Noncompete Limits Pursued by States to Boost Health Workforce

Lawmakers in several states are moving ahead with legislation to prohibit or limit noncompete agreements for certain doctors and other health-care professionals amid concerns that the FTC’s attempt to ban noncompete clauses nationwide will be blocked.

The Federal Trade Commission on April 23 unveiled a long-awaited final rule that would ban noncompete provisions prohibiting workers from switching jobs within an industry—an aggressive push by the Biden administration that almost immediately drew legal challenges.

Two days later, Maryland Gov. Wes Moore (D) signed into law bipartisan legislation (HB 1388) to ban noncompete agreements for health-care professionals in the state with a total annual compensation of $350,000 or less, and limiting noncompetes for those with incomes above that threshold.

At least 11 other states have legislation pending to restrict agreements that place time or geographic limits on employees looking to practice elsewhere after they leave a company. The interest in restricting noncompete agreements in the health sector is largely a result of an increase in hospital consolidation—with more than 1,500 hospital mergers reported from 1998 to 2017.

Despite the Biden administration’s efforts to tackle noncompetes across industries at the federal level, implementation of the FTC rule is likely to be delayed by litigation. It’s also unclear whether the FTC’s rule would apply to nonprofit hospitals, which account for roughly half of all US hospitals, according to the American Hospital Association.

Enacting limits on state noncompete agreements in health care is especially important now, legislators and policy analysts say, to diminish the chances that health-care professionals are deterred from working in regions known to have restrictive noncompete clauses in employment contracts. Otherwise, these clauses can push people out of rural regions and other areas where patients are already facing limited access to health care.

The movement also comes as the National Center for Health Workforce Analysis has predicted an overall shortage of 139,940 physicians through 2036, as well as a shortfall of more than 337,000 registered nurses.

“At the heart of it, this is about access for patients as much as it is about the financial and professional opportunities of providers,” said Gregory Care, a partner at Brown, Goldstein & Levy LLP who counsels physicians and other health-care providers on employment matters.

Nixing Noncompetes

Noncompetes have become a “major public health concern,” according to Mariko Sakakibara, a professor at the University of California, Los Angeles Anderson School of Management.

Hospitals may use noncompete agreements as a way to ensure health-care workers stay at their location, and don’t go to work for competitors or become a competitor by starting their own practice, Sakakibara said.

“If physicians are bound by noncompete agreements and want to leave their current employers, they must leave the geographic area determined by noncompete agreements, reducing patient access to care in the local area and disrupting continuity of care with the same physician,” Sakakibara said.

This was a key motivating factor for Pennsylvania state Rep. Dan Frankel (D) in sponsoring legislation (HB 1633) to limit employers from using noncompete agreements to prevent certain doctors, nurses, and other medical professionals who leave a job from practicing elsewhere. The bill passed the House in April and is awaiting action in the Senate Health and Human Services committee.

“When you take a look at providers who work for these health-care systems, they either leave because they opt to leave or their contracts are not renewed, they’ll find themselves in a position where they can’t practice anywhere in the state,” Frankel said in an interview.

Frankel said the issue is especially prevalent in Pennsylvania, which had nearly 40 health facilities acquired by hospital systems between 2016 and 2020.

“Making sure that we’re able to retain in Pennsylvania providers is really important and noncompetes are a disincentive for folks to be able to opt to practice in our state,” Frankel said.

The uncertainty around whether courts will allow the rule to move forward is also refueling legislators’ desire to limit noncompete agreements for the health-care industry at the state level.

Due to the lawsuits, “the advocates who care about this issue are pretty well aware of the fact that the FTC rule is not certain to go into effect,” Care said.

The lingering question of whether the FTC can regulate nonprofit hospitals prompted legislators in Maryland to move forward with a bill that would apply to noncompetes among for-profit and nonprofit companies, Care said.

Hospital Opposition

Efforts to limit noncompetes at the state level have attracted significant opposition from hospital groups, which analysts say could make bill passage difficult in some states.

The argument from hospitals is “largely that they are investing quite a bit of resources into the goodwill of the business that the physician works at, whether that’s a hospital or a smaller practice, and they take on things like overhead costs, and marketing in order to get the physician’s name out there in the public,” said Brian Mead, a partner at McDermott Will & Emery LLP who counsels clients on noncompetes and employment disputes.

During debate on the Maryland bill, the Maryland Hospital Association submitted testimony to state legislators arguing that noncompete agreements “help protect intellectual property, trade secrets, and competitive advantages,” and “ensure patients will receive care from the same providers in the same health care setting for a set period.”

The Pennsylvania Hospital and Healthsystem Association is opposing Frankel’s bill. Nicole Stallings, the organization’s president and CEO, said in an emailed statement that state lawmakers should “consider the timing of potential state action while the federal landscape is in flux.”

“Banning non-competes may result in ‘bidding wars’ for providers,” and “smaller organizations may be unable to retain staff, health care costs could rise, and patients’ access to care could be diminished,” Stallings said.

Frankel said his legislation does include an exemption for smaller counties in Pennsylvania to address staffing concerns for acute-care hospitals serving rural communities. But he argued there’s “a vast chasm of difference” between these hospitals and “large health systems that are increasing their footprints in the state.”

Limiting noncompetes “is one small way that we can help maintain access, hopefully reduce health-care costs, and make sure that we preserve the relationship between a patient with their provider,” Frankel said.