FTC’s proposed ban on noncompete agreements could be a game changer for some physicians

The last two decades have been a period of declining economic influence for practicing physicians. Independent medical practice has been steadily eroded by hospital employment, as well as by private equity and corporate acquisitions, to the point where less than half of physicians in the U.S. work in private practices.

I have argued that the emerging scarcity of practitioners will eventually reverse this erosion. But an announcement by the Federal Trade Commission on Jan. 5 that it is proposing to outlaw noncompete agreements will help this turnaround come even faster. Noncompete agreements basically prevent employed physicians who want to leave their employer but continue practicing medicine from working in the same community for a specified period of time. The departing physician’s patients are redirected to other employed physicians.

In practice, this means physicians must surrender the patient relationships they have developed and are compelled to move away. This markedly reduces a physician’s bargaining power with employers, and thus their compensation.

The proposed rule would prevent hospitals or corporate employers from creating new noncompete agreements, or enforcing existing ones, with their employed physicians, with very limited exceptions.

Banning noncompete agreements would represent a decisive shift in economic and professional power back to practicing physicians, and enhance their bargaining leverage with potential employers regarding working conditions and professional standards.

Physicians build their practices by establishing relationships of trust with their patients. These are developed by listening to and responding to their patients’ needs. The effect of noncompete clauses is to treat those trusting relationships as property of the employer and to cede to the employer the power to redistribute patients to other employed physicians. This disruption damages both the physician who built the relationships and the patients who depend on them.

Employment relations between a physician and a hospital or corporate entity are an exchange of value. Physicians derive economic security by shifting their business risk to the employers. They also benefit from enhanced collaboration with other employed physicians in consultative relationships and in improving care standards and practice. The employer benefits from generating revenue from referrals for inpatient, outpatient or diagnostic services, and enhanced bargaining leverage with health plans by assuring a denser and better distributed provider network.

The ban of noncompete agreements will not uniformly tilt power relationships across the medical profession. It is not clear how much effect it will have on hospital-based specialists, such as emergency medicine, hospitalist, and intensive care physicians, or on diagnostic specialists, such as pathologists and radiologists, where patient relationships are attenuated, time-limited, or nonexistent. Yet for primary care physicians and subspecialists such as cardiologists and orthopedists, where repeat or continuing patient relationships are common, the effect of the FTC’s ban would be nothing short of revolutionary.

One complicating factor would be if a physician has accepted repayment of medical school debts as a part of their employment agreement. The reduction of indebtedness is a tangible cost the employer bears in expectation that the physician will remain employed for a significant period. How that debt reduction is prorated over the life of the employment relationship, as well as other transition issues, means there is ripe opportunity for the legal profession to insert itself into the conversation.

It goes without saying that there will be aggressive political pushback on the proposed rule from hospital systems and private equity firms that would see their control — and asset values — diminished by the FTC’s action. Physician-owners who sold their practices are apparently prohibited from competing with the new owners, though their non-equity owning associates would not be. Corporate interests will press aggressively for additional exceptions to the ban, or to overturn it outright.

This means that the time for aggressive pro-physician advocacy from medical societies at the federal, state, and local levels, as well as from influential specialty societies, is right now; the comment period on the proposed ban will be open soon. The voices of individual physicians, as well as those of members of Congress who support pro-competitive policies, will also have great influence in determining the ultimate shape of the FTC regulation.

The historical justification for noncompete agreements is to protect an employer’s unique intellectual property, such as software code or product formulas, from appropriation. That justification appears to have limited applicability to the relationship between physicians and their employers. Even in the world of high tech, limiting noncompete agreements appears to have fostered both competition and innovation. In “The Code,” Margaret O’Mara’s masterful history of Silicon Valley, she argued that the State of California’s prohibition of noncompete agreements played a strategic role in the dynamism of the area’s tech industry.

A more dynamic professional marketplace benefits patients and their physicians.

Employers will have to focus more attention on the value proposition for their physicians — not just their salaries but also working conditions, peer collaboration, professional development, career mobility options, and how they can create value for their patients. Employers that genuinely empower their clinicians will stand a better chance of retaining them for the long haul.

Jeff Goldsmith is the president of Health Futures Inc., a strategy consultancy founded in 1982 that specializes in industry forecasting and trend analysis. The author dedicates this essay to his friend, the late Lou Goodman.

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