CEOs will have to adjust their strategies to maintain their workforce if the final rule stands.
The Federal Trade Commission (FTC) voted to ban noncompete agreements and the ramifications on healthcare’s workforce are nothing short of significant.
The final rule, which was proposed in January 2023 and passed with a 3-2 vote, will allow for greater movement among medical workers and force employers to strengthen their recruitment and retention efforts.
In its announcement of the rule, the FTC called noncompetes an “exploitative practice” and said that the ban is expected to lower healthcare costs by up to $194 billion over the next decade.
The FTC clearly had healthcare and physicians specifically in mind when putting together the rule, noting that it “received a large number of comments from physicians and other healthcare workers stating that non-competes exacerbate physician shortages.”
With hospital consolidation becoming more prevalent, physicians with noncompetes often face the choice of having to move out of the market to continue practicing or stop practicing altogether.
The ban will face serious opposition in court and has already been met with a lawsuit from the Chamber of Commerce, so the rule is far from set in stone. However, it will become effective 120 days after publication in the Federal Register.
Providers on the back foot
Leaders at provider organizations have already been dealing with a multitude of challenges related to the workforce, but the difficult level will be ratcheted up if the ban holds.
In response to the rule proposal in January 2023, the American Hospital Association said that “now is not the time to upend the health care labor markets with a rule like this. The COVID-19 pandemic exacerbated existing shortages of skilled health care workers, and these shortages will persist well beyond the pandemic.”
The FTC’s rule also features two key caveats that will further impact workforce dynamics. The first is that existing noncompetes for senior executives earning more than $151,164 annually and in policy-making positions can remain in force. The second, and arguably more important stipulation, is that the rule may not apply to nonprofit entities because they’re outside of the FTC’s enforcement.
That differentiation of the rule’s application on for-profits versus nonprofits could hurt both types of providers. For example, physicians may now prefer to pursue employment at for-profit organizations due to the freedom of movement they’re afforded. Conversely, nonprofit providers with physicians under noncompete contracts may experience less workforce turnover as compared to for-profit organizations.
Chip Kahn, Federation of American Hospitals president and CEO, said in a statement: “This final rule is a double whammy. The ban makes it more difficult to recruit and retain caregivers to care for patients, while at the same time creating an anti-competitive, unlevel playing field between tax-paying and tax-exempt hospitals – a result the FTC rule precisely intended to prevent.”
Even though the FTC can’t go after nonprofits, the agency said that organizations that claim nonprofit tax status but are organized for their profit of their members will have to adhere to the rule.
In terms of competing for workers, CEOs will undoubtedly have to raise compensation. The FTC estimates that the rule will increase the average worker’s earnings by $524 per year. In addition to better pay, leaders will be tasked with offering more or better benefits to attract and keep talent in-house.
A consequence of that could be an increase in labor costs during a time when hospitals are aiming to cut down on expenses.
The noncompete ban may also affect M&A activity, with private equity entities potentially shying away from gobbling up physician practices and networks with less employment control over physicians.
While the FTC’s final rule is a victory for healthcare workers, employers will have to rethink their approach to the workforce.
Jay Asser is the contributing editor for strategy at HealthLeaders.
KEY TAKEAWAYS
In a seismic decision impacting providers, the FTC passed a 3-2 vote to ban employers from using noncompete clauses.
However, the FTC’s lack of jurisdiction on nonprofits means that the rule may only apply to for-profit entities, potentially creating an uneven playing field and negative outcomes for both types of organizations.
Healthcare leaders will have to recalibrate their recruitment and retention efforts as the competition for talent will become even more robust.