Last year, the Federal Trade Commission (FTC) issued a proposed rule to ban most noncompete agreements nationwide, with very limited exceptions. The sweeping rule forbids any contractual term between an employer and a worker that prevents the worker from accepting employment with a competitor or operating a competitive business after the conclusion of the worker’s employment with the employer. The proposed rule also includes an expansive definition of “worker,” including employees, independent contractors, interns, and even volunteers, and includes no exception for executive or highly compensated employees. After more than a year, during which the public, and the healthcare industry in particular, offered comments, the FTC voted 3 to 2 on April 23, 2024, to issue a final rule very similar to its proposed rule.
Healthcare Industry’s Impact on the Proposed Rule
The FTC focused on health care and physicians when drafting its proposed rule, reportedly looking to a 2017 paper published in Management Science titled “Screening Spinouts,” which evaluated the economic effects of noncompete agreements on the healthcare industry. And according to FTC Chair Lina Khan, the healthcare industry gave more feedback on the proposed rule than any other sector.
Of note, the American Hospital Association (AHA) criticized the FTC’s proposed rule, highlighting the negative effect it will have on retention in for-profit hospitals, while the American Medical Association (AMA), the country’s largest physician professional organization, has adopted an official position in support of the rule.
Rise of Noncompete Agreements in the Healthcare Industry
Why is the healthcare industry so concerned about this proposed rule? And what effect might it have within the industry? Historically, because U.S. physicians have usually been self-employed, they’ve generally practiced outside the realm of noncompete agreements. But a vast consolidation of the healthcare sector has changed that.
Between 2020 and mid-2023 alone, more than 7,000 medical practices were sold, and today, the majority of physicians work for large employers. According to the AMA, between 37% and 45% of American doctors are subject to noncompetes. Without any future rule-making or legislation, that number will likely continue to grow as private equity firms, which now own around 40% of the country’s medical practices, continue to invest in the healthcare sector.
Hospitals, especially for-profit enterprises, have generally argued that noncompete agreements are important tools for protecting investments in doctors and senior executives. AHA General Counsel Chad Golder has previously pointed to rural hospitals, which often spend a lot of money on new physicians, who are desperately needed by small communities. The AHA has argued that allowing such doctors to simply leave after a short time, once such a hospital has made that sort of investment, would negatively affect health outcomes in those smaller, rural communities.
On the other hand, physician groups such as the AMA and the American College of Physicians argue the opposite is true and that noncompete agreements contribute to physician shortages while disrupting the doctor-patient relationship. They point out that because noncompetes generally limit doctors from working within their previous employers’ area, doctors must move if they’re unhappy with their jobs, 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 might be especially profound in small subspecialties.
Lawsuits Over Noncompetes
As noncompetes have become more common within the healthcare sector, so have lawsuits attempting to enforce them or, alternatively, challenge them as illegal restraints on trade. Last September, a Michigan court granted a doctor a preliminary court order, allowing him to bypass a noncompete he had signed with a local hospital system.
In that case, a pediatrician specializing in critical care—or the sickest of sick kids—claimed he was subject to an unmanageable workload after a number of doctors were laid off at his hospital. Specifically, he claimed he was made to work outside his specialty and instead work in general pediatrics when it was generally understood he would only work within pediatric critical care.
He sought to leave and work for another employer, and the hospital attempted to stop him, citing his noncompete. He fought back, claiming the hospital had materially breached his employment agreement by expanding his duties and increasing his workload, and as a result, he was no longer subject to a noncompete.
The court found the doctor had a reasonable likelihood of success on that argument. Also, the noncompete restricted him from practicing any type of medicine at all within the relevant area. The Michigan court found this was an unreasonable restraint of trade and that the hospital didn’t have a legitimate interest in preventing the doctor from practicing medicine generally within the area.
Takeaways
While the final rule may eventually change the healthcare landscape, its future isn’t guaranteed because of the legal challenges that were immediately filed against it. Hospitals and doctors can expect enforcement of the rule to be paused pending the resolution of litigation, and eventually, the rule may be struck down as an administrative overreach.
Additionally, the FTC doesn’t have jurisdiction over nonprofits, which are prevalent throughout the healthcare sector. So, the rule might affect doctors within the for-profit sector only.
As both the FTC and the courts begin to scrutinize noncompetes within the healthcare industry more frequently, it’s important to make sure your agreements are narrowly tailored to and compliant with your jurisdiction’s laws. Some courts may be skeptical of noncompetes that prevent doctors, who are important to the community, from providing medicine within the community. So, it’s important for hospitals and healthcare employers to evaluate their restrictive covenants on an ongoing basis.
Joe Lavigne and Samantha Shear are attorneys in Jones Walker’s labor and employment practice group. They can be reached in New Orleans at jlavigne@joneswalker.com and sshear@joneswalker.com.