Many physicians and nurses are pleased with the Federal Trade Commission’s new rule banning noncompete agreements in employment contracts. However, they are disappointed that it may not extend to those employed by nonprofit hospitals and healthcare facilities, which deliver most of the nation’s care and employ the majority of medical professionals.
Last month, in a 3-2 vote, the FTC approved a final rule prohibiting contracts that restrict employees from joining a competitor. The agency described noncompete agreements as “a widespread and often exploitative practice,” calling them an unfair method of competition that depresses wages and stifles new business formation.
The rule prohibits employers in most industries, including healthcare, from using contract clauses that prevent employees from moving to other jobs or starting a competing business in the same geographic area for a specified period.
However, this doesn’t benefit many healthcare professionals because the FTC Act grants the agency authority over for-profit companies but not over nonprofit, charitable organizations, which are also tax-exempt.
Nonetheless, the FTC noted that some nonprofits could still fall under the rule if they do not operate as genuine charities. The rule sets a two-part test to determine FTC jurisdiction over a nonprofit: whether the organization conducts business solely for charitable purposes and whether its income supports public rather than private interests.
“Our rulemaking record includes powerful stories from healthcare workers employed by nonprofits about how noncompetes harm patients and providers,” said FTC Commissioner Rebecca Kelly Slaughter, one of three Democratic commissioners, in comments before the April 23 vote. “I do not think there is a good justification for them to be excluded from this rule.”
Noncompete clauses have become increasingly common for physicians, nurse practitioners, and other medical professionals in hospitals and various healthcare facilities. Some providers report that these agreements have forced them to leave their communities and patients behind to escape unethical or unsafe workplace conditions.
Most work for nonprofits
Nearly 64% of U.S. community hospitals are nonprofits or government-owned, employing many of the nation’s medical professionals. As of 2022, nearly three-quarters of U.S. physicians worked for hospital systems or other companies, both nonprofit and for-profit.
According to KFF, a nonpartisan research organization, U.S. nonprofit hospitals, designated as charities exempt from income or property taxes, received an estimated $28 billion in tax exemptions in 2020. This exceeded the $16 billion they spent on charity care for patients unable to afford their medical bills.
Physician and nursing groups argue that treating nonprofit hospitals differently makes no sense, as they are as profit-driven as for-profit hospitals. They claim that patients would benefit if healthcare providers were free to expose unsafe conditions and change jobs. “Giving physicians freedom of movement will force hospitals to compete to improve working conditions,” said Jonathan Jones, former president of the American Academy of Emergency Medicine.
Chad Golder, general counsel and secretary of the American Hospital Association, which represents mainly nonprofit hospitals, argued that the rule would increase healthcare costs and reduce patient access by sparking bidding wars for physicians. He anticipated that the FTC would apply the rule to both nonprofit and for-profit hospitals.
“They aren’t saying exactly what they’ll do, but it’s a pretty significant move for them to say we’ll apply our own test to determine if we can regulate a nonprofit,” Golder said. “Nonprofit entities now will need to be extra careful.”
Additionally, some nonprofit hospitals have joint ventures with for-profit hospitals and medical groups, raising questions about whether their employee contracts fall under the rule, said Chip Kahn, president and CEO of the Federation of American Hospitals, which represents for-profits.
The new rule originated from President Joe Biden’s 2021 executive order instructing the FTC to curb the unfair use of noncompete agreements, part of his broader initiative to enhance U.S. economic competition and worker mobility.
FTC’s move promises to cut costs
The FTC argued that banning noncompetes, which it stated affect 1 in 5 American workers, would reduce healthcare costs by up to $194 billion over the next decade. It will give Americans “freedom to pursue a new job, start a new business, or bring a new idea to market,” according to FTC Chair Lina Khan.
The rule also bans contract terms that act like noncompetes to prevent employees from joining competing companies or starting their own businesses. These include overly broad nondisclosure agreements, training repayment provisions, and nonsolicitation clauses.
“No one should be trapped in an unsafe job by onerous contracts that prevent them from taking another job,” said Brynne O’Neal, a regulatory policy specialist at National Nurses United, the nation’s largest dedicated labor union for nurses. She noted that hospitals use training repayment agreements, requiring nurses to pay up to $30,000 in training costs if they leave, effectively locking them in their jobs.
California, Minnesota, North Dakota, and Oklahoma already prohibit enforcement of noncompete clauses for all employees of both nonprofits and for-profits, while about nine other states ban noncompetes for physicians. Even in states without bans, judges have struck down noncompetes when they are found to be overly broad or unreasonable.
‘A basic fairness issue’
Hospital executives argue that the noncompete rule will force them to compete against each other to hire physicians and other providers, ultimately increasing costs and giving nonprofits an advantage over for-profits. “All it would do is increase the price of labor in a field that already has labor shortages and thin margins,” said Chad Golder.
“The nonprofit hospital across the street could pursue our employees, while their employees would be protected, and that’s a basic fairness issue,” added Chip Kahn.
However, Clifford Atlas, an employment attorney with Jackson Lewis in New York, said this argument against the noncompete rule “won’t fly” in court because preventing competition for physicians or other workers is not a business interest protected by law or public policy.
The rule is set to take effect in September, though business groups have filed federal lawsuits against it in Texas and Pennsylvania. Many legal experts predict that conservative judges will strike down the rule, arguing it exceeds the FTC’s statutory authority.
Physician and nursing groups hope that, regardless of the rule’s fate in court, it will encourage hospitals and other healthcare employers to stop using noncompetes and prompt more states to ban them.
“We’re telling our members it could be struck down, but we’re asking them to renegotiate their contracts,” said Jonathan Jones of the American Academy of Emergency Medicine. “They should be asking their employers, ‘Wouldn’t you like to be on the right side and not be seen as fighting against physicians and patients?’”
