What noncompete clauses mean to physicians and the health care industry at large

In January 2023, the New York State Senate proposed a bill that would prevent noncompete clauses from being included in employee contracts. Although the bill, S3100A, was vetoed by New York Governor Kathy Hochul in December, the idea of banning noncompete clauses is picking up steam; they are already banned in several other states, and the Federal Trade Commission proposed a ban on them last year.

Let’s discuss what noncompete clauses are, the ramifications that they may have and how the dissolution of noncompete clauses could impact the health care industry.

What is a noncompete clause?

As defined by the Federal Trade Commission (FTC), a noncompete clause is a “contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.” Essentially, this allows businesses to prevent their employees from working with a local competitor after their contract ends for a certain period. These clauses were initially created to protect trade secrets or other confidential information unique to a business.

In 2023, the FTC proposed a ban that would prohibit employers from imposing noncompete clauses on their workers. The FTC is expected to announce a decision on the ban in April 2024.

In addition to noncompete clauses, there are nonsolicitation contracts. In medicine, these contracts prevent physicians from solicitating health care providers and/or patients from another practice if they choose to leave their current practice. Such agreements normally do not limit physicians from seeking employment elsewhere. However, if a nonsolicitation contract extends beyond its intended scope, then it can be considered a de facto noncompete clause.

The AOA’s House of Delegates passed a policy statement in 2023 opposing the use of noncompete clauses that could hinder fair market competition. The American Medical Association’s (AMA) House of Delegates also recently voted to support legislation that prohibits noncompete clauses for physicians employed by for-profit or nonprofit hospitals, hospital systems or staffing company employers. The AMA’s stance is quite clear: Allowing specialists to work for multiple hospitals in a community can increase patient access to care and help reduce health care disparities. However, it is unclear if FTC’s ruling would affect hospitals with nonprofit designations, which make up more than half of the hospitals in the United States.

States around the U.S.

If Gov. Hochul had not vetoed the bill, New York would have been the fifth state to have a near-total ban on noncompete clauses, joining California, North Dakota, Oklahoma and Minnesota. Additionally, states such as New Hampshire, Delaware, Massachusetts and Rhode Island have banned noncompete clauses specifically for physicians. This ban may illustrate that traditional noncompete clauses are not always applicable to physician employment; the specific states that have already banned noncompetes for physicians rank among the top 20 when it comes to health care.

How do noncompete clauses affect hospitals?

In the U.S., many hospitals are treated like a business, and, like most businesses, some will add noncompete clauses in their contracts. Notably, noncompete clauses have some social benefit. Mainly, noncompetes are sometimes used to protect trade secrets, which can promote innovation. Noncompetes may also reduce the probability of worker exit. They may also increase employers’ incentives to provide costly training. Many hospitals offer to train employees in various skills and reimburse them for the cost of additional education; noncompetes make sure the individuals invested in are less likely to leave. Therefore, a potential change in laws could reduce the incentive to train employees. Likewise, patients may move with the physician, taking their business elsewhere.

How do noncompete clauses affect physicians?

A physician, like any employee, may see changes as the law itself changes. Most noncompete clauses tend to limit worker bargaining power, possibly leading to lower wages. Also, noncompete clauses sometimes induce workers to leave their occupations entirely, foregoing accumulated training and experience in their fields. Alternatively, some employees even leave the state they work in, causing a potential void in patient care. This is difficult for a physician who may have a family and ties to the community and their patients.  

However, it’s important to note that private practice physicians may use noncompete clauses to remain competitive with larger hospital conglomerates. And as physicians and leaders of health care, it is imperative to support physician-led practices and recognize this. Therefore, the outright ban of noncompete clauses may negatively affect private practice physicians in some cases. Additionally, patients’ insurance coverage throws in a confounding variable. If a physician only works for one health care organization that takes a patient’s insurance, it is easy for them to access care. However, if their physician works for multiple organizations, it may be difficult to schedule appointments if the additional organizations do not accept that specific insurance. Thus, noncompete clauses keep physicians “in network” for patients.

How do noncompete clauses for physicians affect patients?

Unfortunately, there are no published studies or ongoing research that we are aware of on the effects on patients when physicians enter noncompete contracts. However, some effects can be inferred. The AMA’s code of medical ethics states that “covenants not-to-compete restrict competition, can disrupt continuity of care and may limit access to care” and “removing noncompete clauses can increase a community’s access to specialist physicians and reduce health care disparity.”

The near-total ban of noncompete clauses has been endorsed by the FTC and the AMA, which may be a trajectory shift for health care moving forward. It is difficult to predict all of the ramifications, as many of the effects are merely informed speculation, at least until more studies are published on this topic. New York had the potential to offer an opportune time to conduct these studies prospectively if the bill had been signed into law. Whatever may come, these laws will always affect the medical industry, and it is our job as leaders in the field to understand the consequences.

Related reading:

To solve the problem of too few clinical rotation sites, leaders in medicine consider business solutions

The 3 biggest traps to watch out for in physician employment contracts