Photo Credit: Andrii Dodonov
The FTC banned noncompete agreements and predicts this change will raise competition and business growth nationwide. How will it affect the healthcare sector?
On April 23, the Federal Trade Commission (FTC) issued a rule that bans noncompete agreements nationwide.
Noncompete agreements are contractual agreements that prohibit employees from joining or starting competing businesses after leaving their jobs. Noncompete agreements typically contain terms designating how long these restrictions last or within what geographical range they apply.
The FTC estimates that banning noncompete agreements will promote competition, leading to new business growth of 2.7% annually. That translates to 8,500 new businesses each year, resulting in an annual increase in earnings for workers of $524. Additionally, the FTC expects healthcare costs to decrease by $194 billion over the next 10 years with noncompete agreements off the table.
In healthcare, 37-45% of physicians are affected by noncompete agreements. Healthcare businesses have traditionally used noncompete agreements to mitigate the risk for losing valuable, trained staff and ensure the continuity of care for their patients. However, noncompete agreements force many physicians to decide between enduring subpar working conditions and uprooting their lives to continue their practices elsewhere.
The FTC reported receiving 26,000 comments from the public on its proposed rule before issuing the final rule. Of those, 25,000 were in favor of the ban with a significant number coming from healthcare employees, many of whom shared stories about how noncompete agreements have negatively affected their lives, practices and patients.
The comments further revealed that many employees feel trapped and burned out in their current employment situations. It goes without saying that burnout is a serious problem in the medical field that exacerbates the physician shortage, consequently limiting patient access to healthcare. Physicians who experience symptoms of burnout are twice as likely to commit a serious medical error. Without noncompete agreements, medical facilities will be compelled to ensure better treatment of their staff to retain employees rather than using contracts that limit employee’s financial freedom.
Many physicians who lost the ability to practice in their communities for long periods of time because of geographical restraints in their noncompete agreements also commented. Physicians had to sever their physician-patient relationships, and their patients could not receive treatment from their doctor of choice unless they were able to travel distances that were often significant. Patients and physicians were frustrated about having to build new relationships despite the years already spent building trust and familiarity. Banning noncompete agreements restores a physician’s ability to practice elsewhere in their community, potentially giving patients greater access to healthcare, lowering price options and increasing the longevity of personalized services.
The American Hospital Association (AHA), however, took a stance against the new FTC rule, arguing that it will result in economic distress in the medical sector. Healthcare businesses fear that banning noncompete agreements will lead to frequent, costly bidding wars to secure top talent and higher operational costs for recruiting and hiring. Healthcare businesses also predict a reluctance toward innovation due to a revolving workforce that would need repetitive training on how to use new technology, slowing skill development and reducing the quality of care for patients.
In this same vein, the FTC received comments requesting that the medical sector be exempt from the ban but ultimately rejected that proposition due to the pervasiveness of noncompete agreements in the field. The new rule does, however, 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. Conceivably, this could apply to certain medical personnel who set policy.
Non-profit businesses may also be exempt from the rule. The FTC is authorized to make rules regulating entities that are organized to “carry on business for its own profit or that of its members.” In the late 1990s, the Supreme Court held that the FTC does not have jurisdiction over non-profit entities unless they provide substantial economic benefit to their for-profit members. The FTC has said that non-profit designation or tax-exempt status is not dispositive of whether the entity is profit-making, and many non-profit healthcare facilities may still be subject to the ban. The AHA argues that the discrepancies between non-profit and for-profit hospitals will create an uneven playing field among competing medical businesses.
Since the rule was announced, the FTC has already faced legal challenges questioning its authority to ban noncompete agreements, claiming that the FTC is exceeding its power as an agency because Congress can promulgate a rule with such vast economic impact. The FTC’s rule essentially nullifies thousands of existing contracts and may be found unconstitutional on the grounds that it goes beyond the scope of the FTC’s statutorily permitted powers. With pending cases before the Supreme Court that contemplate limiting the authority of agencies acting within their discretion without direct permission from Congress, it is difficult to predict the outcomes of these challenges.
Ultimately, however, the Supreme Court may strike down the FTC’s rule as an unconstitutional power grab. Given the complexities involved, including that some states and localities already ban or otherwise limit noncompete agreements, individuals subject to noncompete agreements would be wise to seek legal counsel in their respective areas to learn their options.
The FTC rule becomes effective 120 days after publication – which is approximately August 20th – but is expected to be delayed by legal battles.
