Why medical economics may change significantly if FTC noncompete ban is upheld

A new Federal Trade Commission (FTC) rule banning noncompete agreements is projected to alter the future of the healthcare industry’s economy, assuming it is upheld by the courts.

Noncompete agreements contractually prohibit workers from joining or starting a competing business after leaving their employment. These agreements typically contain terms designating how long and where these restrictions apply.

In the health care sector, 37% to 45% of physicians are affected by noncompete agreements. Medical businesses, such as hospitals, have traditionally used noncompetes to mitigate the risk of losing valuable, trained staff and preserve care for their patients. However, many physicians find that their noncompete agreements oblige them to choose between enduring poor working conditions and uprooting their lives to continue their practice outside of the area covered by the noncompete.

The new rule bans noncompete agreements by classifying their usage as unfair methods of competition. The FTC estimates that banning noncompete agreements will benefit the economy by promoting competition, leading to approximately 8,500 new businesses created annually and increasing earnings for workers by $524 per year. Additionally, the FTC believes its new rule will cause healthcare costs to drop by $194 billion over the next decade.

Out of the 26,000 comments received by the FTC on its proposed rule prior to issuing the final rule, about 25,000 were largely in favor of a ban. A significant number of the submitted comments came from healthcare employees and medical business entities. Many healthcare employees shared stories about how noncompete agreements had detrimentally affected their lives, practices and patients. Conversely, many hospitals were in the minority against the rule in the submitted comments and shared concerns about potential financial devastation of their businesses due to the new rule’s impact on staffing, training and employee retention.

Some of the comments in opposition to the ban scrutinized the FTC rule because of the differences in application to nonprofit versus for-profit entities. The FTC is authorized to promulgate rules regulating entities that are organized to “carry on business for its own profit or that of its members.” About 30 years ago, the U.S. Supreme Court decided that the FTC does not have jurisdiction over nonprofit entities unless they provide substantial economic benefit to their for-profit members. When promulgating the new ban on noncompetes, the FTC said that nonprofit designation or tax-exempt status is not dispositive of whether the entity is profit-making, and many nonprofit healthcare facilities may still be subject to the ban.

Commenters argued that the discrepancies between nonprofit and for-profit facilities will create an unfair playing field amongst competing medical businesses, ruining the economy of the industry. Some commenters claimed that insurance premiums will rise because nonprofit businesses would have greater market power in provider network negotiations. Others worried about frequent costly bidding wars to secure top talent, along with higher operational costs for recruiting and training that may have a diminished return value since workers could easily change their employment. Commenters also asserted that the projected increase in worker earnings will result in higher consumer prices to offset the new costs to the businesses.

The FTC responded to these concerns by stating they lacked any empirical data to support them. To bolster the agency’s position, the FTC cited a 2021 study on the effects of varying state laws on healthcare costs. The results showed that, when noncompete agreements are enforced without any checks, it causes higher physician prices, and practice sizes decrease, contrary to what many medical businesses assumed. Addressing the nonprofit/for-profit distinction, the FTC reasoned that any entities outside of the FTC’s jurisdiction that choose to continue to use noncompetes may be at a self-imposed disadvantage in their ability to recruit workers. To address the higher operational costs, the FTC argues that once freed from noncompetes, employees will be more satisfied in their employment, leading to increased productivity and efficiency, which will lead to lower prices.

The FTC also received comments requesting that the medical sector be exempt from the ban, arguing that nuances in the medical industry cannot be accounted for in a sweeping ban of all noncompete agreements. The FTC was ultimately unconvinced of that proposition due to the pervasiveness of noncompetes and their detrimental effects on a large number of healthcare employees. The new rule, however, does carve out a specific exemption for maintaining existing noncompete agreements for senior executives, defined as workers earning more than $151,164 annually who are in policy-making positions, which may apply to certain medical personnel.

Comments from health care employees revealed the extensive negative effects of noncompete agreements in the health care industry. Many comments discussed how noncompetes are contributing to burnout, exacerbating the physician shortage, and consequently limiting patient access to health care. One study showed that physicians who experience symptoms of burnout are twice as likely to commit a serious medical error. With the ban in effect, medical facilities will need to ensure better treatment of their staff to retain employees rather than using contracts to hold them in the same positions.

Furthermore, many physicians who lost the freedom to practice in their community for long periods of time due to provisions in their noncompetes also provided comments. They reported that their physician-patient relationships dissolved and their patients often could no longer receive treatment from the doctor of their choosing unless they had the ability to travel, sometimes appreciable distances. Patients and physicians were aggravated about having to develop new relationships despite the years already spent building trust and familiarity. Banning noncompetes reinstates a physician’s ability to practice wherever they would like in their community, possibly giving patients greater access to health care, lowering price options and increasing lasting personalized services.

The question of whose forecast of the future of medical finances is correct will have to wait to be determined, as the FTC has already faced legal challenges questioning its authority to ban noncompete agreements since the rule was announced. These legal challenges argue that the FTC is overstepping its power as an agency, because only Congress can make rules with such significant economic effects. Essentially, the FTC’s rule nullifies thousands of existing contracts and may be found unconstitutional for exceeding the scope of the FTC’s statutorily permitted authority. Pending cases before the U.S. Supreme Court could restrain the power of agencies to act within their discretion without explicit permission from Congress, rendering predictions for the outcome of the FTC’s rule difficult. Nonetheless, the Supreme Court striking down the FTC’s rule as an unconstitutional exercise of power is a serious possibility.

Given the complexities of the law, including some states and localities that have banned such agreements, employees subject to noncompete agreements would be wise to seek legal counsel in their respective areas to learn about their options.

The FTC rule becomes effective 120 days after publication, approximately on August 20, 2024, but it is likely to be delayed by the legal challenges.

Brian Markovitz represents whistleblowers in federal False Claims Act matters and represents individuals across the country in complex employment litigation and appellate matters involving wrongful termination, wage & hour claims and employer retaliation in response to reporting fraud or misconduct and discrimination on the basis of race, gender, age and sexual orientation. He can be reached at [email protected].

Deborah Jaffe is a law clerk at Joseph Greenwald & Laake PA and a juris doctor candidate at The George Washington University Law School focusing on civil rights and employment law.