The FTC’s new non-compete regulations will affect hospital agreements with physicians, unless courts intervene

Hospital advocates expressed concern about the implications of new federal regulations that prohibit employers from including non-compete clauses in employment agreements.

Although tax-exempt hospitals largely fall outside the jurisdiction of the Federal Trade Commission (FTC), which will enforce the regulations, the newly issued final rule stands to affect clinical staffing. Non-compete agreements apply to between 37% and 45% of physicians, according to data from the American Medical Association.

At for-profit hospitals, the regulations will be farther-reaching, affecting all future hires and most current employees.

Specifically, the rule institutes “a comprehensive ban on new non-competes with workers.”

For existing non-compete agreements, only those with senior executives can remain in force. Any such agreements with other workers will cease to be enforceable on the rule’s effective date, which is 120 days after its imminent publication in the Federal Register.

Update: The rule is set to take effect Sept. 4.

For the purposes of the rule, senior executives are defined as those who make more than $151,164 per year and are in a “policy-making position.”

All other workers must be given notice that their non-competes are no longer enforceable. The regulations include model language that can be used in such notices.

Details on exemption

The FTC wrote that “some portion” of tax-exempt hospitals likely will fall under the new rule’s purview based on an assessment of whether they essentially are a profit-based enterprise. A real-world example cited in the rule is a physician-hospital organization that engaged in business on behalf of for-profit physician members.

Quoting established regulatory language, the FTC advised that the basic fact of tax-exempt or government-owned hospital status “does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.”

Of greater relevance for many hospitals, workers will be covered by the new protections if they perform their duties at a tax-exempt organization but are employed by a for-profit entity such as a staffing agency or physician group. Restrictions on including non-compete clauses in agreements with affiliated clinicians are a key concern for hospitals.

In comments to the FTC, healthcare stakeholders said a ban on non-competes could increase physician wages to excessive levels. The commission did not agree.

“The final rule will simply help ensure that wages are determined via fair competition,” the commission wrote, noting that comments from physicians and other healthcare workers indicated that “non-competes exacerbate physician shortages” and contribute to burnout.

In a February 2023 comment letter on the proposed version of the rule, the American Hospital Association (AHA) said non-compete agreements have been shown to increase physician wage growth and promote patient referrals, among other benefits.

For-profits at a disadvantage

The Federation of American Hospitals (FAH), which represents the for-profit segment of the hospital sector, called the final rule a “double whammy.”

“The ban makes it more difficult to recruit and retain caregivers, while at the same time creating an anti-competitive, unlevel playing field between tax-paying and tax-exempt hospitals — a result the FTC rule precisely intended to prevent,” the FAH wrote in a statement attributed to Chip Kahn, president and CEO.

The FTC sees things differently, positing that “those entities outside FTC jurisdiction that continue to deploy non-competes may be at a self-inflicted disadvantage in their ability to recruit workers, even if they derive short-term benefit from trapping current workers in their employment.”

In addition, states regulate non-competes by statute, regulation and common law, the FTC said, meaning organizations outside the commission’s authority likely still face restrictions.

In its comment letter, the AHA said nearly 79% of for-profit hospitals are in the same hospital referral region as a non-profit hospital. With only for-profit hospitals generally subject to the new regulations, “significant consequences for the healthcare labor markets” could arise if highly trained, highly skilled workers end up capitalizing on the ban and departing those hospitals.

“It is unclear whether the commission or any experts have sufficiently studied the distortions that the proposed rule would cause in this singular situation where federal law creates an uneven playing field for similarly or at least closely situated market participants,” the AHA wrote.

Shaky legal ground

Analysts anticipate litigation that challenges the regulations, which were approved by a 3-2 vote of the commission. The two dissenting commissioners described the rule as “unlawful,” saying it will not survive an expected legal challenge, in part based on the lack of statutory authority to draft such sweeping regulations.

On Wednesday, barely 24 hours after the pre-publication draft of the final rule was released, the U.S. Chamber of Commerce filed suit against the rule in a Texas federal court that has a reputation for being a business-friendly jurisdiction.

“The only saving grace is that this rule will likely be short-lived, with courts almost certain to stop it before it can do damage to hospitals’ ability to care for their patients and communities,” the AHA wrote in an April 23 statement attributed to Chad Golder, general counsel.

The FTC said it forged ahead because of the stakes, with estimates suggesting 30 million workers (one out of every five) are subject to a non-compete clause and that employers frequently utilize the agreements even when prohibited by state law. Survey findings suggest “a large share of workers subject to non-competes are relatively low-earning workers.”

Workers on average will see a $524 annual pay increase courtesy of the rule, per the FTC’s projections. Among more than 26,000 comments on the proposed rule, more than 25,000 supported the idea of banning non-competes, the FTC said, noting that healthcare workers made up a significant share of the favorable feedback.