What the FTC’s Non-Compete Ruling Means for Physicians and Private Equity

Overview of the healthcare worker noncompete ruling

In April 2024, the Federal Trade Commission (“FTC”) issued a rule to ban non-competes within the United States for all employees outside of those senior executives who already signed existing non-competes. The FTC noted the goal was to assist with creating new businesses (projected ~8,500 per year) and drive innovation with an increase of 17,000 to 29,000 more patents each year for the next ten years. This will have a significant impact on the American workforce as one in five workers (~30 million) are subject to non-competes. While a Federal Court has stopped the enforcement of the noncompete ban, the FTC is considering an appeal, and it will be beneficial to plan for any outcome.

Healthcare sector impact

Non-compete agreements have been used in the healthcare sector to assist with retention of the labor force and thus improve the overall experience for patient care. This has allowed patients to transition to a new provider due to the termination notice period within employment agreements. The impact of the ban is that healthcare workers (both physicians and nurses) will be able to transition between healthcare practices more easily, which could lead to an increase in labor costs as the practices hope to retain these employees. This potential consequence paired with high labor costs in specialty practice areas could spell disaster for certain healthcare providers.

There are ways to combat this increase through seeking longer notice periods for termination as the FTC commented that fixed-duration employment agreements would be available for physicians and employers. Additionally, the FTC noted that companies use non-solicitation agreements and non-disclosure agreements to assist with the protection of company knowledge.

Private equity impact

As private equity continues to back healthcare groups, non-competes are an essential aspect of transactions as it is common practice for physicians to receive profits interests as a form of compensation in private equity transactions. The FTC noted that the ban on non-competes would apply no matter the intent of the profits interest. With that said as rollover equity (previous physician or owner’s equity) continues to be a new normal practice for private equity investments in healthcare companies, it is important to note that the FTC did not explicitly ban non-competes related to rollover equity if they relate to purchase and sale rather than be considered compensation.

The overall impact of a noncompete ban is that there would be less certainty surrounding the labor force that private equity firms are acquiring; thus, leading to increased costs to retain talent (in particular specialty doctors and nurses) but will also most likely lead to a decrease in valuations due to the riskiness of losing labor force. While the ban was overturned by a Texas federal court judge on August 20, 2024, there is some thought the FTC will appeal the decision to the Supreme Court. While no one knows what the outcome will be, it is important to stay attune to the decisions and ultimate impact of non-competes on the healthcare profession.

The Keiter Healthcare industry team closely monitors new and changing regulations that impact healthcare practices, including physician owned practices. Questions on this topic or other healthcare regulations? Contact your Keiter Opportunity Advisor.

Source:
FTC.gov