The Federal Trade Commission voted Tuesday to finalize a rule that bans most employers from issuing and enforcing noncompete clauses, which could have a wide-ranging impact on the healthcare workforce.
The FTC released a sweeping proposal in January 2023 to ban noncompete clauses, which are used in an estimated 40% of physician employment contracts to restrict employees from working in a specific geographic area or for a rival organization. In addition to the physician sector, such provisions are common in the insurance and pharmacy benefit manager industries, experts said.
Related: FTC's noncompete ban could apply to nonprofits, former staffers say
Many hospitals, health systems, physician groups, insurance companies and pharmacy benefit managers enforce noncompete agreements to prevent former employees from sharing proprietary information with competitors. Some employers say they are more likely to invest in workforce development and training programs if noncompete provisions are in place.
Previous employers may sue or withhold deferred compensation if a former employee violates the contract. Without a federal policy, noncompete agreements have been governed by a patchwork of state laws.
Under the FTC's final rule, employers are prevented from issuing noncompete agreements for new hires and from enforcing them in existing contracts, except for senior executives. Employment contracts carried over from the sale of a business are also exempted from the ban.
FTC Chair Lina Khan said during Tuesday's meeting that noncompete agreements suppress wages, limit innovation and deter new businesses.
“We have heard from physicians who served underserved areas of the country who explained how noncompetes restricted their ability to continue serving their patients,” she said.
The FTC estimates the regulation will reduce spending on physician services by up to $194 billion over the next decade, create 8,500 jobs a year and boost wages by up to $488 billion over the next 10 years.
The rule is set to go into effect 120 days after it is published in the Federal Register, although implementation may be delayed by litigation. Organizations are expected to sue to block the regulation, potentially on the grounds the FTC doesn’t have rulemaking authority.
That is, in part, why FTC Commissioners Melissa Holyoak and Andrew Ferguson dissented, resulting in the 3-2 vote. Khan, Commissioner Rebecca Slaughter and Commissioner Alvaro Bedoya voted in favor.
“Does the commission have authority to promulgate legislative rules under Section 6(g) of the FTC Act? I believe the answer is no,” Holyoak said during the meeting.
The U.S. Chamber of Commerce is expected to file a lawsuit to block the rule, and some employers may follow suit, said Kevin Paule, a litigation attorney at the law firm Hill Ward Henderson who specializes in business disputes and trade secrets.
“There is a heavy level of skepticism that the courts will uphold this type of rule, on the theory that this is a major decision and courts may deem this is a more proper avenue for the legislature and not for an executive agency,” he said. “I would be surprised if a lawsuit is not filed by tomorrow.”
The push to ban noncompete provisions has drawn mixed feedback from healthcare associations. The American Hospital Association pushed back against the FTC’s “one-size-fits-all” approach to a noncompete ban, arguing physicians and senior hospital executives should be exempted. The American Medical Association supports limiting noncompete clauses, claiming they restrict patient access and exacerbate health inequity by not allowing specialists to work at multiple hospitals.
Chip Kahn, president and CEO of the Federation of American Hospitals, said in a statement the ban makes it more difficult to recruit and retain caregivers.
"In a time of constant healthcare workforce shortages, the FTC's vote today threatens access to high-quality care for millions of patients," he said.
Cheryl DeMars, CEO of the Madison-based coalition of self-insured employers called the Alliance, said a ban could have both positive and negative consequences. Noncompete agreements used in physician contracts promote anticompetitive and monopolistic behavior, DeMars said. However, a ban could also eliminate training incentives for employers, she said.
“The FTC should find a way to strike the appropriate balance between what is reasonable and pro-competitive and what is not,” DeMars said.
Healthcare lawyers have expressed uncertainty regarding whether nonprofit entities, and thus a large swath of the healthcare industry, would be subject to the ban.
The FTC Act, which created the agency and outlined its purview in 1914, defines a corporation as a company that “is organized to carry on business for its own profit or that of its members.” Some healthcare lawyers said the act definitively exempts nonprofits from the FTC’s oversight, while others said the scope of the exclusion is unclear.
The commission could invoke other legislation, such as Section 1 of the Sherman Act, in individual cases and use consent decrees to work around potential exceptions outlined in the FTC Act, former FTC staffers said.
Slaughter mentioned the questions around nonprofits during the meeting, urging Congress to take action. Slaughter also hinted that not all nonprofits would be exempted from the ban, depending on their structure.
“As a matter of law, I'm mindful of the fact that Congress has limited our jurisdiction,” she said. “We want to be transparent about the limitation, and recognize there are workers, especially healthcare workers, who are bound by anticompetitive and unfair noncompete clauses that our rule will struggle to reach.”
There isn’t a good policy justification for healthcare workers to be excluded from this rule, Slaughter added.
Deferring to existing state laws would be a better option than instituting a broad ban on noncompete agreements, Ferguson said.
“The statutory text on which the commission relies is based on this oblique or elliptical language that cannot justify the redistribution of nearly half a trillion dollars of wealth within the general economy by regulatory fiat,” he said.
