Physician Noncompete Agreements

The Federal Trade Commission dropped a bombshell last week, a new rule that bans most noncompete clauses in employee contracts. One of the many trade groups in opposition is the American Hospital Association, who is particularly upset about losing noncompete clauses in physician contracts.

Now, employee noncompetes have long been controversial. The strongest justification for them is that they keep executives and salespeople from taking business secrets and clients with them to join direct competitors. For most employees, on the other hand, noncompetes are simply a power play intended to lock workers into their jobs on unequal terms. Which is why there was such an uproar when the Jimmy John’s fast food chain began requiring frontline employees to sign noncompetes. (Jimmy John’s backed down in the face of state lawsuits in 2016.)

Most states and countries that allow noncompetes require them to be narrow and “reasonable” such that they protect the intellectual property of the company without unfairly restricting an employee's ability to work in their field and region.

Now, even with sales people and executives, noncompetes are not actually necessary to protect a company’s interests. There are other legal mechanisms to protect trade secrets and client relationships. Plus, job mobility enhances innovation. Silicon Valley’s dynamic flavour of capitalism owes some of its success to the fact that California has banned noncompetes since 1872.

In my own career I’ve spent the past two decades working at a large medical testing company that thrives in the absence of noncompetes. I’ve never signed one, nor been asked to sign one, even during the years when I was an executive. I’ve also see sales people over the years jump ship to competitors, as well as from competitors to our company. Interestingly, this company isn’t even located in a state that bans noncompetes. The reason it doesn’t use them is attributable to its academic origin within a university, where faculty mobility is a core value.

So now let’s go back to the issue of noncompetes for physicians in clinical practice. This 2018 study found that 45% of U.S. physicians were bound by noncompete agreements. From an ethical perspective, these contracts are extremely problematic. One reason is that they prevent patients from continuing to see their physician if that physician ever leaves the practice. There’s a similar concern in the field of law. The American Bar Association forbids non-competes for attorneys as unethical, the rationale being that firms should not be allowed to interfere with the sacred attorney-client relationship. As a result, attorneys leave firms all the time and take their clients with them. Has that resulted in the demise of the legal profession? Obviously not.

A second ethical problem is that by locking physicians into their employment situations, noncompetes interfere with professional independence. A physician who’s asked to practice in ways that they consider unsafe, such having unrealistic quotas on the number of patients seen per hour, is prevented from speaking up, given the risk of retaliation, when they can’t easily leave to start or join a new practice in the area.

Sadly, the American Medical Association has less backbone than the ABA. AMA policy was updated in 2023 to “support” noncompete bans in “most” settings. But AMA fell short of calling them categorically unethical, saying that owners of private practices may need noncompetes in order to compete with larger organisations who use them.

There’s also an interesting healthcare industry-specific twist to the FTC’s announcement. Many (perhaps most) of the hospitals and health systems that impose noncompete clauses on physicians are nonprofit, and apparently the FTC only has authority over profit-making entities. But the specifics of that are murky, with FTC saying that non-profit hospitals who behave like for-profits would still be subject to the rule.

Bottom Line: The Hippocratic Capitalism assessment

• From a healthy markets perspective, restraints on competition are a bad thing. They reduce innovation, concentrate power, and may exacerbate labor shortages.
• From a humanist ethics perspective, restraints on labor mobility violate worker dignity, increase un- and under-employment, and reduce organisational accountability.
• From a medical ethics perspective, the doctor-patient relationship must take priority over the financial interests of corporations.

So it’s pretty clear that physician noncompetes are a violation of Hippocratic capitalism. Hospitals that genuinely care about patients, communities, and the practice of medicine should voluntarily give up the use of noncompete agreements immediately rather than fighting this out with FTC. As for the AHA, I think this would be a great time for them to take a deep introspective look at their core values and priorities.