The Federal Trade Commission voted to ban noncompete agreements on Tuesday, obviating the restrictive agreements that lock in physicians — and the patients they treat — with their existing employer.
With the 3-2 vote, FTC commissioners have finalized a rule proposed in January 2023 to prevent employers from enforcing noncompetes, after finding the practice is exploitative, suppresses wages and blocks new businesses from being created.
The ban has far-reaching consequences for a number of sectors, including healthcare, an industry that frequently relies on noncompetes, especially as a growing number of doctors are employed by hospitals and other corporations.
Zeroing out noncompetes equalizes the balance of power between those physicians and their employers, and frees up medical workers to more easily move between jobs, according to experts. It could also cause wages to rise.
However, the ban is almost certain to face a legal challenge that some antitrust lawyers say the FTC is unlikely to win. The U.S. Chamber of Commerce — the largest business lobby in the nation — has said it plans to sue over the rule as early as Wednesday.
The final rule
The FTC was expected to finalize the ban as the agency under Chair Lina Khan has taken a more aggressive stance in combating anticompetitive behavior than during past administrations. Now, regulators are moving to change the employment landscape for the estimated one in five American workers subject to a noncompete.
“The freedom to leave your job and take another job is fundamental to a free and fair economy,” said Commissioner Rebecca Slaughter, a Democrat who voted in favor of the rule, during the FTC’s meeting Tuesday.
The final rule bans new noncompetes for all workers. Existing noncompetes can remain in effect for senior executives — employees earning more than $151,164 annually in policy-making positions — but are unenforceable for all other workers after the rule goes into effect, 120 days after its publication in the Federal Register.
In crafting the final rule, the agency found a large body of research that noncompetes make it harder for workers to move between jobs and can raise prices for goods and services, while suppressing wages for workers and inhibiting the creation of new businesses, said Ben Cady, an attorney in the FTC’s Office of Policy Planning, during the meeting.
Of the 26,000 comments regulators received on the proposal, 25,000 were in favor of the ban, Cady said.
A number of those comments were from physicians testifying that noncompete agreements would force them to leave their communities to find work if they wanted to leave their employer, an issue that’s exacerbated by rampant hospital consolidation.
Khan and Slaughter, along with Commissioner Alvaro Bedoya (also a Democrat) specifically called out healthcare workers as a key example of why noncompetes should be overturned when voting in favor of the rule.
“These are doctors who had to move their families or move out of the state just so they could practice medicine. A pandemic killed half a million people in this country, and there are doctors who cannot work because of a noncompete,” Bedoya said.
The FTC also found evidence that noncompetes increase consumer prices for medical care. According to Cady, the FTC’s Bureau of Economics estimates the final rule would lower healthcare costs by $194 billion over the next decade.
In voting against the rule, Commissioners Melissa Holyoak and Andrew Ferguson, both Republicans, said the FTC doesn’t have congressional authority to promulgate the regulation. Holyoak noted her dissent was not an endorsement of noncompetes, while Ferguson said he was “sympathetic to the policy,” but “I do not believe we have the power to nullify tens of thousands of existing contracts.”
However, “the FTC does have the power, just historically has not sought to use it,” said David Balto, an antitrust attorney and former policy director at the FTC.
Hospital opposition
Hospitals, which are the largest employer of U.S. physicians, are also likely not happy with the FTC’s vote. Powerful hospital lobby the American Hospital Association has argued the agency doesn’t have authority to ban noncompetes, and also pushed the FTC to exempt doctors and executives from any final regulation.
“Now is not the time to upend the health care labor markets with a rule like this,” the AHA wrote in comments on the proposed rule last year, highlighting the turbulent state of healthcare employment during the coronavirus pandemic. Hospitals did see labor costs skyrocket during COVID-19 as they struggled to retain staff, though the trend has moderated in recent months.
Some groups representing medical practices, including the American Medical Group Association, have also opposed the ban, arguing noncompetes improve care continuity for patients. However, the American Medical Association voted to oppose noncompetes for doctors working at hospitals or staffing firms at a meeting in June.
Interestingly, some hospital employers could be exempt from the rule, if it survives legal challenges.
The rule may not apply to nonprofit health systems, which make up about half of all U.S. hospitals, as the conduct of not-for-profit, tax-exempt organizations falls outside of the FTC’s purview.
During the Tuesday meeting, Slaughter noted the rule will “struggle to reach” healthcare workers employed by nonprofits, despite “powerful stories” those workers submitted on the proposed rule.
Still, “if you claim nonprofit tax status but are really organized for the profit of your members, you are within our jurisdiction and are covered by the rule,” Slaughter said.
The overturn of noncompetes comes as medical workers, including doctors and nurses, report being deeply dissatisfied with their employment — in particular because of low wages. Almost half of healthcare workers say they want to quit in the next 12 months, according to a survey by payroll tech provider Everee.