to significant legal disputes. For example, the rule spares “senior executives” who meet certain compensation thresholds and role requirements from the ban, yet it fails to precisely define “senior executives” and requirements, which creates more ambiguity. The rule indicates that this is a “small, narrowly defined group.” The rule seems to exclude physicians, but it also says that partners in a business, such as physician members of an independent practice, would “generally qualify as senior executives under the duties prong and have authority to make policy decisions about the business.” It goes on to state, “CEOs and presidents are presumed to be in a policy-making position … and will not be otherwise subject to a job duties test, while highly paid workers in a nonexecutive role such as many physicians will not.”

The rule does not apply to nonprofit institutions and yet creates confusing layers of challenge by the comments about what is and what is not truly considered a nonprofit institution for purposes of the rule. One of the five FTC commissioners, Rebecca Kelly Slaughter, J.D., indicated that even if entities register as nonprofit institutions but are in fact organized for the profit of their members, they will fall under the FTC’s rule. But one commissioner on the FTC doesn’t get to dictate a national overhaul of entrenched state law. In addition, trying to challenge a group that is legally under a nonprofit status as actually for profit to fall under this rule is unreasonable and untenable. The rule also does not apply to noncompete agreements formed during the bona fide sale of a business (but still cannot spring up in repurchase rights), adding another layer of complexity.

Third, this ban creates more division among an already stretched-thin physician workforce. Hospitals are pushing noncompetes as a protection of their business interests, but Amy Vertrees, M.D., a general surgeon in Tennessee, strongly disagrees. “Noncompetes hurt us more than help us,” she said. She indicated that in her experience, doctors are not taking trade secrets from a hospital and sharing them with another. “We aren’t stealing the secrets from Apple here. If anything, we bring industry knowledge to the hospital, not the other way around,” she said. Vertrees noted that “we have to protect our own interests because no one else is going to do it for us.”

Corinne Smith, J.D., M.H.A., an adjunct professor of health law at Trinity University in San Antonio, Texas, and a lawyer with my firm, believes noncompetes are too one-sided against the physician and cause massive disruption in the physician/patient relationship that doesn’t help this strapped market.” Lawyers don’t have these restrictions,” she said. “It’s causing more of a divide between physicians and their patients, and the detrimental ripple effect it’s having on physicians is wide.”

If we want more doctors to enter the market, we need to reduce barriers, not add them.

Physicians dislike noncompetes from hospitals and large employers

Nisha Mehta, M.D., a radiologist, physician advocate, and founder of the grassroots Physician Side Gigs community, gathered more than 6,000 signatures from physicians to show support for a noncompete ban for hospital-employed physicians, arguing that noncompetes in this situation allow hospital systems to have leverage over physicians despite a lack of evidence showing that individual physicians leaving a hospital poses a threat to the financial stability of the institution. This is detrimental to physician career longevity, patients, and the nation’s “long-term ability to maintain access to quality care,” she said.

Similarly, Matt Mazurek, M.D., MBA, M.H.A., an assistant professor at Yale School of Medicine in New Haven, Connecticut, criticizes noncompetes in academic medicine, sharing a story of a physician blocked from working due to a noncompete. Mazurek noted that “noncompetes hold doctors hostage in bad situations, reduce access to care and only serve as another mechanism to exploit physicians.”

Reasonable, narrowly tailored noncompetes may help protect smaller practices

On the flip side, some argue that noncompetes are essential for business stability in small, privately owned practices. One of my clients, a pediatric practice owner in a large city, has a very narrowly tailored restriction of only 7.5 miles around the practice. It’s proved very helpful for business interests but still allows doctors to find work in and around where they live.

The U.S. Chamber of Commerce, which ardently opposes the ban, argues that employers are more likely to spend resources developing their workforce if they have some reassurance that their workers won’t take that knowledge to a competitor.

The ruling is going to be difficult to interpret and enforce

Austin Kaplan, J.D., an employment and civil rights lawyer in Austin, Texas, anticipates significant legal battles. “The U.S. Chamber of Commerce has already stated their intent to challenge the decision and delay or derail its implementation,” he said. Primarily, he argues that noncompetes should not be enforced, since he represents mostly individuals, and says the legal fights are coming. Allison Bowers, J.D., an employment attorney in Austin who represents mostly employers, echoes this sentiment. She stated that “we shall soon see whether a court will issue a temporary injunction halting enforcement of the rule pending litigation.”

This new rule by the FTC represents a drastic shift in the landscape of physician employment and contractual agreements that plunges the health care world into more chaos. Although it is intended to free employees from restrictive clauses, it introduces a new realm of legal uncertainty and potential conflicts that may ultimately harm rather than help the very workforce it aims to protect.

There are 120 days after publication of the rule for employers to change course. But it’s most likely that legal challenges will result in a stay of the effective date, and it may be years before it goes into effect. Employers can develop a middle-ground approach where they eliminate noncompetes for everyone except highly paid individuals and wait to see how the courts come down on the exceptions.

In short: The new rule is confusing

Regardless of where doctors fall on the spectrum of whether noncompetes should be allowed, this FTC rule causes more confusion and legal wrangling than good. Instead of a more measured approach that may have had some real impact, it is an act of overreaching and political posturing. It’s a shame, really, because physicians are working harder under more intense pressure. They are struggling to keep practicing amid lower reimbursement and increased workload, and they really need actual relief.

This new FTC rule introduces more questions than solutions, suggesting that the road ahead will be fraught with legal disputes and continuing controversy over noncompete clauses in the health care sector.

This is not the solution doctors were hoping for.

Amanda Hill, J.D., is a health care attorney based in Austin, Texas, and founder of Guard My Practice, an online video platform for physicians offering 15-minute weekly continuing medical education videos that guide them through complicated subjects, including contract negotiations, fraud and abuse issues, employment conflicts and the basics of setting up a practice.

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