Research & Commentary: States Not Waiting for Federal Ban on Noncompete Agreements in Health Care

Published March 19, 2024

One-in-five (about 30 million) working Americans are bound by noncompete agreements. Noncompete agreements are routinely executed to prevent valuable, and sometimes proprietary, information from traveling with employees when they change jobs. Technology companies thrive in a highly competitive environment where the coin of the realm is novelty. So, it is understandable that many such employers ask workers to sign noncompete agreements to protect the intellectual property of the business and its investors. The Federal Trade Commission (FTC) is becoming concerned that these agreements are being misused to trap (primarily) lower wage employees in contracts unfavorable to the worker. This year, the FTC is considering a sweeping rule that would eliminate most noncompete agreements.

The federal government considers comprehensive changes to limit or eliminate noncompete agreements as a “whole-of-government” approach, which is why states should tailor policies specifically for the health care industry. Legislators considering such bills in several states are discovering that the competing interests of doctors, patients, and hospital systems, within a highly overregulated market, makes finding good solutions a thorny pursuit. Policymakers interested in free-market solutions to challenges created by noncompete agreements in health care should consider the best interests of the patient first, and not wait for a one-size-fits-all federal ruling that seems likely to face legal challenges.

States are rightly eliminating the restrictions on hospitals and clinics from building new facilities through the removal of outdated “Certificate of Need” laws.  If legislatures are removing prohibitions on brick and mortar facilities, they should do the same for doctors and nurses needed to work in those facilities. 

According to the American Medical Association, 37 to 45 percent of all doctors are restricted by noncompete agreements. This practice developed when most doctors worked for private practices. With increasing capital and support staff necessary to keep up with technology, regulatory compliance, and legal liability, doctors began taking down their shingles and going to work for corporate medical groups. After decades of growth since 1980, the number of physicians employed by corporate entities exploded during the COVID-19 pandemic. That number grew from 62 percent in January of 2019 to 74 percent just two years later.

When the pandemic struck in the first quarter of 2020, certain regions and hospitals were particularly hard hit as patients filled hospital beds and sidelined providers who themselves became sick with the virus. Calls for extra help during the crisis in one of Atlanta’s largest hospitals were met with frustrated doctors who were barred from stepping up because of “current or prior agreements with their employer.”

Retired physicians often would like to volunteer or work to fill badly needed care gaps but are prevented from doing so due to noncompete agreements. One physician wanted to provide addiction recovery services through a federal clinic for the underserved, but was prevented from doing so for two years.

“Patients are suffering with access to healthcare, and physician shortages are being exacerbated because every time a physician has to leave because of non-compete clause they start hiring and credentialing all over again and it can take months for them to be able to work again” one physician noted in the FTC’s open comment submission. “It also affects their family and their children. Non complete clauses are also about the access to services, in this case healthcare and wellness, that these clauses significantly impact in a negative way, ” he concluded.

The American Hospitals Association (AHA) disagrees. The AHA contends that the FTC lacks the authority to impose such a restriction and even if it did, it would not apply to nonprofit hospitals and groups who employ physicians due to the  FTC’s own governance standards. Former FTC attorneys disagree on whether this legal case could still be made, but that argument itself may forecast the bumpy legal road ahead for such a sweeping ban. Finally, the AHA argues that the labor shortages in health care would be made worse by removing noncompete agreements, “exacerbating problems of health care labor scarcity, especially for medically underserved areas like rural communities.”

Several state legislative bills introduced in 2023 sought to eliminate or restrict noncompete agreements. In Minnesota, a sweeping bill that eliminates nearly all noncompete agreements (medical and non-medical) was passed and took effect on July 1. HF 3035 outlaws any noncompete agreements signed after the enactment date. The Minnesota Medical Association (MMA) led an effort to have Minnesota join 12 other states that ban noncompete agreements for physicians. In a letter to lawmakers, the MMA stressed, “In addition to preventing physicians from practicing within a certain geographic area for a specified time, these provisions can also prevent them from informing their existing patients that they are leaving and providing their new location.”

New York’s state Senate similarly passed a comprehensive noncompete reform through Senate Bill S3100A, which is currently pending in the legislative process, as is Connecticut’s HB 6594. Other bills including Rhode Island’s H 5284 and Utah’s SB 170 failed to pass, while Indiana’s SB7 to effectively ban physician’s noncompete agreements became law on July 1, 2023.

Many legislators are wondering if state laws to ban health care noncompete agreements are necessary given the Biden administration’s aim at ending them entirely through the Federal Trade Commission’s proposed action. In 2021, President Biden clearly laid out his case to end noncompete agreements through a “whole-of-government effort to promote competition in the economy.”  Specifically, Biden highlighted the need to “encourage the FTC to ban or limit non-compete agreements.”

The FTC’s proposed rule would eliminate most noncompete agreements. The agency received more than 21,000 comments this spring in preparation for a ruling expected in 2024.

Health care leaders should look to approaches like Indiana’s SB7, which focuses on a specific need within a state. Legislators anticipating a whole-of-government mandate from the FTC would be relying on an expansive rule that should be a smaller bill passed by elected officials. James Oh, an attorney who represents health care employers recently noted that, “Even if the Federal Trade Commission were to ban noncompetes, legal challenges to block the ban are nearly certain.”

The following documents examine noncompete agreements in hospitals and clinics:

Noncompete Agreement for Physicians: Clear and Consistent Policy is Needed

John O’Shea, M.D. and David Balat of the Texas Public Policy Foundation make a free-market argument for getting rid of noncompete agreements in healthcare.

Noncompete Clauses for Physicians are Hurting Healthcare, AAFP Says

Richard Payerchin of Medical Economics examines noncompete agreements for physicians and why some doctors are favoring the FTC’s proposed mega ban on noncompete agreements.

AHA: Banning Noncompetes Would Profoundly Transform Healthcare Labor Market

Richard Payerchin of Medical Economics looks at the case against the FTC ban made by hospitals.

South Carolina Bill Proposes Sweeping Repeal of Antiquated Certificate of Need Laws

The Heartland Institute’s Matt Dean highlights one state’s efforts to remove laws that prohibit the construction of new or expanded medical facilities without specific approval form government.

Executive Order on Promoting Competition in the American Economy

President Biden’s executive order urging the FTC to eliminate noncompete agreements.

Non-Compete Clause Rulemaking

The Federal Trade Commission’s proposed rule to eliminate noncompete agreements in most workplaces.

Noncompete Rule Puts Doctors, Hospitals at Odds

Roll Call’s Jessie Hellmann: “Doctors say the clause s limit career growth, but hospitals say they need them to retain workers.”

The Impacts of Restrictive Mobility of Skilled Service Workers: Evidence from Physicians

Kurt Lavetti, Carol Simon, and William D. White examine the changing workplace for doctors and how their employment agreements are impacting care.

Non-compete Contracts Sideline Low-Wage Workers

Tyle Boesch, Katherine Lim, and Ryan Nunn of the Federal Reserve Bank of Minneapolis look at noncompete agreements and their impact on the workforce.

Ending Physician Noncompete Agreements, Time for a National Solution

Eric B. Smith, MD, JD, MS of JAMA makes the case.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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