Which healthcare entities will be affected by ban on noncompetes? Look to business practices, not tax status
The Federal Trade Commission (FTC) voted 3-2 to ban noncompete contracts that limit workers' options. Advocacy groups in healthcare are already celebrating, but it isn’t clear how the new rule will impact employees of healthcare entities, especially hospitals and health systems.
Noncompete clauses in employee contracts are common in every industry—including healthcare, where persistent labor shortages mean companies will fight to enforce contracts. As an example, ThedaCare gained national media coverage in 2022 when the company successfully filed a restraining order to stop seven clinicians from taking new jobs elsewhere. A judge later threw out that order, and it isn’t clear what the specifics of the employees’ contracts were. However, the case is notable because it illustrates how employers in healthcare have the power to make it difficult for workers to freely seek jobs.
Last year, the American Medical Association released a statement condemning the use of noncompetes for clinicians, claiming that between 35% and 45% of physicians are locked into contracts that forbid them from taking their services elsewhere, stifling competition and ultimately increasing the cost of care for patients.
The FTC seemed to agree. In its announcement, healthcare is specifically mentioned as a motivator for the ban on noncompetes. The FTC said it anticipates the move will reduce costs through "$74-194 billion in reduced spending on physician services over the next decade."
The FTC also said the new rule will bolster worker wages, predicting they could increase by as much as $488 billion. Low pay in healthcare is often cited as a reason for employee shortages and burnout, and increased pay is often a primary demand of sector labor unions.
But there is a catch: The new FTC’s jurisdiction only impacts for-profit, tax-paying businesses—and, according to a report from the Department of Health and Human Services (HHS), more than 60% of hospitals in the U.S. are nonprofits.
So, does that mean healthcare workers in those settings may not be protected against noncompetes? Not necessarily. In a post commenting on the new FTC rule, lawyers at Husch Blackwell wrote that the decision may come down to business practices as opposed to tax status:
"Notably, the FTC Act does not apply to non-profit organizations not organized to carry on business for their own profit or that of their members such as 501(c)(3) organizations; however, not all entities claiming tax-exempt status as nonprofits fall outside the FTC's jurisdiction. If entities claiming tax-exempt status are in fact profit-making enterprises based on their actual operations and goals, those 501(c) tax-exempt entities are still covered by the final rule.
Thus, while hospitals and healthcare entities claiming tax-exempt status as nonprofits do not necessarily fall outside the FTC's jurisdiction, the FTC's ban on non-compete agreements does not apply to hospitals and healthcare entities that are true 'nonprofits.' With respect to for-profit healthcare entities, these employers and their healthcare workers are subject to the final rule."
Ultimately, healthcare employees will have to wait until the FTC rule goes into effect later this year, at which time there will inevitably be court challenges and lawsuits that clarify what a “ban” on noncompetes really means.
Chad is an award-winning writer and editor with over 15 years of experience working in media. He has a decade-long professional background in healthcare, working as a writer and in public relations.