Healthcare Split on Noncompete Agreements

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A Federal Trade Commission (FTC) proposal to prohibit noncompete agreements is splitting the healthcare community, with some organizations saying the agreements are needed to protect healthcare systems’ interests and others saying they are unfair means to control the labor force.

In an email to Managed Healthcare Executive, the American Medical Association (AMA) said the organization “opposes the use of unreasonable noncompetes, but AMA does not support an outright ban on noncompetes.” James Madara, M.D., CEO and executive vice president of AMA, was one of the more than 25,000 people and organizations that submitted comments to the FTC on its proposed rule, which would ban employers from requiring workers to sign noncompete agreements.

The FTC says having such an agreement in place “suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses.” The commission says the abolition of noncompete agreements would increase wages by almost $300 billion per year and expand the career opportunities of about 30 million people.

In a prepared statement, FTC Chair Lina M. Khan said that “the freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” During a public hearing in February 2023 on the rule proposed by the FTC, Khan said that noncompetes now affect 1 in 5 American workers.

The Office of Economic Policy, which is part of the U.S. Treasury Department, said in a 2016 report that the agreements are used to “protect trade secrets, reduce labor turnover, impose costs on competing firms and improve employer leverage in future negotiations with workers. However, many of these benefits come at the expense of workers and the broader economy.”

In his letter to the FTC about the proposed ban, Madara said the AMA is “deeply troubled by the fact that there are employed physicians in this country who are bound by unreasonable, coercive and abusive noncompetes.” Yet Madara also wrote that “physicians who are employers and owners of physician practices or leaders in integrated delivery systems may favor the use of reasonable noncompetes.”

“I understand what the FTC is trying to do,” says Carrie Amezcua, J.D., an attorney with Buchanan Ingersoll & Rooney in Philadelphia. “(But) the rule is very broad.”

Bob Frolichstein, M.D., president-elect of the American Academy of Emergency Medicine and chief of staff of Methodist Hospital in San Antonio, says his organization has long been opposed to noncompetes. Emergency physicians don’t have their own patients and don’t possess trade secrets, he explains, which are key reasons for organizations to require noncompetes. The agreements “are used as a mechanism of control over the workforce,” Frolichstein says.

The specifics of healthcare systems’ noncompetes vary greatly, Frolichstein says. Some agreements prohibit physicians from practicing within a certain geographic radius of their current location, whereas others might prevent them from practicing in any geographic area where the healthcare system has operations.

Of particular concern are the effects of noncompete agreements on physicians who raise objections about how a healthcare system is operating, according to Frolichstein. As an example, he says an emergency department might be severely understaffed at night. Physicians who express concern about staffing might be fired. If they signed a noncompete agreement, they might be forced to pack up their family, pull their children out of school and move to another location, Frolichstein says.

Although Frolichstein says it is unclear how many physicians work for organizations with policies that require them to sign noncompetes, he says he “largely believes the largest emergency medical contract organizations have restrictive covenants."

Sameer Baig, M.D., an hematologist/oncologist with Cancer Specialists of North Florida, was sharply critical of noncompetes in his remarksduring the FTC hearing in February. Baig said noncompetes are ubiquitous in medicine and noted that 75% of physicians are now employees. He said the agreements contribute to physician shortages and burnout, and are instrumental in the creation of oligopolies as corporations carve up territory. “Noncompetes in medicine are immoral, unnecessary and a clear and present danger to the country," Baig said.

Hospitals favor noncompetes

The American Hospital Association (AHA) opposes the proposed prohibition of noncompetes, particularly for physicians and senior executives. Chad Golder, the AHA’s deputy general counsel, says noncompetes can benefit physicians, patients and hospitals. Research has shown that physicians receive higher wages over the long term if a noncompete agreement is in place, he says.

The agreements also help to improve integrated care for patients, Golder says, and they protect the investments hospitals make when it comes to recruiting physicians and senior executives, particularly in rural or underserved areas.

In a letter to the FTC, the AHA says banning noncompetes “would instantly invalidate millions of dollars of existing contracts while exacerbating problems of healthcare labor scarcity, especially for medically underserved areas like rural communities.”

Golder says that with the agreements in place, there is more sharing of proprietary information within hospitals and healthcare systems, and the agreements make it more likely that health systems would invest in training of employees. One drawback to the proposed FTC rule is that a proposed prohibition of noncompetes would apply to for-profit healthcare systems but not to nonprofits, Amezcua explains. The rule would “lend itself to unpredictable and disparate treatment,” she says.

The AMA agrees. In its letter to the FTC, the association says that 57% of U.S. hospitals operate as not-for-profits, “significantly tilting the playing field in favor of these large employers.”

The letter also states that “the issue of physician noncompetes warrants much greater consideration of the potential disruption and unintended consequences of implementing a blanket federal approach of banning all noncompetes while overlooking alternative approaches to achieve the intended objective. A one-size-fits-all ban fails to adequately address many of the factors that are unique to the physician market, such as hard-won state noncompete statutes that apply specifically to physicians.”

Several states, including California, North Dakota and Oklahoma, as well as Washington, D.C., have extensive bans on noncompetes. Minnesota just joined this group. Several others ban noncompete agreements for workers below a certain pay level.

Indiana’s legislature recently approved a ban on noncompetes for primary care physicians that started this month, and the Indianapolis National Public Radio station WFYI reported that Eskenazi Medical Group, a large medical group in the state, said it was abolishing noncompete agreements for all of its physicians.

If the FTC approves its noncompete ban, it won’t hamper states’ efforts to prohibit such agreements. The FTC rule would be “a floor, not a ceiling,” Amezcua says, and states could implement their own, stronger restrictions on noncompetes. Meanwhile, Jennifer Abruzzo, the general counsel for the National Labor Relations Board, sent a memo in late May stating that enforcement of noncompete provisions in most cases violates the National Labor Relations Act. Her memo also says that overly broad noncompetes hamper employees from exercising their rights to take collective action to improve working conditions.

The agreements may be “reasonably construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes and preferences as to type and location of work,” Abruzzo wrote.

Although no one is sure what the FTC will decide regarding noncompete agreements, the experts say it will take months for the commission to wade through all the public comments it has received, with a decision possibly expected early next year.

Susan Ladika is an independent journalist in Tampa, Florida, who writes about healthcare and business. She is a frequent contributor to Managed Healthcare Executive.