New Federal Rules Would Ban Non-Compete Agreements

In July, the Biden Administration released an executive order that included proposed reforms that would create a ban on noncompete agreements that the Administration argued limit a worker’s ability to leave their job. 

The fact sheet released by the Administration argued that the agreements, which had been comparatively rare, have now become common, with an estimated 1 in 5 workers being bound by one, and even more common in the healthcare industry. President Biden even promoted this effort in his 2023 State of the Union address.

In response to the administration’s request, on January 5, 2023, the FTC issued a proposed rule that would prohibit employers from using non-compete clauses with workers. The proposed rule would require employers to:

• Rescind all existing non-compete agreements. The deadline for ending the agreements would be no later than the rule’s compliance date, which has not been established.
• Provide notice to current and former workers under these agreements that the workers’ non-compete clauses are no longer in effect. The rule does provide specific model language that employers can use to satisfy this obligation.

Overview of Proposed Rule

Both the administration’s initial request and the release of the rule has produced strong views both in favor and against these changes. While opponents of noncompete agreements argue the agreements limit competition, proponents argue that the agreements are necessary to protect hospitals and medical practices that have made substantial investments in recruiting, relocating, and training doctors.

As detailed below, the proposed rule is problematic in that it is broad and vague, and in LUGPA’s view the proposed rule represents yet another regulatory shift over the last few years that favors large hospital systems over independent medical groups. If the rule is approved, patients could have fewer options for urologic care, and less access to independent medical care, which is often more effective and affordable than hospital-based care.

Even FTC Commissioner Christine S. Wilson acknowledged that “the proposed rule is a departure from hundreds of years of precedent and would prohibit conduct that 47 states allow.” As with other rules that have potential impact on member practices, we will follow the FTC’s new rule to determine its impact on the independent practice of urology and submit comments to the FTC that oppose the proposed rule.

Further complicating the issue is that the rule, as proposed, would not apply to not-for-profit institutions.  However, because of prevailing corporate practice of medicine (CPOM) laws, this varies substantially from state-to-state.  Consequently, the proposed rule could pose an existential threat to independent medical providers, who already face numerous financial and recruitment challenges.  Absent the ability to enforce non-competes, independent practices will be disadvantaged relative to hospitals with vastly greater recruiting resources—these will be compounded in those jurisdictions in which the FTC rules do not even apply to hospitals.  

Even if finalized, it is virtually certain that, given the substantial impact on many industries, that we can expect litigation to occur.

Specific Provisions in Rule

The FTC defines the term non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”

The proposed rule also clarifies that the status of a provision as a non-compete clause would depend not on what the provision is called, but on how the provision functions. The term "worker" in the rule applies to not only employees, but also contractors, interns, volunteers, and apprentices.

The proposed rule has a very broad reach and could affect more contractual provisions than expected and is vague on how the FTC will evaluate these provisions. One concern brought up by critics is the lack of exceptions in the rule based on the employee’s role in the business, compensation level, or access to sensitive proprietary information. 

Another concern is the functional test that the rule uses to determine whether a contractual term is a non-compete clause. The rule includes language that states that “the term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting work with a person or operating a business after the conclusion of the worker’s employment with the employer.”

These terms are both extraordinarily broad and vague, and the FTC has not provided guidance on what contractual terms it considers unusually broad and how it will determine this in the future. The result is other contractual agreements like non-disclosure agreements being drawn into the ban, which could further restrict businesses.

One important point to note is that the new rules will supersede any state laws that the FTC deems are inconsistent with the proposed rule. This means that any existing agreements that were designed to comply with state rules in the 10 states with such laws are also impermissible.

Limited Exceptions

The proposed rule does contain a limited exception for non-compete clauses between the seller and buyer of a business. This exception only applies when the party affected by the non-compete clauses is an owner or partner holding at least a 25% ownership interest in a business.

FTC Penalties

When the FTC finds a violation of its rules, it has the enforcement authority to investigate and bring the accused before an administrative law judge. The judge in these proceedings can either provide a recommendation for a cease-and-desist order or dismiss the complaint. Both parties can appeal their judge’s decision to the full Commission, or in court after the Commission’s final decision.

If a cease-and-desist order is finalized, the FTC can pursue several remedies in court including civil penalties, restitution, and damages. In addition, the FTC can refer cases to the U.S. Department of Justice for criminal prosecution. 

Status of Proposed Rule

The release of the rule produced significant concerns from stakeholders.  Generally, any proposed rule must have a public commentary period, which is usually 60 days from the date of publication.  Given the complexity and broad impact of the rule, the FTC has extended the comment period for this rule to April 19, 2023.  LUGPA will continue to follow the progress of the rule and will file comments in opposition.

Pharmacy Benefit Manager (PBM) Reform Update

Lowering the cost of prescription drugs is a top healthcare priority for many Americans. In a February 2022 poll by Axios-Ipsos, 50 percent of Americans believe that the government should emphasize lowering prescription drug costs and work on bringing down the overall cost of health care. While there are many reasons for the high price of prescription drugs, including high regulatory, research, and administrative costs, one factor that has begun to receive additional scrutiny is the role of pharmacy benefit managers (PBMs) in increasing drug costs. This brief will examine the role of PBMs and recent reform efforts to change how they operate.

Pharmacy benefit managers essentially act as a middleman between insurers and pharmacies to reduce administrative costs for insurers. PBMs assist with determining a patient’s eligibility, administering plan benefits, and negotiating costs between pharmacies and health plans. PBMs work with drug manufacturers, wholesalers, pharmacies, and health insurance providers but are not directly involved with the physical distribution of prescription drugs, they only handle negotiations and payments.

The process of moving products from the manufacturers to pharmacies is a multi-step process. When new drugs are made available for sale, drug manufacturers negotiate with wholesalers who then sell and distribute the drugs to pharmacies. PBMs negotiate agreements with these manufacturers on behalf of insurance companies and are paid rebates by drug manufacturers for their services. PBMs then work with pharmacy service administrative organizations to determine the reimbursement rates. Finally, PBMs then pay pharmacies on behalf of insurance providers for the drugs dispensed to patients.

PBMs are paid for their services in several ways: through administrative fees; through spread pricing, where the PBM keeps the difference between what is paid to pharmacies and the negotiated payment from health plans; through the shared savings which occurs when the PBM keeps part of the rebates or discounts negotiated with drug manufacturers; and clawbacks, which occur when the copayments paid by insured patients exceed the cost of a drug.

While PBMs have proven to be very effective in lowering administrative costs for manufacturers and pharmacies, some concerns have emerged from regulators and healthcare advocacy groups regarding how PBMs profit from their services and their effect on the cost of drugs, especially generic drugs.

For years, PBMs have operated with relatively few checks on their business. The increasing cost of drugs combined with the lack of transparency in how PBMs determine drug costs has led many states and the federal government to impose new rules on PBMs. These reforms included new licensing rules, pharmacy audit requirements, and generic drug pricing reforms designed to shift some control away from PBMs regarding pricing.

The first practice to be banned was gag clauses, the provisions in the contracts between PBMs and pharmacies that blocked pharmacists from informing patients when the cash price of a drug was less than the copay price under their insurance. This practice was banned in 2018 by two laws, the Patient Right to Know Drug Prices Act and the Know the Lowest Price Act.

The second PBM practice to be targeted for reform is spread pricing, which is currently being debated in Congress. On February 16, the Senate Committee on Commerce, Science, and Transportation convened a full committee hearing titled “Bringing Transparency and Accountability to Pharmacy Benefit Managers”.

The meeting focused on a bill that was proposed and passed out of the committee during the last legislative session, S. 127 – The Pharmacy Benefit Manager Transparency Act. The PBM Transparency Act empowered the Federal Trade Commission (FTC) to increase drug-pricing transparency and create rules holding Pharmacy Benefit Managers (PBMs) accountable for unfair and deceptive practices.

This proposed Act specifically prohibits PBMs from engaging in spread pricing. The bill also prohibits arbitrarily reducing drug reimbursement payments to pharmacies and charging pharmacies additional fees to offset any federal reimbursement changes. The act does include some exemptions for PBMs that pass on any rebates to their consumer and offer complete transparency to their buyers.

The bill received bipartisan support during the meeting, the only opposition to the proposal arose due to concerns over giving the FTC additional authority, fears of vertical consolidation within the drug industry, and concern over the effect of a new rule on drug costs.

The FTC has also expanded its focus on PBMs over the last two years. In June 2022, the FTC released a policy enforcement statement, Policy Statement of the Federal Trade Commission on Rebates and Fees in Exchange for Excluding Lower Cost Drug Products. In the statement, the FTC responds to complaints regarding the rebates and fees generated by PBMs and argues they “may shift costs and misalign incentives in a way that ultimately increases patients’ costs and stifles competition from lower-cost drugs, especially when generics and biosimilars are excluded or disfavored on formularies.” This statement, along with recent inquiries into the PBM industry indicates an increased interest in PBMs and could lead to increased regulations in the future.

LUGPA supports legislative efforts directed at Pharmacy Benefit Managers that address unfair payor policies that negatively impact patient access to care and the ability of urologists to provide appropriate treatment. We will monitor for any new developments with the previous proposal and respond to any new legislation.

LUGPA supports CMS initiative to streamline prior authorization process 

LUGPA recently submitted a comment letter to CMS regarding the Advancing Interoperability and Improving Prior Authorization Processes Proposed Rule (CMS-0057-P).  

In summary, the letter sates that LUGPA broadly supports CMS’ initiative to speeden and streamline the prior authorization process and enhance the use of electronic resources by both payors and providers.

LUGPA urges CMS to:

• Implement the prior authorization API requirements in a manner that is not burdensome to providers;
• Finalize its proposal to shorten timeframes and decisions on standard and expedited prior authorization requests, but decrease the timeframe to require prior authorization decisions of 5 days for standard requests and 48 hours for expedited requests.
• Apply the interoperability, prior authorization, and related requirements in this Proposed Rule to Medicare FFS.
• Finalize its proposal to the implement the PARDD API requirement but urges CMS to
• establish an earlier implementation date than January 1, 2026.
• Defer implementation of its new “Electronic Prior Authorization,” in the Health Information Exchange (HIE) objective for the Promoting Interoperability performance category under the Quality Payment Program (QPP) Merit-based Incentive Payment System (MIPS) as well as defer rulemaking related to any proposed scoring methodology.

Read the entire letter here. 

LUGPA Welcomes Matthew Glans, MA, new Advocacy and Health Policy Manager     

Matthew Glans, MA became LUGPA’s new Advocacy and Health Policy Manager in February of this year. Matthew has extensive experience in health policy and government relations, including interacting with elected officials and staff on a variety of issues; tracking new legislation; and drafting responses to public policy issues via policy papers, talking points, news releases, and op-ed pieces.

Matthew will serve as staff liaison to LUGPA's Health Policy and Political Affairs committees. In his role, he will coordinate with lobbyists and outside counsel and assist in the development of responses to national and local policies affecting urology practice, including population health, managed care, quality of care, state health policy, Medicare, Medicaid, private health insurance markets.

Matthew will review and summarize relevant literature, studies and reports while also developing talking points, legislative summaries, and materials to support advocacy and policy efforts. He will also manage external communications for policy efforts including action alerts, website content, social media, and e-newsletter articles. Matthew will also work with member groups to support LUGPA’s fly-in events and encourage attendance. 

Matthew earned his Master's degree in political studies from the University of Illinois at Springfield and bachelor's from Bradley University. 

You can reach him at [email protected]. 

Welcome Matt!