Practice Management Alert

Surprise: Healthcare is mentioned specifically in the proposed rule.

The Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) Jan. 5, 2023, to prohibit employers from corralling workers with noncompete clauses.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Lina M. Khan, chair of the FTC, in a Jan. 5 news release. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Understand the Nuts and Bolts

Noncompete agreements, also called “noncompetes,” threaten workers with litigation or other consequences if they leave their current job to work for a rival organization or another organization within an industry or region.

A fact sheet released by the FTC on the NPRM says: “Evidence shows that noncompete clauses bind about one in five American workers, approximately 30 million people. By preventing workers across the labor force from pursuing better opportunities that offer higher pay or better working conditions, and by preventing employers from hiring qualified workers bound by these contracts, noncompetes hurt workers and harm competition.”

How ending noncompetes would affect businesses: The proposed rule would ban employers from entering noncompete clauses with workers, including independent contractors, and rescind existing noncompetes, as well as requiring employers to “actively inform” workers that previous contracts are no longer applicable.

Important: The FTC’s use of the term “worker” suggests that the agency intends for the noncompete ban to be applied widely, to employees, independent contractors, and, in the healthcare industry, physician owners in private practice, says William E. Berlin, JD, an attorney at Hall Render, in online analysis. The Proposed Rule applies to all industries and categories of workers, including those receiving low wages and CEOs.

As the Proposed Rule is written, there is no private right of action — only the FTC can enforce rule violations.

Today’s Healthcare Industry May Benefit From Noncompetes

FTC Chair Khan and fellow commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya estimate that noncompetes force healthcare consumers to pay approximately $148 billion a year that would perhaps be unwarranted were noncompetes banned.

The assertion comes from a study, “Physician Practice Organization and Negotiated Prices: Evidence from State Law Changes,” published in 2021, written by Naomi Hausman and Kurt Lavetti. The Proposed Rule says the study “finds increased concentration, as measured by the Herfindahl- Hirschman Index (HHI), at the firm level final goods prices and increased as the enforceability of non-compete clauses increases. Hausman and Lavetti’s study focuses on physician markets, showing that while non-compete clauses allow physician practices to allocate clients more efficiently across physicians, this comes at the cost of greater concentration and prices for consumers.”

The study authors looked at how states enacted and enforced laws governing noncompete clauses and found a causal link to changes in concentration, and, thus, consumer prices. Hausman and Lavetti find that “there is little to no effect on prices for the most labor-intensive procedures, in contrast with procedures which use relatively less labor … [which] shows that decreases in healthcare prices associated with decreases in non-compete clause enforceability are not due to passthrough of lower labor costs,” the Proposed Rule notes. The commissioners are careful to say that the estimate is a linear extrapolation from a study, and they don’t count it as a “standalone benefit” of the Proposed Rule.

Know Your Right to Submit a Comment

The FTC invites public comments on the Proposed Rule. As of publication, the comment window was not yet open, but once it opens, it will remain available for 60 days.

The FTC will probably take a while to issue a Final Rule, due to the broad range of implications and anticipated volume of comments, and a Final Rule will possibly be met with litigation. Compliance is required 180 days after a Final Rule is issued in the Federal Register.

Some states already have laws on the books about noncompete clauses, so consider looking up your state’s rules or, if you have employees who live in other states, looking there as well, to make sure your organization is in compliance with applicable laws.