9/23/2024
The events described in this post are current as of the date above. PHC4 will not be updating this page as new events unfold.
What do I Need to Know?
The American Bar Association defines non-compete agreements as “contractual agreements between employers and employees that restrict employees from competing with their former employers for a certain period of time and within a certain geographic area after the termination of employment”1. This post uses the term “non-compete agreements” but they can also be known as “restrictive covenants”. Similarly, some states identify certain members of the health care community, such as physicians or nurses, as the focus of their legislation. For simplicity, this post will employ the broad term “provider” to indicate a patient-facing health care worker.
In July 2024, Pennsylvania passed the Fair Contracting for Health Care Practitioners Act, Act 74 of 2024, limiting non-compete agreements for providers to a single year after leaving their employer voluntarily. Act 74 does not include language pertaining to the geographic area set by non-compete agreements2. Set to take effect in September 2024, the Federal Trade Commission (FTC) issued “the final rule” banning all non-compete agreements, except for senior executives, nationwide3. The final rule was struck down in a Texas federal court in August of 2024, before it could take effect4. The FTC has stated they may appeal the ruling to the Supreme Court of the U.S. (SCOTUS). So far in 2024, 15 states had legislation either introduced or acted upon to restrict the use of non-compete agreements in a health care setting. Currently, 35 states and the District of Columbia have some legislation pertaining to the use of non-compete agreements in health care5.
Why is this Important?
Opponents argue non-compete agreements hamper market competition by limiting an employee’s ability to change jobs within their industry and hurts their potential wage growth by reducing their employment options. Proponents argue these clauses protect company assets and enable employers to recoup the investment they make in recruiting and training new employees.
Specific to health care, providers working under a non-compete agreement can be restricted from practicing medicine unless the provider is willing to move out of the geographic area defined in their non-compete agreement. This limitation can hamper access to care by forcing providers to move out of an area or stop practicing medicine altogether. Supporters of non-compete agreements argue that that patients could follow their provider when they change employers and damage the financial health of their previous employer.
Legal Timeline
Select the arrows below to read a description of the event.
7/9/2021 – President Biden’s Executive Order on Promoting Competition in the American Economy
The Biden administration issued an executive order affirming the administration’s intent to combat excessive concentration of industry, abuses of market power, and harmful effects of monopoly and monopsony. The Order outlined the health care market including insurance, hospital, and prescription drug markets as a focus of attention. The Chair of the FTC was directed to “curtail the unfair use of non-compete clauses… that may unfairly limit worker mobility6.”
4/23/2024 – The FTC’s Final Rule
The FTC published the Final Rule in the Federal Register, the rule was set to take effect on September 4th, 2024. The final rule would ban all restrictive covenant clauses nationwide with exceptions only for current senior executives defined as employees making more than $151,164 and working in a “policy-making position.” Restrictive covenants would be banned for any senior executives hired after September 4th. Importantly, the FTC stated there are no special exemptions for the health care industry2. The FTC typically does not have authority over tax-exempt organizations, such as non-profits.
4/24/2024 – U.S. Chamber of Commerce Files Lawsuit
U.S. Chamber of Commerce alleged the FTC overreached in implementing the final rule broadly7.
7/3/2024 – Texas Federal Judge Partially Blocks the Final Rule
U.S. District Judge Ada Brown in Dallas partially blocked the final rule arguing the rule was too broad. Judge Brown delayed a decision to block the rule nationwide until it was clear whether such an order was appropriate8.
7/17/2024 – PA Act 74 of 2024 – Fair Contracting for Health Care Practitioners Act
The act was first introduced by PA Representative Dan Frankel (D-Allegheny), Chair of the PA House Health Committee. It limits all restrictive covenant clauses in contracts for certain health care providers to a single year after a provider leaves the practice voluntarily. Affected providers include medical doctors, doctors of osteopathy, certified registered nurse anesthetists, certified registered nurse practitioners, and physician assistants. The act also places requirements on employers to notify patients of a provider leaving their practice and to assist in transitioning patients to a new provider. This act only impacts providers working in Pennsylvania. The act takes effect on January 1st, 2025 and directs the Pennsylvania Health Care Cost Containment Council to conduct a 3-year study on the effects of this act2.
7/23/2024 – Pennsylvania Federal Judge Allows the Final Rule
U.S. District Judge Kelley Hodge in Philadelphia rejected a bid to block the final rule. Judge Hodge wrote the FTC has the power to ban practices it deems anticompetitive9.
8/15/2024 – Florida Federal Judge Partially Blocks the Final Rule
U.S. District Judge Timothy Corrigan in Florida blocked the final rule arguing the FTC needed, but did not have, Congress’ explicit permission to make such a ruling due to the broad societal impact10.
8/20/2024 – Texas Federal Judge Fully Blocks the Final Rule
U.S. District Judge Ada Brown in Dallas issued a final ruling to block the final rule from taking effect nationwide4.
How are Act 74 and the Final Rule Different?
Firstly, Act 74 only pertains to certain health care providers working in Pennsylvania. Secondly, Act 74 only limits the use of non-compete agreements to the first year after a provider voluntarily leaves their employer. The final rule would ban the use of non-compete agreements for all for-profit employers nationwide across all industries. The only exceptions are for senior executives in policy-making positions. However, the FTC does not have the authority to regulate tax-exempt organizations, such as non-profits. This limits the impact the final rule could have on the health care industry which contains many tax-exempt organizations. Currently, Pennsylvania has 220 licensed hospitals (73% non-profit) and 289 licensed Ambulatory Surgery Centers (15% non-profit). PHC4’s public reporting contains further information on hospitals and ambulatory surgery centers in Pennsylvania.
How Common are Non-Compete Agreements in Provider Contracts?
A 2007 study surveyed physicians to understand the use of non-compete agreements. The survey sample included 1,967 primary care physicians across California, Georgia, Illinois, Pennsylvania, and Texas. The results showed the prevalence of non-compete agreements highest amongst Pennsylvania physicians at 60.6%. Across the whole sample, 45.1% of physicians indicated they were subject to a non-compete agreement11. There is little data on the current prevalence of non-compete agreements in health care.
The FTC collected public comment before the publication of the final rule. Among the thousands of comments received, the FTC reported “33% of practitioners in the applied behavioral analysis field reported being subject to a non-compete agreement, along with 68% of cardiologists, 42% of colorectal surgeons, [and] 72% of members of the American Association of Hip and Knee Surgeons…”3.
What Other States Have Done
The map below shows which states have banned non-compete agreements for all health care providers, labeled “Full Ban”. Other states choose to limit the usage of non-compete agreements for health care providers, labeled “Partial Ban”. These limitations can pertain to which types of providers are subject to the ban, how long the non-compete agreements are enforceable, and/or other restrictions. Finally, some states have no restrictions in place on the usage of non-compete agreements, labeled “No Ban”. In states without legislation pertaining to non-compete agreements, enforceability is set by the court system during civil proceedings. As in partial ban states, the extent of enforceability varies from state to state.
The Michigan Non-Compete Experiment
A study published in a 2009 volume of Management Science leveraged a change in Michigan’s laws regarding enforcement of non-compete agreements to conduct a natural experiment. A natural experiment is a unique research opportunity that becomes possible when real-world events make the establishment of an experimental group and a control group possible. In Michigan, non-compete agreements were banned beginning in 1905 until the law was inadvertently repealed in 1985 as part of the Michigan Anti-Trust Reform Act. The unplanned change allowed researchers to compare the unbiased job mobility of employees in Michigan, the experimental group, against the mobility of employees in other states, the control group. This unique study design is more powerful than common observational studies and can inform how non-compete agreements impact worker job mobility in a more global sense.
Researchers analyzed patent data to track if inventors in the experimental and control groups changed employment at different rates after the change in legislation. The study tracked 98,468 inventors via 372,908 patents from 1963 to 2006. The study identified an 8.1% decrease in job mobility for Michigan inventors relative to other states following the repeal of the ban. The authors also identified a larger decrease, 16.2%, for inventors with a highly specialized skillset12. These findings suggest the limitation of non-compete agreements by Act 74 will increase provider job mobility in Pennsylvania.
Let Us Know Your Thoughts
The Pennsylvania Health Care Cost Containment Council (PHC4) has begun studying non-compete agreements and their effects on health care in the Commonwealth of Pennsylvania. This work aligns with PHC4’s mission to empower Pennsylvanians through transparency, providing access to data, research, analysis, and reporting focused on the cost, utilization, and quality of health care delivery in the Commonwealth. On September 21, 2024, PHC4 began collecting public comments on Act 74. If you would like to submit a comment you may send it by mail to 225 Market St Suite 400, Harrisburg, PA 17101 or by email to [email protected]. Comments submitted on or before October 21, 2024 will be included in the analysis.
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References
All citations were accessed on 8/21/2024.
- Tenenbaum, J. S. (2023, May 17). Employee non-compete agreements: What every association needs to know in a rapidly evolving legal and regulatory landscape. American Bar Association. https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-june/employee-non-compete-agreements-what-every-association-needs-to-know/
- 2024 Act 74. Pennsylvania General Assembly. (2024, July 17). https://www.legis.state.pa.us/cfdocs/legis/li/uconsCheck.cfm?yr=2024&sessInd=0&act=74
- Federal Trade Commission. (2024, May 7). Non-Compete Clause Rule. Federal Register. https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule
- Wiessner, D. (2024e, August 21). US judge Strikes down Biden administration ban on worker “noncompete” agreements. Reuters. https://www.reuters.com/legal/us-judge-strikes-down-biden-administration-ban-worker-noncompete-agreements-2024-08-20/
- State Noncompete Law Tracker. Economic Innovation Group. (2024, June 26). https://eig.org/state-noncompete-map/
- The United States Government. (2021, July 9). Executive order on promoting competition in the American economy. The White House. https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/
- Wiessner, D. (2024a, April 24). US Chamber of Commerce sues FTC for ban on noncompete agreements. Reuters. https://www.reuters.com/legal/us-ban-worker-noncompete-agreements-faces-lawsuit-major-business-group-2024-04-24/
- Wiessner, D. (2024b, July 5). US judge partially blocks FTC ban on worker noncompete agreements. Reuters. https://www.reuters.com/legal/us-judge-blocks-biden-administration-ban-worker-noncompete-agreements-2024-07-03/
- Wiessner, D. (2024c, July 23). US judge Will Not block biden administration ban on worker “noncompete” agreements. Reuters. https://www.reuters.com/legal/us-judge-will-not-block-biden-administration-ban-worker-noncompete-agreements-2024-07-23/
- Wiessner, D. (2024d, August 15). Second US judge Blocks FTC ban on worker noncompete agreements. Reuters. https://www.reuters.com/markets/us/second-us-judge-blocks-ftc-ban-worker-noncompete-agreements-2024-08-15/
- Kurt Lavetti, Carol Simon, & William D. White, The Impacts of Restricting Mobility of Skilled Service Workers: Evidence from Physicians, 55 J. Hum. Res. 1025, 1042 (2020).
- Marx, M., Strumsky, D., & Fleming, L. (2009). Mobility, skills, and the Michigan Non-Compete Experiment. Management Science, 55(6), 875–889. https://doi.org/10.1287/mnsc.1080.0985
