LUPGA Opposes the Proposed Federal Trade Commission (FTC) Rules that Would Restrict Non-competes in the Healthcare Marketplace

In July 2022, the Biden Administration released an executive order that included proposed reforms that would ban noncompete agreements that the Administration argued limit workers’ ability to leave their jobs. 

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 prohibiting 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• Provide notice to current and former workers under these agreements that the workers’ non-compete clauses are no longer in effect.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

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

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 will be faced with reduced access to independent urologic care within their community, which is often more effective and affordable than hospital-based care.

After hospital consolidation began to pick up in the 1990s, many systems discovered that hospital-owned practices were not as efficient or as profitable as independent, physician-owned groups. In a 2022 article published by MGMA, the authors noted that in a large number of cases, the acquired practices became less efficient and less profitable soon after hospitals acquired them.

Further complicating the issue is that the proposed rule 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, 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 employees, contractors, interns, volunteers, and apprentices.

The proposed rule has a broad reach and could affect more contractual provisions than expected, and it 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 excessively vague and exceedingly comprehensive, and the FTC needs to provide specific 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 is that the new rules will supersede any state laws that the FTC deems inconsistent with the proposed rule. This means any existing agreements designed to comply with state rules in the ten 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.

Status of Proposed Rule

The release of the rule produced significant concerns from stakeholders.  Generally, any proposed rule must have a public commentary period, usually 60 days from publication.  Given the complexity and broad impact of the rule, the FTC extended the comment period for this rule to April 19, 2023. 

In a comment on the proposed rule, sent to the FTC on April 18, LUGPA voiced its concerns about the ban and explained how non-compete agreements are an essential tool for independent practices that enable competition with larger health systems by incentivizing investment in the professional development of physicians while mitigating the risk.

LUGPA’s comments made several points and recommendations to CMS:

• First, if the FTC continues to pursue the proposed rule, LUGPA asked the agency to exclude the healthcare industry from the Proposed Rule.

• Second, LUGPA’s comment warns FTC about the potential distortion of labor markets in states without the absolute corporate practice of medicine (CPOM) laws, where the new rule would favor nonprofit healthcare entities.