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Competing Complications

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Senior Policy Analyst

Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.

Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.

On April 23, the Federal Trade Commission (FTC) voted to approve a new final rule banning noncompete agreements (NCAs) across the entire economy with very limited exceptions. This is as big a deal in health care as anywhere else: According to the American Medical Association (AMA), NCAs affect between 37-45 percent of physicians, and the FTC argues in the rule that anywhere from 35-75 percent of hospitals are under its jurisdiction. The FTC also claims a potential $194 billion in spending reductions in the health care sector over the next decade. Let’s explore the details – and complications – of this final rule below.

Background on Final Rule

The final rule states that, under Section 5 of the FTC Act, “it is an unfair method of competition” for employers to “enter into [NCAs] with workers on or after the final rule’s effective date.” NCAs are clauses in contracts that prevent or restrict employees from working for an employer’s competitor for a given period and within a given geographic area after leaving the employer. An employer may include additional benefits, training, or wages to compensate the employee for taking an NCA, but may also require reimbursement for expenses (training, education, etc.) if the employee terminates the contract early. The FTC’s rule makes all existing NCAs with workers unenforceable after the effective date except for senior executives. I will leave the legal analysis to others, but some prominent legal experts believe the FTC lacks the legal authority for such a sweeping policy change. From a non-legal perspective, giving this level of economy-wide power to unelected bureaucrats over private contractual arrangements is striking.

The FTC’s Rationale and Estimated Impacts on Health Spending

With regards to health policy, it’s important to understand the complications and uncertainties of NCAs. Let’s start with the FTC’s projected savings, which it claims result from doctors making lower income without NCAs. The FTC claims the rule will result in $74-$194 billion in reduced spending on physician and clinical services over 10 years. The FTC arrived at that number using findings from one study focused on the health care industry that found that an increase in enforcement of NCAs led to an increase in physician prices.

There are two main issues with the FTC’s estimate: First, the rule uses the percentage of hospitals the FTC estimates are under its jurisdiction as a proxy for physicians under its jurisdiction, although the better metric would be to directly estimate the physicians under an NCA subject to FTC jurisdiction. A brief aside – only 24 percent of hospitals in the U.S. are for-profit and thus under FTC jurisdiction, though the FTC claims that at least some portion of the 58 percent of hospitals that are non-profits are under their jurisdiction as well (the remaining hospitals are state- and county-owned). Doing a back-of-the-envelope estimate using the AMA data on the number of physicians subject to NCAs, I estimate that savings on physician and clinical services range between $103.7-$126 billion under the unrealistic assumption that all physicians with NCAs fall under the FTC’s jurisdiction, so even this narrow range is too high. Literature on the effects of NCAs on the broader wage market is scarce, and neither my estimate nor the FTC’s estimate take into account the potential market effects of NCAs on the income of employees who are not subject to them.

Second, and more importantly, the FTC only looked at four studies that examined the relationship between NCAs and prices and market concentration, ruled out two (one of which found physicians subject to NCAs had similar prices as physicians who were not), and only one of the remaining two was connected to the health care industry. That is simply not enough evidence on which to reliably base its estimate of potential health savings (or lower doctor pay), much less use as justification for this sweeping rule.

Health Industry Views on NCAs

Health industry reaction to the FTC’s rule has been mixed. The AMA and many independent physicians support banning NCAs. This is interesting because it seems counter to physician monetary interests, as Levetti et al. (2021) note that physicians with NCAs have 13 percent higher hourly earnings and their earnings rise 7 percent faster over time, with a cumulative effect of 35 percent higher earnings after 10 years on the job. Levetti et al. also note that this higher income partly results from reduced patient poaching that leads to greater patient retention over time. Nurses have generally spoken in favor of the ban as well, citing NCAs that force nurses who leave or are terminated before the end of their contract to repay the health system for training and other costs.

Many physicians may feel that they are forced to enter into NCAs and may feel resentful and trapped, particularly if differences related to business practices between them and their employers emerge. There’s some polling to back the latter up: Physician burnout is often linked to feeling like “micromanaged cogs in a machine”, according to one paper. This feeling has increased as more physicians than ever have become employed at hospitals or other corporate entities (77.6 percent in 2023). The AMA claims that NCAs are also generally less advantageous for residents, fellows, and young physicians. Such a claim is certainly plausible when you consider that a less established physician is less likely to have as many options for employment than a more established physician does, so an NCA may be less of a bargaining chip for a higher salary and more of an unpleasant feature needed to gain employment. Nurses argue that NCAs create a chilling effect against speaking out about issues in the workplace due to the fear of termination and subsequent financial burden of reimbursing . Additionally, NCAs appear to increase consolidation, and consolidation generally depresses wages for nurses.

On the medical facility side, banning NCAs creates two problems: It is almost always more expensive to hire new employees rather than retain existing ones due to recruitment, onboarding, and training costs. Additionally, physicians who are no longer bound by NCAs can leave for a competitor, bringing their patients (and therefore revenue) with them. NCAs provide larger, established companies an advantage in retaining talent over smaller, younger companies, making it difficult for new competition to grow and develop. Hospitals shouldn’t worry too much, however; they still have anti-kickback laws, the Stark Law, Medicare payment policies, and bans on Medicare payment for physician-owned hospitals that have constrained physicians’ freedom to operate independently in the market. The majority of regions in the U.S. have only one or two health systems, meaning physicians may have few options to choose from in order to practice where they would like.

The Problem with the Final Rule

The health care market in the U.S. is neither free nor sensible. A wide variety of government rules and regulations have entrenched major players while making it exceedingly difficult for entrants and disruptors. The biggest problem with a policy of flat-out bans on NCAs is that there are cases where NCAs can make sense and benefit both parties. For example, the hospital or medical facility wants to secure a provider’s services for many years to avoid training and initiation costs, and providers benefit from increased pay from providing a time certainty, as well as greater patient retention. Simultaneously, many providers feel that NCAs limit their independence and ability to criticize management or leave for better opportunities. Reforming NCAs is certainly a popular idea in Congress, with multiple bipartisan bills limiting them. A happy medium on the issue might be Congress or state legislatures limiting employers from requiring an NCA from employees, but employees being allowed to sign one in exchange for a greater salary or benefits. The big takeaway from all this: NCAs in health care are far too complicated for one massive, sweeping rule from a single federal agency.

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