FTC’s crackdown on noncompete clauses will help your doctor and your health

Federal regulations may sometimes seem petty and unnecessary, but they often bring substantial benefits to ordinary people. 

Consider the Federal Trade Commission’s new rule prohibiting so-called “noncompete” provisions from most employment contracts, which takes effect Sept. 4. Not only will it free millions of workers to seek better jobs for higher wages, but it will also improve the operation of the health care system for both patients and doctors.

Let’s say you are a parent with a young family, and you are delighted to have found a pediatrician who shares your values, relates brilliantly to the kids and always seems available when you need her. 

Now let’s say that your beloved doctor has a falling out with the private equity firm that recently acquired her group practice. Perhaps the dispute involves too much interference with her medical judgment or not enough compensation for her long hours. So she decides to strike out on her own.

You and many other patients will surely want to follow her, but until recently, you probably would have been out of luck. Your doctor likely signed a noncompete provision, prohibiting her from joining or opening a competing practice in the same geographic area for up to five years. 

In other words, leaving her employer would also mean leaving her town and patients behind.

According to the FTC, almost 20 percent of American workers are currently subject to noncompetes, from senior business executives to fast food workers. Consumers aren’t usually aware when the people serving them are unhappily tethered to their employers, which prevents them from changing jobs for higher pay and better conditions. But doctors have alternatives.

With high incomes and high-demand skills, doctors can frequently cope with noncompetes by finding positions in other communities. Yet it is burdensome for doctors, as for anyone, to move their families, and so many remain in jobs they would rather leave.

Some frustrated doctors do move away. It is not the doctor’s fault if a noncompete prevents them from simply opening a new practice across town, but patients may feel abandoned just the same.

The new FTC rule addresses that problem by banning new noncompetes for employees nationwide, including doctors. It also invalidates existing noncompetes for all but a small category of senior executives, defined as those in policymaking positions earning over $151,154 annually. Most doctors exceed that income threshold, but relatively few will qualify as policymakers.

Doctors spoke in favor of the prohibition throughout the rulemaking process. One supporter, practicing in an “underserved area of Appalachia,” observed that “with hospital systems merging, providers with aggressive noncompete clauses must abandon the community that they serve if they choose to leave their employer.”

The American Academy of Family Physicians applauded the formal adoption of the rule. 

“This decision puts patients first,” said the AAFP president, “and ensures family physicians can pursue opportunities that value their expertise and continue to provide high-quality care that their communities need.”

Employers see things differently. The American Medical Group Association opposed the rule, claiming that noncompete provisions are needed to “build strong, sustainable care teams that work together to coordinate care for their patients.” 

The CEO of the Federation of American Hospitals implausibly argued that eliminating noncompetes will make it “more difficult to recruit and retain caregivers to care for patients.”

The American Hospital Association’s general counsel blasted the rule for its “adverse impacts on the health care markets,” predicting that courts are “almost certain to stop it before it can do damage to hospitals’ ability to care for their patients and communities.”

There is a potential gap in the rule’s coverage, because the FTC’s jurisdiction does not extend to nonprofits. A controversial provision in the commentary to the rule, however, asserts that many tax-exempt hospitals and health care organizations may be subject to the noncompete prohibition if they have “ceded effective control” to a for-profit partner, or if they pay “unreasonable compensation, including percentage-based compensation, to founders, board members” or other insiders.

The U.S. Chamber of Commerce and the Business Roundtable have already filed a lawsuit challenging the rule in a federal court in Texas. The plaintiffs no doubt hope to prevail in the conservative Fifth Circuit, but they may be in for a surprise. Physician noncompetes are unpopular, even on the right. Indiana's legislature, for example, with a Republican supermajority, has already passed a law prohibiting noncompetes for primary care physicians, with no exception for nonprofits, which may be the beginning of a trend.

One of the strongest arguments against medical noncompetes was articulated during the rulemaking process by a doctor, distressed by the working conditions imposed at a hospital system. 

“My only recourse to this coercion is to give up medical practice anywhere covered by my current medical license, which is injurious to the patients in my care, and to myself.”

That should not have to happen, and the new FTC rule is a good step in the right direction.

Steven Lubet is the Williams Memorial Professor Emeritus at the Northwestern University Pritzker School of Law.