As the healthcare industry braces for potential federal action on noncompete agreements, some providers are reassessing the need for them.
Noncompete agreements generally restrict employees from working in a specific geographic area or doing similar work at a rival company for a specified period of time. Where legal, they have become standard in many healthcare contracts, with researchers estimating in a 2020 study in the Journal of Human Resources that at least 40% of physicians are held to the agreements that typically bar them from working for competitors within a 30-mile radius for one or two years of leaving companies.
Proponents of noncompetes in healthcare say the clauses protect investments in talent, patient relationships, and research and development; opponents raise concerns about the potential to suppress wages and hinder innovation.
A handful of states have enacted legislation abolishing or restricting the use of noncompetes, leading some provider companies to go beyond legal requirements to retroactively strike the clauses. Other organizations say a review of the issue now will enable them to get ahead of recently proposed plans from the Federal Trade Commission.
Why now?
The FTC proposed a rule in January that, if finalized, would do away with noncompete agreements across all sectors and compensation levels, although it remains to be seen whether it would apply to nonprofit entities. The commission projects the rule would increase competition and reduce consumer healthcare costs by up to $148 billion per year.
The proposal has faced a mixed response from business and industry groups.
National organizations like the American Hospital Association and U.S. Chamber of Commerce have pushed back on what they critique as its one-size-fits-all approach, while the American Medical Association’s House of Delegates adopted policies in favor of regulations and legislation prohibiting noncompetes for physicians in clinical practice who are employed by for-profit or nonprofit hospitals, hospital systems or staffing companies. The organization said in a news release that a physician’s freedom to work for multiple hospitals can increase patient access to specialists.
A senior leader at healthcare staffing company AMN Healthcare said some health systems are expecting some form of a national ban within the next year. Such companies may not want a restrictive noncompete to be the reason a worker declines a position, especially as the industry continues facing a critical staff shortage.
“I think in a world where the FTC will likely ban these in some form or fashion in the next year, you're potentially causing somebody not to take your job over a part of your contract that may not even be enforceable a year from now,” said Cody Futch, vice president of recruiting for AMN Healthcare’s physician solutions division, formerly Merritt Hawkins.
If a noncompete clause is so restrictive that a position is left open, then that’s lost money for a system, he said. A single physician vacancy means thousands of dollars of lost revenue each day the job goes unfilled, according to a Merritt Hawkins white paper published last year. Specifically, an internal medicine physician vacancy equates to about $7,000 lost per day, or $222,000 a month. A vacancy in cardiology could mean $9,500 in missed revenue per day, or $290,000 a month.
Removing noncompetes without bolstering retention initiatives could lead to higher turnover rates—and additional cost pressures—in the long term as physicians have greater latitude to work for rival companies, said Greg Button, president of global healthcare services at consulting firm Korn Ferry. An increase in turnover could equate to millions of dollars lost to bottom lines, Button said.
Taking action
State-level policy has meant some health systems have been without noncompetes for decades, while others are responding to more recent legislative action by rethinking their approach.
California, Minnesota, North Dakota and Oklahoma have already enacted near-total or total bans on noncompete agreements across industries, while Delaware, Indiana, Massachusetts, New Hampshire and Rhode Island have bans in place for certain clinical positions.
Brett McClain, senior vice president and chief operating officer of Sharp HealthCare, said a federal action is unlikely to make much difference to the San Diego-based health system in terms of staffing. Most uses of noncompetes have been prohibited in California since the 1940s.
McClain said in a statement that Sharp HealthCare “does not anticipate any significant changes in recruitment or retention due to the increased activity at the federal level to ban most employee noncompete agreements.”
Eskenazi Medical Group, a nonprofit provider affiliated with Indianapolis-based Eskenazi Health, said in June it was removing noncompete clauses from the contracts of all of its more than 100 physicians after Indiana Gov. Eric Holcomb (R) signed legislation in May prohibiting them from future agreements with primary care providers. CEO Curtis Wright told the Associated Press he doesn’t want to force doctors to stay at the organization and doesn't think the clause is necessary.
At Robbinsdale, Minnesota-based North Memorial Health, more than 15% of employees, including physicians and executives, are bound by noncompete agreements. A state law that went into effect this month prohibits noncompete agreements going forward, but the two-hospital health system is also examining existing contracts to determine whether to retain the clauses.
The clauses can cause hurt feelings and frustration, said North Memorial Chief Human Resources Officer Julie Kline. A review of the issue better positions the system to react to the FTC’s noncompete ban, if finalized, she said.
“I think of this as being an opportunity for every organization to really rethink all of their policies, their documentation, their handbooks, and truly their culture and values,” Kline said. “We really want to look at the ethical side of it [and] the business rationale. Every single thing we have is on the table again to review and really say, ‘OK, how do we need to modify our documents?’”
