Questions Abound in the Healthcare Industry after Federal Trade Commission Bans Non-Competes

Eric Plinke Kelly Leahy Christopher B. and Bryan Cockroft

On April 23, 2024, the Federal Trade Commission (“FTC”) voted to issue a final rule banning non-compete provisions in most industries in the United States (“Final Rule”). Dinsmore attorneys were quick to publish the details and impact of the Final Rule, which is available here. This supplement focuses on the impact of the Final Rule on the healthcare industry.[1]

The FTC acknowledges in the Final Rule that the impact on non-profits will be limited due to the scope of the FTC’s jurisdiction.[2] In the same breath, the FTC indicated its intent to exert its jurisdiction to the maximum extent possible by evaluating non-profit entities for compliance with Internal Revenue Service (“IRS”) standards for tax-exempt organizations and FTC rules governing non-profit entities. Where non-profit entities are in breach of these rules, the FTC considers the Final Rule applicable to non-compete provisions utilized by such entities. Given the large number of non-profits operating in the healthcare industry, these comments in the Final Rule may provide more questions than answers.

The FTC continued in noting its prior actions and jurisdiction in evaluating whether an entity actually satisfies non-profit status.[3] The FTC explained that it will apply a two-part test to make such determinations:

1) whether there is an adequate nexus between an organization’s activities and its alleged public purposes (e.g., whether the corporation is organized for, and actually engaged in, business for only charitable purposes) and,

2) whether the net proceeds are properly devoted to recognized public, rather than private, interests (e.g., whether either the corporation or its members derive a profit).[4]

The questions raised by the Final Rule include confusion about how it will apply to non-profit entities that have a financial interest in for-profit entities, such as commonly used joint venture arrangements. For example, if a non-profit hospital holds an interest in a for-profit ambulatory surgery center, physician practice or other provider entity, will the Final Rule apply against the non-profit hospital’s activities, either in the for-profit entity or flowing up to the hospital’s own provider contracts? Given the FTC’s dual goals of eliminating the alleged harm caused by non-compete provisions (a) on competitive conditions in labor markets, and (b) in product and service markets, it appears the FTC intends to apply the Final Rule to the maximum extent, meaning non-profit entities may be impacted by their interest in for-profit ventures.[5]

Questions have also been raised about whether the FTC has the legal authority to ban non-compete provisions. The American Hospital Association, for one, believes the ban will be short-lived as court challenges come forward against the FTC’s jurisdiction involving non-profit entities.

The Final Rule presents a major change to healthcare industry hiring efforts, investment in personnel, hospital-provider alignment and transactional analysis. Dinsmore attorneys can help entities navigate these changes and advise on the Final Rule’s impact on the healthcare industry.

[1] Dinsmore previously reported on the impact of the FTC’s proposed rule in 2023, available here.

[2] Final Rule at 15; 15 U.S.C. 44.

[3] For example, In the Matter of the Am. Med. Assoc., 94 F.T.C. 701, 1979 WL 199033 (FTC Oct. 12, 1979), available here.

[4] In reference to the influence of the IRS, the Final Rule explained “if the IRS concludes that an entity does not qualify for tax-exempt status, such a finding would be meaningful to the [FTC]’s analysis of whether the same entity is a corporation under the FTC Act.

[5] For example of FTC exercising jurisdiction involving non-profits see In the Matter of Preferred Health Services Inc. FTC? No. 41-0099, 2005 WL 593181, at 1 (March 2, 2005).