Nonprofit hospitals aren't immune to FTC's noncompete ban, lawyers, Fitch analysts warn

The widespread ban on noncompete contracts finalized last week by the Federal Trade Commission (FTC) will throw a wrench into the staffing and finances of nonprofit hospitals, legal experts and Fitch Ratings analysts say.

Those changes are expected despite the agency’s limited jurisdiction over entities that aren’t corporations, experts say.

The rule, which forbids new noncompetes and has organizations stop enforcing existing noncompetes for all but senior executives, is slated to take effect 120 days after its April 30 publication in the Federal Register.

Although major groups like the U.S. Chamber of Commerce have already taken to the courts to challenge the FTC’s authority to issue the rule at large, there’s also some ambiguity as to how exactly the ban would impact healthcare should it survive litigation.

The FTC’s jurisdiction extends to corporations that are organized to carry out business for their own profit or for those of its members—a limitation that puts it at odds with an industry in which more than half of all acute care hospitals are classified as nonprofits. These organizations would ostensibly be the source of a substantial portion of the noncompete clauses that, per the American Medical Association, bind an estimated 35% to 45% of physicians.

During last week’s open hearing and vote on the final rule, Commissioner Rebecca Slaughter acknowledged that there are numerous healthcare workers with noncompetes “that our rule will struggle to reach.”

However, she also hinted that not all nonprofits would be free from the ban, a position that’s reflected in the text of the final rule. There, the agency wrote that ”tax-exempt status is certainly one factor to be considered” but doesn’t overrule “further inquiry into a [entity’s] operations and goals,” noted Brandon Zarsky, a partner in Frier Levitt’s Healthcare Practice Group.

“This would appear to indicate that, even if an entity is tax-exempt, it could still be subject to the Final Rule,” he told Fierce Healthcare.

Zarsky and Kay Klele, a partner in McCarter & English’s healthcare and business litigation practice, explained that the FTC would apply a two-part test to determine whether an entity is bound by the rule. To be exempt, the nonprofit would need to have an “adequate nexus between the organization’s activities and its alleged public purposes” and devote its net proceeds “to recognized public, rather than private, interests,” Zarsky said.

FTC said such analyses would be “fact sensitive” and therefore would be conducted by the commission on a case-by-case basis, Klele said.

Kate O’Connor, a partner in McDermott Will & Emery’s antitrust group who focuses on healthcare, noted that specific operations underneath a nonprofit health system could play into the calculus, “for example, potential joint ventures with for-profit entities, for-profit subsidiaries, affiliated health plans, Clinically Integrated Networks, and others.”

The lawyers also highlighted language in the final rule that outlines one such exception, in which a nonprofit hospital is contracted or otherwise works with a for-profit entity to deliver clinical services.

“Although some of these individuals may work at an excluded hospital,” the FTC wrote, “the final rule applies to their employer—the staffing agency or for-profit physician group—because it is covered by the final rule.”

Klele stressed that the commission’s framing of the above as just an “example” of a potential circumstance “leaves the door open” on the extent of FTC’s jurisdiction. Zarsky said the two-part test and staffing agency example together paint a high bar for the FTC to clear should it choose to apply the ban to a nonprofit hospital.

“In our estimation, this means that a non-profit hospital would have to engage in conduct (e.g., private inurement) that would jeopardize its non-profit status as a whole in order for the FTC’s argument (that the ban would apply to said entity) to have any merit, and this is not likely to be common or simple for the FTC to achieve,” Zarsky said.

Still, Klele said any nonprofit hospitals finding themselves on the bubble of the final rule’s enforcement parameters will likely check the winds before taking a chance on new noncompetes.

“What I suspect will happen is they’ll look at those arrangements that will get FTC’s two-part analysis, they’ll look at some of the precedent [where] the FTC applies that two-part analysis within the healthcare industry and they’ll determine what steps, if any, should be taken,” he said. “And really [it depends] on the outcome of the court decision, which is likely to be ruled on before the rule becomes in effect.”

Higher wages, "operating volatility" risks greater for small, rural nonprofits

The practical effect of the FTC’s ban is still up in the air, but is certain to complicate the nonprofit hospital sector’s “already challenged labor picture,” Fitch analysts wrote in a Thursday report.

The nonprofit hospital sector was “only recently” clamping down on labor costs that spiked during the pandemic, per the report. Nonprofit hospital medians among entities with fiscal years ending halfway through 2023 showed a slight decrease in personnel costs as related to total operating revenues (55.4% versus 55.7% the year prior). Nonprofit hospital payrolls have also risen for 27 consecutive months and as of March 2024 are 5.3% higher than pre-pandemic.

On the other hand, job openings remain relatively high at 7.8% as of February 2024, as opposed to the 4.2% average of the 2010s. Hospitals are also staring down a handful of other staffing headwinds that could bump their spending in coming years, such as laws increasing California’s minimum wage and other states’ minimum nurse staffing ratio requirements.

Should it survive the courts, FTC’s rule could end up benefiting nonprofit hospitals by encouraging mobility within the labor and physician recruiting pool, Fitch analysts wrote.

However, in line with the FTC’s own analyses promising unsuppressed wages through greater competition, Fitch wrote that the final rule could lead to higher personnel spending and “potentially introduce operating volatility if there were increased healthcare staff turnover” among nonprofits.

“This may be especially true for smaller or rural [nonprofit] hospitals, which may struggle to keep staffing at adequate service levels without ramping up costs,” according to the report.

Fitch wrote that it isn’t expecting any immediate impact on nonprofit hospitals’ credit ratings as the full effects of the ban “would not be felt until 2025” if upheld in court.

Beyond the factors listed in the agency’s report, the FTC also wrote in its rule that nonprofits outside its jurisdiction that continue deploying noncompetes “may be at a self-inflicted disadvantage in their ability to recruit workers, even if they derive some short-term benefit from trapping current workers in their employment.” The FTC also cited data that over 12% of nonprofit hospitals are in states that already have laws banning noncompetes for all employers.

The agency’s success in fully implementing the rule is by no means guaranteed. Zarksy noted that “many of the arguments being made by [litigating groups] are persuasive, so it may very well be that enforcement of the rule is stayed pending the outcome of the cases, and potentially struck down in whole or in part.”

Klele was less likely to read the tea leaves, but pointed to the stay requested by the Chamber of Commerce and others that would preserve the status quo while the final rule gets put through its paces over the course of a year or more. The decision on whether to issue the stay would come before the 120-day implementation date.

Should the ban survive, though, Klele said that the FTC would need to “clarify” some of the ambiguous language in the final rule with clearer definitions for employers. Such amendments likely come down the pike as guidance or, more likely, through the rulemaking process to preserve the FTC’s enforcement capability, he said.