How will the FTC law banning noncompete clauses impact physicians?

As of 2007, about half of physicians had noncompete clauses (“noncompetes” for short) in their contracts. However, a recent FTC rule severely limits when they could be used.

What specifically did the new FTC rule say about non-competes? Fuse Brown et al. (2024) provide a helpful summary.

The final FTC rule declares all new noncompete clauses or agreements between an employer and employee to be unfair methods of competition, violating Section 5 of the FTC Act. Existing noncompete clauses are now unenforceable, except for prior agreements with “senior executives” who earn over $151,164 annually and serve in policy-making positions.

The rule defines a “noncompete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” Prior to the FTC’s rule, physician noncompetes were regulated by state law, with considerable variation in how these agreements were enforced. In states where they were allowed, noncompetes typically restricted physicians from practicing within a specified geographic area—ranging from 10 to 50 miles from a practice location—and for an average duration of approximately two years.

FTC estimates that fewer noncompete will result in significant cost savings.

the Commission estimates that the rule will reduce spending on physician services over ten years by $74-194 billion in present discounted value, will result in thousands to tens of thousands of additional patents per year, and will increase in the rate of new firm formation by 2.7%.

Fuse Brown et al. (2024) summarize the pros and cons of noncompetes as follows:

Advantages: They promote stability between physician and patient, the incentivize firm investment in training of physician staff, and (from the investor’s perspective) they can help to circumvent existing federal fraud and abuse laws that prohibit entities from paying for physician referrals. Disadvantages: They restrict physician mobility, health care providers might become more concentrated in certain geographic areas, and “…may also discourage physicians and clinical staff from voicing concerns about practice issues, patient safety, or unethical employers [due to fewer outside employment options]. “

There is still a lot of uncertainty around noncompetes for physicians. There is pending litigation. Also, non-competes may be enforceable when individuals sell a business, which may often occur if employed physicians have some ownership stake they need to relinquish if they quit. Non-profits are exempt from the non-compete ban, but many physicians work at non-profit hospitals or clinics. Finally, existing noncompetes for senior executives are still in effect; as senior executives are defined as individuals making more than $151,164 per year, most existing physician noncompetes may still be enforceable.

You can read the full article summarizing outstanding issues on physician noncompetes here.