Greater scrutiny is ahead for physicians’ noncompete agreements
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The rate of hospital and health care organization acquisition of medical practices has increased rapidly during the past decade. New ownership models, including private equity management, have increased the number of employed physicians.
The most recent American Academy of Orthopaedic Surgeons census data showed that in 2018, more than 57% of orthopedic surgeons worked full-time in some form of private practice. However, this number has been changing. According to a study by the Physicians Advocacy Institute, 52.1% of all physicians were hospital-employed by January 2022, which represented an 11% increase during the 3-year study period.
Noncompete clauses
The responsibilities of employed physicians include behaviors to support the sustainability and growth of the employer. At times, the behaviors may be at odds with an entrepreneurial physician whose individual style conflicts with the vision and culture of the employer. As physicians plan departures from employers, they often face the reality that the terms of their employee contracts include a clearly defined noncomplete clause that substantially restricts their options moving forward.
Employers invest in employees by providing jobs, income, education and sharing of valuable company information and intellectual property. Noncompete agreements are common between employers and employees, except in a few states where the agreements are restricted or prohibited by law. The noncomplete clause is usually found in the description of the employee’s responsibilities in employment agreements. The clause is conceptually designed to prevent employees from competing with the business if they leave for another work environment. The noncompete clauses have established timeframes from the end of employment and geographic distances to prevent physicians from easily moving their patients and practices from one location to another. This distance could be a few miles in densely populated areas, or it can be more than 50 miles in rural communities.
Physicians must realize that what they believe is “their” patients and practice is actually owned by their employer. Collecting patient information to stay connected after termination of employment is strictly prohibited. Recruitment of staff is also prohibited. A noncompete clause can be eliminated or unenforceable if the parameters of the agreement do not meet the standards of the community in terms of what is appropriate to protect the employer’s business.
Proposed rule
On July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy. The executive order covered multiple sectors of the economy, including health care, but was mostly related to pharmaceutical and drug development, health insurance plans, price transparency and hearing aids, not specifically calling out noncomplete agreements for physicians.
On Jan. 5, 2023, the Federal Trade Commission proposed a new rule that would ban noncompete clauses and require employers to rescind existing ones. The FTC proposed rule followed President Biden’s encouragement of the FTC to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility,” according to a White House press release.
In an FTC press release, the FTC estimated that banning noncompete agreements will affect 30 million workers in the United States and may increase worker’s earnings by nearly $300 billion, save consumers up to $148 billion on health costs each year, double the number of companies in the same industry founded by a former worker, and may close racial and gender wage gaps by 3.6% to 9.1%. Concerns about the impact of noncompete agreements on the health care industry include patient access to chosen physicians, limited options for physicians to choose employers and work environments, and reduced competition. Furthermore, it is likely to limit entrepreneurial behavior.
In 2022, Sherman and colleagues from Tulane University published a study on the impact of a noncompete clause on patient care and orthopedic surgeons in Louisiana. Overall, 117 members of the Louisiana Orthopaedic Association voluntary answered a survey on the prevalence and details of noncomplete agreements and their perceptions of the impact of the agreements. Their perceptions were not surprisingly overwhelmingly negative. Most surgeons (84.3%) said the agreements provide unfair leverage during contract negotiations. In addition, 71.4% of respondents said they were deterred from accepting another job offer. Results showed that most surgeons were required to abandon patients and make no effort to contact them. Two-thirds of respondents said they were required to move their families. Almost all respondents perceived the consolidation of health care systems and hospitals as creating unreasonable and overwhelming burden with noncompete agreements. Additionally, most responded that the elimination of such agreements would improve overall health care in Louisiana.
While more evidence is valuable, anecdotal conversations suggest these survey results would be similar for employed orthopedic surgeons in other states that enforce noncompete agreements, especially where health care delivery is dominated by a few large health systems.
Greater scrutiny ahead
With the encouragement of President Biden and the perceived contempt by the FTC, noncompete agreements will be under greater scrutiny by employees, employers and legal advisors. The FTC proposal was open to public comment for 60 days, closing on March 20. The FTC will decide whether to modify the proposed rule, or it may issue a final rulemaking. If it is final, there will be immediate legal challenges in all sectors, including health care. On Feb. 22, the American Hospital Association issued a statement on its opposition to the proposed rule by the FTC in its current form.
For orthopedic surgeons considering a move to another practice, it is critical that your employment agreement is clearly understood. A noncompete clause that defines restrictions is likely to include geographical limitations, duration of 1 to 2 years, non-solicitation of current patients and prohibition on recruiting fellow providers, physicians and staff. If there is evidence of violating these terms, employers will pursue legal action, including immediate suspension of the practice, which will likely suspend your income. Furthermore, employers will define their investment in you as a physician, your practice and your contributions to the overall business, especially if you are a shareholder or have some form of equity in the practice.
There is the potential for a substantial financial penalty. While the orthopedic surgeons of Louisiana, and most likely most of the United States, believe noncompete agreements are an unfair point of leverage for employers and likely inhibit competition and the highest quality of patient care, the proposed rule by the FTC will take years before a final decision is allowed.
- References:
- American Hospital Association. AHA Senate statement on examining health care workforce shortages: Where do we go from here?. Available at: www.aha.org/testimony/2023-02-15-aha-senate-statement-examining-health-care-workforce-shortages-where-do-we-go-here
- AAOS Department of Clinical Quality and Value. Orthopaedic Practice in the U.S. 2018. Available at: www.aaos.org/globalassets/quality-and-practice-resources/census/2018-census.pdf
- Physicians Advocacy Institute. COVID-19’s impact on acquisitions of physician practices and physician employment 2019-2021. Available at: www.physiciansadvocacyinstitute.org/Portals/0/assets/docs/PAI-Research/PAI%20Avalere%20Physician%20Employment%20Trends%20Study%202019-21%20Final.pdf?ver=ksWkgjKXB_yZfImFdXlvGg%3d%3d
- Sherman WF, et al. Orthopedic Reviews. 2022;doi:10.52965/001c.38404.
- www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
- www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition
- www.healio.com/news/orthopedics/20230203/blog-noncompete-agreements-are-not-a-thing-of-the-past-yet
- www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy
- For more information:
- Anthony A. Romeo, MD, is the Chief Medical Editor of Orthopedics Today. He can be reached at Orthopedics Today, 6900 Grove Road, Thorofare, NJ 08086; email: orthopedics@healio.com.
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