Details on the rule

Under the rule, which was first proposed in January 2023 and will take effect in August, companies will no longer be allowed to issue noncompete agreements and will be required to inform employees with existing noncompete agreements that they will not be enforced.

FTC estimates that 18% of the U.S. workforce, or around 30 million people, are covered by noncompete agreements. According to Modern Healthcare, noncompete agreements are used in an estimated 40% of physician employment contracts and are used by many hospitals, health systems, physician groups, insurance companies, and pharmacy benefit managers.

FTC noted that any corporations concerned about protecting intellectual assets can use restraints like confidentiality agreements and trade secret laws instead of noncompete agreements.

The agency estimates that banning noncompetes will increase employees' earnings by up to $488 billion over the next decade and will lead to the creation of over 8,500 new businesses each year.

The rule contains several exceptions, including for senior executives, or those who hold a policy-making position and earn more than $151,164 a year. It also makes exceptions for nonprofit companies. However, the rule notes that if a tax-exempt company is organized in a way that seeks to drive profit to its members, FTC can treat that company as a for-profit entity and therefore subject it to the noncompete ban.

FTC notes that "some portion" of the 58% of tax-exempt hospitals and 19% of government hospitals will likely fall under the rule.

"What the FTC is saying is that just because an entity has 501(c)(3) status, they won't just necessarily assume those entities are nonprofit," said Spencer Perlman, director of healthcare research at the investment advisor Veda Partners. "If they are engaged in activities the FTC views to have a profit motive, they will enforce their rule."

FTC justification

FTC Chair Lina Khan said that noncompete agreements restrict workers' opportunities and infringe on their fundamental rights by preventing them from changing jobs.

"Robbing people of their economic liberty also robs them of all sorts of other freedoms, chilling speech, infringing on their religious practice, and impeding people's right to organize," Khan said.

"It is so profoundly unfree and unfair for people to be stuck in jobs they want to leave, not because they lacked better alternatives, but because noncompetes preclude another firm from fairly competing for their labor, requiring workers instead to leave their industries or their homes to make ends," Democratic FTC Commissioner Rebecca Slaughter said.

However, the agency's two Republican commissioners, Melissa Holyoak and Andrew Ferguson, argued that federal law doesn't allow FTC to adopt broad rules prohibiting conduct it believes to be anticompetitive.

"Beginning with policy puts the cart before the horse," Ferguson said. "No matter how important, conspicuous and controversial the issue, and no matter how wise the administrative solution, an administrative agency's power to regulate must always be grounded in the valid grant of authority from Congress. Because we lacked that authority, the final rule is unlawful."

Industry reaction

Labor unions praised FTC's rule, including the AFL-CIO, the largest labor federation in the United States.

"Noncompete agreements trap workers from finding better jobs, drive down wages, and stifle competition," AFL-CIO said in a tweet, adding that it "commend[s] the FTC and (Lina Khan) for finalizing a strong rule to ban these exploitative practices and level the playing field for American workers."

According to Heidi Shierholz, a labor economist and president of the Economic Policy Institute, the only leverage nonunion workers have is "...[T]heir ability to quit their job. Noncompetes don't just stop you from taking a job — they stop you from starting your own business."

However, many groups representing employers, including hospitals, pushed back against the rule.

The U.S. Chamber of Commerce, the largest business lobby in the country, alongside other business groups, filed a lawsuit on Wednesday seeking to block the rule.

Neil Bradley, the Chamber of Commerce's chief policy officer, said FTC lacks the power to adopt broad rules. "There is really no aspect of the U.S. economy they couldn't regulate" if the rule is allowed to stand, he said.

Chamber president and CEO Suzanne Clark said FTC's rule is "a blatant power grab that will undermine American businesses' ability to remain competitive."

"This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy," Clark added. "The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked."

Chip Kahn, president and CEO of the Federation of American Hospitals, said in a statement that FTC's 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 anticompetitive, unlevel playing field between tax-paying and tax-exempt hospitals — a result the FTC rule precisely intended to prevent," he said. "In a time of constant health care workforce shortages, the FTC’s vote today threatens access to high-quality care for millions of patients."

Similarly, Chad Golder, general counsel for the American Hospital Association, said FTC's rule is "bad law, bad policy, and a clear sign of an agency run amok."

"The agency's stubborn insistence on issuing this sweeping rule — despite mountains of contrary legal precedent and evidence about its adverse impacts on the health care markets — is further proof that the agency has little regard for its place in our constitutional order," Golder said.

Advisory Board's resources on physician employment

Want Advisory Board's insight on what FTC's noncompete ban could mean for healthcare? In this expert insight, our researchers outline three things that physician employers should do right now in response to the rule.

In addition, Advisory Board has synthesized some of the best, up-to-date data sets on providers to highlight what you need to know about the physician workforce. This research reveals key data points about the physician workforce's demographics, employment, well-being, and turnover — and the implications for the future.

Advisory Board also put together resources on how you can become the physician employer of choice by providing physicians with meaningful autonomy, ample time, and seamless support that helps them thrive as both doctors and people. (Wiessner, Reuters/USA Today, 4/23; Michaels/Ellis, Wall Street Journal, 4/23; Giorno, The Hill, 4/23; Gibson, CBS News, 4/23; Moreno, New York Times, 4/23; Mark, Washington Post, 4/23; Kacik, Modern Healthcare, 4/23; Reed, Axios, 4/24; Bannow, STAT+ [subscription required], 4/23; Michaels/Adams, Wall Street Journal, 4/24)