The FTC Ruling's Impact on Physician Contract Negotiations

After the Federal Trade Commission (FTC) announced a ban on non-compete clauses in April 2024, the healthcare sector experienced a major shift in physician employment contract negotiations. In this episode of Value-Based Care Insights, Hal Katz, a partner at Husch Blackwell specializing in healthcare life sciences, explores the consequences of this decision along with the resulting policy adjustments and legal appeals. Gain insights into the FTC ruling on physician employment agreements, the required alignment between single-specialty groups health systems, and more.  

LISTEN TO THE EPISODE:

 

Daniel Marino:

Welcome to value based care insights. I am your host, Daniel Marino. Back in April of this year there was an interesting ruling that came out from the FTC. I'm sure many of our of you, many of our listeners have seen that. And the ruling was really around the FTC banning non-competes. And, boy, I'll tell you it really started a whole series kind of a tighter wave of discussions, if you will. On what is potentially is going to mean to physicians. Single specialty physicians, such as anesthesia as well as employed medical groups, large multi-specialty groups who have employment agreements that have non-competes included in there. It really it started a lot of chatter. And then, very soon after the FTC came out with their ban, of course there was a number of appeals, and it stuck in an appeal right now. But again, it has such a large implication to our provider community that I thought it would be really interesting for us to dive into what the potential ban means, and what are those implications to both physicians who maybe they're negotiating employment agreements with a non-compete, or our executive partners who may be negotiating with a medical group that you may or may not want to include a non-compete. 

 

Well, I'm really excited today to have a colleague that I've worked with for quite some time, Hal Katz. Hal is a partner with Hush Blackwell. And he leads the healthcare life sciences and education strategic business unit for Hush Blackwell, over 30 years of experience. Just a great knowledge of information. And just a great guy. Hal welcome to the program. 

 

Hal Katz:

Dan. You can introduce me anytime. Thank you for those kind words. Great to be with you today.

 

Daniel Marino:

Well, I appreciate it, Hal, and it's definitely well worth it on your end. So thanks for joining. This is a interesting topic, you know. Once this came down, ruling came out. It was, one of the things that that ended up happening to me was boy. I had a flood of calls from a number of physicians, couple of senior executives. Getting my opinion as to what this potentially means to their employment agreement what it potentially means to the overall agreement between a single specialty group such as anesthesia and a hospital. It's been fascinating to watch how the healthcare community is starting to interpret this. What are you seeing, or what's been your impression of the ban? And in conjunction with that, the appeal? 

 

Hal Katz:

Wow! I think we, I think many of us were surprised by the bold and aggressive move by the Federal Trade Commission. As you know, and most of our listeners know historically, non-competes have been addressed at the State level. So very surprised to see this come out. We, we've, we've seen concerns expressed at the administrative level around non solicitation provisions a more pro employee environment attitude. But we were very surprised with this this rule. We, too, have been receiving many calls from people within the healthcare space. Be it as you said, senior executives, executives, owners, physicians, wondering whether they still have enforceable non-competes. What do they do about their current non-competes? What do they do going forward? And so we've been busy advising them on best next steps. 

 

Daniel Marino:

So there was a an interesting quote of modern healthcare not too long ago that that basically referenced 40% of the employment agreements have some level of a non-compete. Frankly, I think it might even be higher for some of these single specialties. But again, to your point earlier, some of this has been enforceable for the within the States for years, and some of it has not. Do you feel like it makes it just a lot more confusing right now? Or are you advising a lot of folks to follow what's occurring within their individual states? 

 

Hal Katz:

Currently nothing has changed. As you said, the rule is final, the rules not effective until September 4th as you also alluded in your introductory remarks. The rule is currently being challenged in litigation, and I know we'll cover this in a little bit. But we won't know for some time whether the law will actually be permanently adopted. 

 

Daniel Marino:

Right. And so with the, maybe you can go into a little bit more around what's included within that that FTC ban. Are they basically eliminating all non-competes and saying that none of these would apply? Are there certain parameters of those clauses and contracts that would still apply? What is the what does the ban cover? 

 

Hal Katz:

Good question. So 1st of all, the rule defines a non-compete clause as something that either prohibits, penalizes, or prevents a worker from seeking or accepting work with a different person, as well as operating a business after conclusion of employment. So you know, that's the focus of the rule itself. Now, as far as the type of non-competes, there, there are 2 types of non-competes, those that expressly prohibit a worker from seeking or accepting other work or starting a business, as I said, so those are express prohibitions. And the others are a financial penalty, paying a fine, a significant amount of money if they do that in both types of non-competes are prohibited. We've got the scenario you also mentioned, where there are existing non-competes versus new non-competes going forward. The rule touches both of those non-competes as far as new non-competes. It does pretty much ban any non-compete that restricts services, the provision of and of services, and it applies to employees as well as independent contractors, even senior executives. I'll mention in a moment that the exception, with respect to some senior executive. The prohibition you know, is on entering into any kind of the non-compete that I described earlier on. If we've got an existing non-compete they will only remain in force for those senior executives. I'm earning more than a $151,000 You know, it's a $151,000, a $164,000 specifically, and who are in policy making positions. So it's not just any senior executive, that income level, it's also a policy making decision. 

 

Daniel Marino:

Yeah, well, and so that so I find that interesting, right? So the ban is not impacting those senior executives. So they have to stay, you know, in place. But then you have a physician or a medical group, and let's say we'll choose a scenario. You have 2 hospitals in the market, and they're competing. And one of the hospitals invests a lot in cardiovascular services, and, as you know, recruited or employed, this cardiovascular group. Up to now they would have some type of non-compete that says we, you know you can't jump over to the other hospital, right? There has to be some protections for good reasons. Right? The hospitals investing in the cardiovascular program, you know, it's part of their that's part of their investment. It's part of their insurance. Now with the potential ban, I mean, this cardiovascular group can could just jump over to the hot public hospital. 

 

Hal Katz:

That is true. There is that risk the hospitals investment is in jeopardy. Of course, the hospital will still be able to protect proprietary information. The non disclosure obligations, are still something that can be included in these contracts. But I definitely appreciate the risk and the cost of losing a physician to a compete to a competitor. This is going to be a real challenge for hospitals and other large groups, and it's not even just hospitals or private equity platforms. There are completely, independently owned physician medical groups that use non-competes with their own affiliated physicians. 

 

Daniel Marino:

Oh, yeah, right? 

 

Hal Katz:

So yeah, it's going to impact them, too. I you know, I think this might motivate those parties to spend a little more time ensuring that they're providing the service that they need to provide to maintain the physicians to retain the physicians. They there might be more time spent on recruiting to ensure that the physicians are a good fit for the practice or for the business to minimize the risk that the physicians are going to be unhappy or not, do what they're supposed to do and leave and then compete. And I think there might also be some creative mechanisms were terms negotiated that make it a little bit harder for doctors to just leave without some kind of impact. And while it won't restrict a physician from going to work for a competitor. There may be some kind of obligation on the physician to cover expenses associated with a run out period. If they don't give significant or sufficient notice of termination. So I think we're going to see some creative terms in in agreements. Should this rule be upheld, ultimately. 

 

Daniel Marino:

If you're just tuning in, I'm Daniel Marino, you're listening to value-based care insights. I am with Hal Katz today, and we're having a fascinating discussion on the recently announced FTC ban on non-competes. So, Hal, as you were as you were describing, that I guess one thing came to mind, love to get your opinion on, do you think the potential elimination of these non-competes between, you know, for physicians, for providers, and particularly those that are in a competitive community. Does it change the economic incentive? In other words, if the if you have a competing hospital and one hospital, as I mentioned, invested in this cardiovascular program, what's to stop the other hospital from offering a larger dollar incentive to have that other group come over to their hospital? Right? I mean, there's no, non-compete that's standing in the way. The only thing that would be the financial incentive. Do you think that could be an adverse effect? 

 

Hal Katz:

I think there, there's definitely that risk. The hospitals and others in that space are at least protected in part somewhat by the fraud and abuse laws that require compensation to be consistent with fair market value. So you know, hospitals and other groups can't go too far above what the what the physician was probably already being paid to recruit someone away. And I think that's only going to yeah, we we might have a period of time where there is some of that happening, that recruiting, that soliciting of practices. But one hospital does that to another. We we're gonna see, I believe, the reverse. You know that they're just gonna start picking off each other's providers, and the providers are going to figure it out, and the hospitals are going to figure out.  and I think there will be there will be some stabilizing within the market after a couple of or 3 years, if you will. Again, should the final role be adopted. 

 

Daniel Marino:

Hal, I would like to get your opinion on some single specialty groups, particularly anesthesia. Anesthesia as you know, has really been pressured. There's a shortage of anesthesiologists. Many either hospital, through their employed group of anesthesiologists have really used the non-competes to really protect their investment. A lot of the independent groups have done the same right? as they've started to recruit in the markets. Do you feel like a specialty like anesthesia, which has a lot of pressure to begin with, do you think this is only gonna exacerbate the challenges we have with anesthesia and potentially increase the costs. 

 

Hal Katz:

I don't think so. If anything, I it may be helpful with regard to the anesthesia specialty we've seen already a case involving anesthesia where the anesthesia provider has alleged to have monopoly power. So there's been so much consolidation at the anesthesia  level. It's been very hard to provide to find those services, whether you're a hospital or surgery center. And positions have been locked up. They, you know, they sold to a large private equity platform, or affiliated with a large group that had a non-compete, and even if they were unhappy, they weren't able to break away. If this rule is adopted, or, I should say upheld, then we will likely see some of those anesthesia’s break away and be more available to hospitals and surgery centers for their services. So it may be beneficial when it comes to certain specialties like anesthesia. 

 

Daniel Marino:

So when you think about where we're going with the appeal process, what do you think's gonna come out of this? I mean, obviously, you have no crystal ball. Would you feel like there's gonna be a compromise. Do you feel like this is really gonna be incorporated fully by what the FTC said, and I guess my last opinion or question I'd love to get in your opinion is, what are the States gonna do right? There's this constant battle between the States having the authority versus having more of a Federal say. 

 

Hal Katz:

Yeah, great question. The experts are a little divided, but I would say that the overwhelming majority of the legal experts and scholars believe that this this is beyond the authority of the Federal Trade Commission, and that the Supreme Court will likely overrule the FTC's rule and find it unenforceable. I think it's gonna be 6 to 9 months before that happens. We will likely have a formal injunction by the beginning of July. So again. As I was saying earlier, we will continue business as usual until the Supreme Court hears the case.  But I would be very surprised if the rule is upheld. 

 

Daniel Marino:

I agree with you. I mean it's it was really. I mean, when you look at the vastness of the ban that the FTC put forth I mean, and then the potential implications. I mean, it's I agree with you. I think there's definitely gonna be some legal challenges, and and certainly make it to the Supreme Court. You know, as a as a potential outcome. So what's some of the advice that you're given to your clients right now. You said business as usual, are they? Are you seeing any changes, or are there any recommendations that you're offering your clients in into the type of what they, what they should include in their either employment agreements or contractual agreements that have non-compete clauses? 

 

Hal Katz:

The 1st thing we're recommending to clients I'm recommending to my clients is that they closely monitor what happens with regard to this rule. Each step of the way, making sure that the that the that the court actually does issue an injunction and compliance is delayed required. The compliance is delayed. The second thing is to start reviewing their agreements and identifying where they do have non-competes that would fall under the rule for which they would have to comply with the rule and start developing at least a rough idea of what notices they will send those employees. That's 1 of the things required under the rule that the employees receive notice of the rule and the prohibition and the unenforceability of the rule. So developing that model notice language is the next step. And then, lastly, we are, as I mentioned, earlier, helping clients think about what kinds of amendments they may want to make to their contracts. To still have to still have some kind of consequence, or to discourage employees from just leaving and going to work somewhere else, increasing a notice period. And, as I said, and if they don't provide that that notice being required to pay the trailing expenses, you know, associated there with their, you know, historic support. Those are the recommendations I'm making to my clients. 

 

Daniel Marino:

Yeah, I think that makes sense. I mean, I think, really thinking about those clauses and the potential consequences, although I think many folks believe expertly that this won't be upheld. You do have to. You have to plan for it right? Especially if you're if you are a hospital or a health system, and investing in growing your provider, community or employees, and so forth. Provider community. And you do have to have some level of protections. Are those same type of clauses that you mentioned, same type of recommendations? Are those also in? Are you? Are you making those same recommendations for the type of agreements. Let's say a hospital was to structure an agreement with radiology group, or an er group or anesthesia, for that matter? Are there different types of things to consider? 

 

Hal Katz:

Great question. The same kind of issues need to be considered, whether it's an individual employment agreement or individual professional services agreement or a large professional services agreement between a hospital and a large medical group where the group is going to be providing hospital services, emergency care services, anesthesia services. It will apply there, too. So in in addition to thinking about the types of provisions that may need to be amended and incorporated in those agreements, it's also really important to identify vulnerabilities. For a medical group, for a hospital, for other healthcare organizations, even a health plan. You know, where are vulnerabilities? Where are our physicians or our employees unhappy? Have you know where there's been tension, where they might try to use this as an opportunity to break away. And how can we spend some time trying to address issues or sure things up to minimize that risk, again, if the rule is upheld. 

 

Daniel Marino:

Well. And I think to that point, I think it's also gonna affect some strategic planning. We recently had a did a strategic planning exercise with the hospital. And they, you know, again, we're are very interested in expanding their oncology services, and they want to invest in radiation oncology. And they're gonna form this relationship with, they want to form this relationship with this independent oncology group. And they wanna have some restrictions. And that, you know. And rightfully, so they're going to be investing a lot of money into their oncology services. So when we got down to the area of talking about critical success factors. Right? We always talk about those things that you know. What are the potentials that will limit the plan, limit the success limit the opportunities for you to achieve your goals. The not knowing of what's gonna happen with these non-competes is definitely one how to put in the right structure of language that protects the investment. 

I think is definitely folks that are thinking about. And frankly, it's a lot of money right? When you're thinking about thinking about investing in this particular or expanding the oncology service line. You have to have some assurance more than just a hope and a prayer that it's gonna work out. 

 

Hal Katz:

Completely, agree. 

 

Daniel Marino:

So, Hal, if any of our listeners are working through this, and I'm sure many of them are. You know you obviously have a lot of lot of knowledge, and you're speaking to a lot of folks across the country. Any advice you'd give them? Or how could some of our listeners contact you directly if they have some specific questions. 

 

Hal Katz:

Well, they can easily find me just by Googling my name and Hush Blackwell. They can reach out to me, either through Linkedin or through my email that they'll easily find on our website. We also have some great information on our website. Hush Blackwell, just Google, Hush Blackwell, FTC final rule, and you'll get the latest updates on the courts, decisions. 

 

Daniel Marino:

And Hal I I'd love, I know you're very busy, but I'll tell you when the ruling comes down. You know, maybe as we get closer to September, I'd love to have you back again, and just do an interpret again in in layman's terms what this means to our fellow colleagues in in the industry. I think it's going to continue to be complicated and not so much from the language standpoint, but really complicated in terms of how to incorporate this into our business structure. So love to have you back again, my friend. 

 

Hal Katz:

Dan, it would be my pleasure. I'm equally as fond of you. I think you're a wonderful resource both to me and to the clients I send your way. So keep up the good work. 

 

Daniel Marino:

Well, thanks again for that, Hal. I really appreciate it, and thank you to our listeners for tuning in. Until our next insight. I am Daniel Marino, bringing you 30 min of value to your day. Take care. 

 

About Value-Based Care Insights Podcast

Value-Based Care Insights is a podcast that explores how to optimize the performance of programs to meet the demands of an increasingly value-based care payment environment. Hosted by Daniel J. Marino, the VBCI podcast highlights recognized experts in the field and within Lumina Health Partners