Category Archives: Noncompete Agreements

The state of state physician noncompete bans

Posted on by • Posted in Federal Trade Commission (FTC), Health System, Hospital, Hospital Industry, Noncompete Agreements, Physician, Physician Contracts, Tax Exempt Status • Leave a comment

https://www.kaufmanhall.com/insights/blog/gist-weekly-may-17-2024

With the Federal Trade Commission (FTC) issuing a final rule last month that bans noncompete agreements nationwide, the graphic above is our attempt to categorize the current status of complex state noncompete laws that affect physicians. 

Except in the event of a business sale, five states—California, North Dakota, Minnesota, Nebraska, and Oklahoma—ban all noncompete agreements for all employees, and at least 19 states either ban them for physicians or place varying limits on them for physicians. 

Examples of these limits include a narrow law in Florida that allows noncompetes to be voided if there is only one employer of a physician specialty in a county, and a Tennessee law that only permits physician noncompetes that bar a physician from practicing at facilities where their former employer provides services. 

As a noncompete agreement can restrict a physician’s ability to practice near a former employer for years, bans on physician noncompete agreements have been shown to improve community access to care. One study found that, compared to places that allow them, places that banned noncompetes for physicians saw increased physician employment, the opening of more physician practices, and a lower likelihood of practice closures. 

Should the new FTC ban survive the mounting legal challenges it faces, its effect on the physician labor market may be limited, as not-for-profit organizations fall outside the FTC’s traditional enforcement jurisdiction. However, the agency has indicated a willingness to reevaluate an entity’s not-for-profit status and stated that “some portion” of tax-exempt hospitals could fall under the final rule’s purview.

FTC bans noncompete agreements for workers

Posted on by • Posted in Employee Agreements, Federal Trade Commission, Federal Trade Commission (FTC), Noncompete Agreements, Proprietary Information • Leave a comment

The Federal Trade Commission banned noncompete agreements for most U.S. workers Tuesday with a new rule that will bar employers from enforcing clauses that restrict workers from switching employers within their industry, which the agency said suppresses wages and gums up labor markets.

The FTC voted 3 to 2 Tuesday to issue the rule it proposed more than a year ago. The new rule makes it illegal for employers to include the agreements in employment contracts and requires companies with active noncompete agreements to inform workers that they are void. The agency received more than 26,000 comments about the rule after it was proposed some 16 months ago. The rule will take effect after 180 days, although business groups have promised to challenge it in court, which could delay implementation.

Scholars cite a body of research that shows the agreements suppress worker pay and entrepreneurship while also imposing costs on firms wanting to hire workers bound by the agreements. A Labor Department study published in June 2022 estimated that 18 percent of Americans are bound by noncompete agreements, while other research suggests it could be closer to 5o percent. They are used in a wide range of industries, including technology, hairstyling, medicine and even dance instruction, while imposing restrictions on both high- and low-wage earners.

The FTC estimates that banning noncompete agreements could create jobs for 30 million Americans and raise wages by nearly $300 billion per year.

“I think the FTC has done a real public service here by compiling all this evidence, making a really strong case for a complete ban and establishing a new gold standard for policymaking in this area,” said Sandeep Vaheesan, legal director at the Open Markets Institute, which proposed a noncompete ban to the agency in 2019. “No employee or professional should be made to sign one of these contracts.”

Business groups opposed to the rule, such as the U.S. Chamber of Commerce, have said that the contracts are necessary to protect proprietary information and training, and justify investing in workers who might otherwise immediately jump to a competitor. The Chamber has argued the rule represents a “radical expansion” of the FTC’s authority and has vowed the challenge the rule in court.

Noncompete agreements have been prohibited in three states — California, North Dakota and Oklahoma — for more than a century. In recent years, 11 states and Washington, D.C., have passed laws that prohibit the agreements for hourly wage workers or those who fall below a salary threshold.

But the patchwork nature of the legal landscape has made bans difficult to enforce. Some legal experts said that companies include noncompete clauses in employee contracts regardless of state prohibitions, knowing workers and competitors will be wary of litigation.

Some observers fear that employers will also find workarounds to the FTC rule, but Vaheesan said that a federal rule will provide legal clarity and send a strong message.

“It establishes, in the place of this mushy standard that exists in most states, a bright line,” he said. “So everyone will know these contracts are illegal.”

Ex-CEOs at for-profits remain on payroll as consultants

Posted on by • Posted in Board, CEO, Continuity, Employment Agreement, Institutional Knowledge, Intellectual Property, Leadership, Leadership Transition, Noncompete, Noncompete Agreements, Post-Employment Consulting, Sounding Board • Leave a comment

https://www.modernhealthcare.com/compensation/ex-ceos-profits-remain-payroll-consultants?utm_source=modern-healthcare-daily-finance&utm_medium=email&utm_campaign=20190819&utm_content=article1-readmore

For some hospital chains and health insurers, CEO departures are anything but a clean break. Employment agreements outline long, expensive goodbyes that compensation experts say may be designed in part to enforce noncompete agreements.

Investor-owned companies like HCA Healthcare and health insurer Anthem have contracts in place with current and recently departed CEOs outlining the terms of paid consulting gigs they step into once their tenures as the top executive end. The contracts ensure leadership will continue to be paid handsomely for scaled-back workloads.

Even though Joseph Swedish retired from Anthem’s top spot in November 2017, the company pays him $4.5 million per year plus benefits to serve as a consultant and senior adviser to the CEO, currently Gail Boudreaux. The contract, which runs until May 2020, doesn’t spell out specific time commitments, but says he’ll perform duties assigned to him by the CEO “from time to time.” Anthem didn’t respond to requests for an explanation about the agreement.

Former HCA CEO R. Milton Johnson, who stepped down at the end of 2018, will make up to $3 million in base pay, stock awards and bonus pay in calendar 2019 plus benefits for his role as executive adviser. He also served as HCA’s board chairman through April 26. The agreement requires he work 20% of his average level of service in the three years before stepping down.

It’s not clear how common it is for companies to keep former CEOs on their payrolls as consultants. Modern Healthcare’s analysis was limited to large publicly traded health systems and insurers, but the practice could also take place at private and not-for-profit healthcare companies, although those contracts would not be publicly available.

Such deals may be struck in part to add teeth to noncompete agreements that preclude those CEOs from working at similar companies in the years immediately following their employment, said David McMillan, managing principal of strategy and integration at consultancy PYA. Noncompete agreements tend to be difficult to enforce, and adding pay into the mix strengthens them, he said.

“This might be a nice workaround to say, ‘I have you under contract and I’m compensating you. As part of that contract, you can’t compete with me,’ ” McMillan said. “In essence, I’ve just monetized the noncompete and created more enforceability so I don’t lose intellectual property.”

Several of the CEOs with consulting agreements also have noncompete agreements. HCA’s Johnson, for example, can’t engage in any work that competes with HCA for two years after his advisory role ends.

Dallas-based hospital chain Tenet Healthcare Corp.’s employment agreement with its current CEO, Ron Rittenmeyer, ends June 30, 2021. In each of the two years that follow, Tenet will pay Rittenmeyer $750,000 for working a maximum of eight days per month as a consultant. Rittenmeyer is also covered under a noncompete agreement that lasts for one year after he steps down as CEO.

Institutional knowledge

A Tenet spokeswoman said post-employment consulting is a common way to ensure smooth transitions from one leadership team to another.

Franklin, Tenn.-based Community Health Systems’ former chief financial officer, Larry Cash, retired in May 2017, but still makes $300,000 a year working as a consultant for the investor-owned hospital chain. His employment agreement, which runs through March 2020, bars him from working for any CHS competitors, affiliates or suppliers during his time as a consultant.

The agreement with Cash gives CHS access to his 20 years of historical knowledge of company matters, CHS spokeswoman Tomi Galin wrote in an email.

Beyond enforcing noncompete agreements, there are other operational benefits to keeping former CEOs on the payroll. It adds continuity during the CEO transition period, with the former CEO acting as a sounding board for the new one, said Allen Reed, a partner in Odgers Berndtson’s healthcare and life sciences practices.

Deb Bilak, a partner with human resources consultancy Mercer, said companies sometimes transition the outgoing CEO to a consulting role when that executive has not yet completed a strategic initiative that was launched during his or her tenure. While the practice happens in other industries, it may be more common in healthcare given ongoing transformation in the sector.

“There’s so much going on in healthcare and health plans as far as consolidation and transformation that we are seeing that they want to retain that knowledge for a period of time,” Bilak said.

Compensation for consulting is typically based on what the executive was making as CEO and the time commitment required, Bilak said.

The consulting gigs, while high-paying, don’t pay the executives at the levels they made as CEO.

HCA’s Johnson made about $21.4 million in total compensation in 2018. Tenet’s Rittenmeyer made nearly $15 million in total compensation that year. Anthem CEO Swedish, meanwhile, made about $18.6 million in total compensation in 2017, his last year in that role.

Consulting agreements carry the potential downside of undermining the incoming CEO, especially if that person was recruited externally and there’s no established relationship between the new CEO and the organization, Paul Bohne, managing partner and healthcare practice leader with WittKieffer, wrote in an email. Staff members, directors and physicians are accustomed to the former CEO making decisions, and it can be tough to break those habits.

“Even with the best intentions, it is difficult to decondition others in the ways they were accustomed to working with the outgoing CEO,” Bohne said.

Not all outgoing CEOs become consultants. Organizations that want to retain the CEO’s knowledge may opt to put the executive on the board of directors instead.

After Michael Neidorff retires as CEO of Medicaid managed-care insurer Centene Corp. in 2023, for example, he’ll stay on as executive chairman of the board for a year before becoming non-executive board chairman, according to a February 2019 amendment to Neidorff’s employment agreement.

The agreement doesn’t detail compensation, but states that “for the remainder of his life,” Neidorff will have access to a full-time administrative assistant and an office at the company’s headquarters. During his time as chairman and for five years after, Centene will require he use the company’s aircraft for all air travel.

Longtime DaVita CEO Kent Thiry will make up to $2 million in base and bonus pay for serving as executive chairman of the company’s board for one year following his retirement, which was effective June 1. That’s a far cry from his $32 million in total compensation in 2018, but much more than DaVita’s director salaries that year, which ranged from about $323,000 to $445,000.

Thiry continues to provide counsel and is active in the company’s policy efforts to deliver integrated kidney care, DaVita spokeswoman Courtney Culpepper wrote in an email.

The difference in pay could spell problems if fellow directors protest the disparity, Reed said.

“That’s probably where it would be more favorable to have a consulting engagement,” he said.

On the other hand, directors have a legal and fiduciary responsibility to the company, McMillan said.

“The additional value the organization is getting is the duty of care that comes along with a board position,” he said.