Last Tuesday (April 23), the Federal Trade Commission (FTC) issued a 570-page final rule in a partisan 3-2 vote prohibiting employers from binding most American workers to post-employment non-competition agreements (the “Final Rule”):

“Pursuant to sections 5 and 6(g) of the Federal Trade Commission Act (“FTC Act”), the Federal Trade Commission (“Commission”) is issuing the Non-Compete Clause Rule (“the final rule”). The final rule provides that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date. With respect to existing non-competes—i.e., non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives (in policy setting/executive positions who earned more than $151,164 last year), existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.” (p.1)

“Concerns about non-competes have increased substantially in recent years in light of empirical research showing that they tend to harm competitive conditions in labor, product, and service markets. … When a company interferes with free competition for one of its former employee’s services, the market’s ability to achieve the most economically efficient allocation of labor is impaired. Moreover, employee-noncompetition clauses can tie up industry expertise and experience and thereby forestall new entry… competes by employers tends to negatively affect competition in labor markets, suppressing earnings for workers across the labor force—including even workers not subject to noncompete. This research has also shown that non-competes tend to negatively affect competition in product and service markets, suppressing new business formation and innovation… Yet despite the mounting empirical and qualitative evidence confirming these harms and the efforts of many States to ban them, non-competes remain prevalent in the U.S. economy. Based on the available evidence, the Commission estimates that approximately one in five American workers—or approximately 30 million workers—is subject to a non-compete. The evidence also indicates that employers frequently use non-competes even when they are unenforceable under State law.” (p.6)

On its home page, the FTC says “with a comprehensive ban on new non-competes, Americans could see an increase in wages, new business formation, reduced health care costs and more.”(www.ftc.gov)

The rule takes effect 120 days following its publication in the Federal Register and is applicable to every employer including specified operations in not-for-profit organizations (which represents the majority of hospitals, nursing homes and others). The agency noted it received 26,000 comment letters since the proposed rule was published January 19, 2023 including significant reaction from healthcare organizations.  By the end of last week, two lawsuits were filed: one by the Chamber of Commerce in the United States District Court for the Eastern District of Texas and the second by a global tax services and software company in the Northern District of Texas – each challenging the Final Rule and arguing that the FTC lacked the authority. Others are likely to follow and its implementation will be delayed as arguments about its merits and the FTC’s standing to make the rule find their way thru the courts.

Special attention to hospitals and physicians in the rule

Notably, the use of non-competes in healthcare is a central theme in the rule, particularly in tax-exempt hospital and medical practice settings. Noting that one in 5 workers (30 million) and up to 45% of physicians work under non-compete agreements today, the Commissioners illustrated the need for the rule by inserting vignettes from 14 workers in their introduction: 4 of these were healthcare workers– 2 physicians and employees of a hospital and electronic health record provider (p.11-13). Throughout its exhaustive commentary, the Commissioners took issue with assertions by healthcare organizations about the potential negative consequences of the rule citing lack of empirical evidence to justify opposition claims. References to tax-exempt hospitals, their for-profit activities and their employment arrangements with physicians are frequent in the commentary justifying the application of the rule as follows:

“Many commenters representing healthcare organizations and industry trade associations stated that the Commission should exclude some or all of the healthcare industry from the rule because they believe it is uniquely situated in various ways. The Commission declines to adopt an exception specifically for the healthcare industry. The Commission is not persuaded that the healthcare industry is uniquely situated in a way that justifies an exemption from the final rule. The Commission finds use of non-competes to be an unfair method of competition that tends to negatively affect labor and product and services markets, including in this vital industry; the Commission also specifically finds that non-competes increase healthcare costs. Moreover, the Commission is unconvinced that prohibiting the use of non-competes in the healthcare industry will have the claimed negative effects.” (p.303)

Not surprisingly rule, responses from the hospital trade groups were swift, direct and harshly critical:

• American Hospital Association (www.aha.org):” The FTC’s final rule banning non-compete agreements for all employees across all sectors of the economy is bad law, bad policy, and a clear sign of an agency run amok. The agency’s stubborn insistence on issuing this sweeping rule — despite mountains of contrary legal precedent and evidence about its adverse impacts on the health care markets — is further proof that the agency has little regard for its place in our constitutional order. Three unelected officials should not be permitted to regulate the entire United States economy and stretch their authority far beyond what Congress granted it–including by claiming the power to regulate certain tax-exempt, non-profit organizations. 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.”
• Federation of American Hospitals (www.fah.org): “This final rule is a double whammy. In n a time of constant health care workforce shortages, the FTC’s vote today threatens access to high-quality care for millions of patients.”

By contrast, the American Medical Association (www.ama-assn.org) response was positive, linking its support for the rule to AMA’s ethical principles of physician independence and clinical autonomy.

Four implicit messages to healthcare are evident in the rule

It is unlikely the rule will become law in its current form. Opposing trade groups, employers dependent on non-competes for protections of trade secrets and business relationships and many others will actively pursue its demise in courts actions. But a review of the text makes clear the FTC is intensely focused on competition and consumer protections in healthcare akin to its ongoing challenges to hospital consolidation.

Four messages emerge from the text of the rule:

1-‘The healthcare industry is a business which needs more regulation to protect consumers and its workforce by lowering costs and stimulating competition. ‘

“Many commenters representing healthcare organizations and industry trade associations stated that the Commission should exclude some or all of the healthcare industry from the rule because they believe it is uniquely situated in various ways. The Commission declines to adopt an exception specifically for the healthcare industry. The Commission is not persuaded that the healthcare industry is uniquely situated in a way that justifies an exemption from the final rule. The Commission finds use of non-competes to be an unfair method of competition that tends to negatively affect labor and product and services markets, including in this vital industry; the Commission also specifically finds that non-competes increase healthcare costs. Moreover, the Commission is unconvinced that prohibiting the use of non-competes in the healthcare industry will have the claimed negative effects.” (p.373)

2-‘Physicians play a unique role in healthcare and deserve protection.’

“Some healthcare businesses and trade organizations opposing the rule argued that, without non-competes, physician shortages would increase physicians’ wages beyond what the commenters view as fair. The commenters provided no empirical evidence to support these assertions, and the Commission is unaware of any such evidence. Contrary to commenters’ claim that the rule would increase physicians’ earnings beyond a “fair” level, the weight of the evidence indicates that the final rule will lead to fairer wages by prohibiting a practice that suppresses workers’ earnings by preventing competition; that is, the final rule will simply help ensure that wages are determined via fair competition. The Commission also notes that it received a large number of comments from physicians and other healthcare workers stating that non-competes exacerbate physician shortages.” (p.157)

“Hundreds of physicians and other commenters in the healthcare industry stated that non-competes negatively affect physicians’ ability to provide quality care and limit patient access to care, including emergency care. Many of these commenters stated that non-competes restrict physicians from leaving practices and increase the risk of retaliation if physicians object to the practices’ operations, poor care or services, workload demands, or corporate interference with their clinical judgment. Other commenters from the healthcare industry said that, like other industries, non-competes bar competitors from the market and prevent providers from moving to or starting competing firms, thus limiting access to care and patient choice. Physicians and physician organizations said non-competes contribute to burnout and job dissatisfaction, and said burnout negatively impacts patient care.” (p.202)

“…the Commission notes that while the study finds that non-competes make physicians more likely to refer patients to other physicians within their practice—increasing revenue for the practice—it makes no findings on the impact on the quality of patient care. The Commission further notes that pecuniary benefits to a firm cannot justify an unfair method of competition.” (p.206)

3.’Tax exempt hospitals that operate like for-profit entities deserve special scrutiny from regulators and are thus subject to the rule’s provisions.’

“Merely claiming tax-exempt status in tax filings is not dispositive. At the same time, if the Internal Revenue Service (“IRS”) concludes that an entity does not qualify for tax-exempt status, such a finding would be meaningful to the Commission’s analysis of whether the same entity is a corporation under the FTC Act.” (p.53)

“As stated in Part II.E, entities claiming tax exempt status are not categorically beyond the Commission’s jurisdiction, but the Commission recognizes that not all entities in the healthcare industry fall under its jurisdiction. “(p.374)

“While the Commission shares commenters’ concerns about consolidation in healthcare, it disagrees with commenters’ contention that the purported competitive disadvantage to for-profit entities stemming from the final rule would exacerbate this problem. As some commenters stated, the Commission notes that hospitals claiming tax-exempt status as nonprofits are under increasing public scrutiny. Public and private studies and reports reveal that some such hospitals are operating to maximize profits, paying multi-million-dollar salaries to executives, deploying aggressive collection tactics with low-income patients, and spending less on community benefits than they receive in tax exemptions.943 Economic studies by FTC staff demonstrate that these hospitals can and do exercise market power and raise prices similar to for-profit hospitals.944 Thus, as courts have recognized, the tax-exempt status as nonprofits of merging hospitals does not mitigate the potential for harm to competitive conditions.” (p.383)

“Conversely, many commenters vociferously opposed exempting entities that claim tax exempt status as nonprofits from coverage under the final rule. Several commenters contended that, in practice, many entities that claim tax-exempt status as nonprofits are in fact “organized to carry on business for [their] own profit or that of [their] members” such that they are “corporations” under the FTC Act. These commenters cited reports by investigative journalists to contend that some hospitals claiming tax-exempt status as nonprofits have excess revenue and operate like for-profit entities. A few commenters stated that consolidation in the healthcare industry is largely driven by entities that claim tax-exempt status as nonprofits as opposed to their for-profit competitors, which are sometimes forced to consolidate to compete with the larger hospital groups that claim tax-exempt status as nonprofits. Commenters also contended that many hospitals claiming tax-exempt status as nonprofits use self-serving interpretations of the IRS’s “community benefit” standard to fulfill requirements for tax exemption, suggesting that the best way to address unfairness and consolidation in the healthcare industry is to strictly enforce the IRS’s standards and to remove the tax-exempt status of organizations that do not comply. An academic commenter argued that the distinction between for-profit hospitals and nonprofit hospitals has become less clear over time, and that the Commission should presumptively treat hospitals claiming nonprofit tax-exempt status as operating for profit unless they can establish that they fall outside of the Commission’s jurisdiction.” (p.377-378)

“After carefully considering commenters’ arguments, the Commission declines to exempt for-profit healthcare employers or to exempt the healthcare industry altogether.” (p.380)

4. ‘The net impact of non-compete agreements is harmful to the workforce and the public. ‘

“The Commission finds that with respect to these workers, these practices are unfair methods of competition in several independent ways:  

• The use of non-competes is restrictive and exclusionary conduct that tends to negatively affect competitive conditions in labor markets.
• The use of non-competes is restrictive and exclusionary conduct that tends to negatively affect competitive conditions in product and service markets.
• The use of non-competes is exploitative and coercive conduct that tends to negatively affect competitive conditions in labor markets.
• The use of non-competes is exploitative and coercive conduct that tends to negatively affect competitive conditions in product and service markets.” (p.105)

“The Commission notes that the vast majority of comments from physicians and other stakeholders in the healthcare industry assert that non-competes result in worse patient care. The Commission further notes that the American Medical Association discourages the use of non-competes because they “can disrupt continuity of care, and may limit access to care.” In addition, there are alternatives for improving patient choice and quality of care, and for retaining physicians, that burden competition to a much less significant degree than non-competes…commenters asserted that a ban on non-competes would upend healthcare labor markets, thereby exacerbating healthcare workforce shortages, especially in rural and underserved areas. A medical society argued that non-competes can allow groups to meet contractual obligations to hospitals, as physicians leaving can prevent the group from ensuring safe care. As the Commission notes, there are not reliable empirical studies of these effects, and these commenters do not provide any. However, the Commission notes that the rule will increase labor mobility generally, which makes it easier for firms to hire qualified workers.” (p.208)

“The Commission also noted that in three States—California, North Dakota, and Oklahoma—employers generally cannot enforce non-competes, so they must protect their investments using one or more of these less restrictive alternatives…Commenters provide no empirical evidence, and the Commission is unaware of any such evidence, to support the theory that prohibiting non-competes would increase consolidation or raise prices. “384

The bottom line:

Odds are this rule will not become law anytime soon allowing healthcare organizations to consider alternatives to the non-competes they use. Work-arounds for protection of intellectual property, talent acquisition, employment agreements are likely as HR professionals, benefits and compensation consultancies huddle to consider what’s next.

Those that operate in 3 states (CA, ND, OK) already face state reg’s limiting non-competes and more states are adding measures. As noted in the rule, the health systems in these states have not been debilitated by non-compete limitations nor empirical evidence of public/worker harm produced, so no harm no foul.

The bigger takeaways from this rule for healthcare—especially hospitals—are 2:

The rule may fuel already growing antipathy between the workforce and senior management. Physicians are frustrated and burned out. Mid-level clinicians, techs and nurses are not happy. The hourly workforce is insecure. The hospital workplace—its clinics, programs and services—is not a happy place these days. The rule might fuel increased union organizing activity among some work groups at a critical time when demand is high, utilization is increasing, resources are stretched, reimbursement is shrinking and conditions for solvency and sustainability in question for rural, safety net and community hospitals in areas of declining population.  And employed physicians will push-back harder against pressure from their hospital and private equity partners to work harder and produce more. The rule gives physicians a moral premise on which to oppose employer demands, whether the rule is implemented in its current form or not.

And the second equally notable takeaway is the rule’s specific attention to tax-exempt hospitals that operate as “for-profit” organizations. The FTC Commissioners question their tax exemptions and their investor-owned competitors are happy they noticed. They’re joined by investigations in 5 Committee’s of Congress with Bipartisan support for a fresh look at their bona fide eligibility despite strong pushback by the American Hospital Association and others.

This rule was introduced as a proposed rule last year with a comment period of 90 days allowed. Fifteen months and 26,000 comments later, it’s the latest reminder that the future of healthcare is everyone’s business and hospitals and physicians see that future state differently.

In its summation, the FTC estimates that this final rule will lead to new business formation growing by 2.7% per year, create 8,500 additional new businesses annually, produce 17,000-29,000 patents for innovation, increase earnings for workers and lower health care costs by up to $194 billion over the next decade. Maybe.

What’s clear is that the FTC and regulators in DC and many states are watching the industry closely and many aren’t buying what we’re selling.