Docs Suffer From Noncompete Clauses: Any Hope for Change?

Shelly M. Reese

April 07, 2021

When Traci Purath, MD, a Wisconsin neurologist, decided to leave the health system where she worked and go into private practice in 2012, she faced a major stumbling block: the noncompete clause in her employment agreement precluded her practicing within a 15-mile radius of either of the health system's facilities for at least 18 months.

Purath's lawyer said fighting the contract would cost about $50,000, and she wouldn't be able to practice medicine until the case was settled. Undaunted, Purath opened a clinic in a small town about 30 miles away.

But because her noncompete agreement restricted her ability to advertise, her patients didn't know what had become of her. When they called her former employer, they were sometimes told that she had moved out of state or was no longer practicing.

Purath ultimately landed on her feet — thanks to Google, many of her patients eventually found her, and when her noncompete clause expired, she moved her practice closer to home.

Her struggle is far from unique. In a recent Medscape poll of 558 physicians, more than 9 out of 10 respondents said that they were either currently bound by a noncompete clause or that they had been bound by one in the past that had forced them to temporarily stop working, commute long distances, move to a different area, or switch fields.

Some healthcare executives debate whether noncompete agreements are good or bad. Despite the blistering anecdotes, there are some defenders.

The Good and the Bad

Over the last few decades, noncompete clauses have become ubiquitous. Often used by employers to protect intellectual property and proprietary information, consolidation in the healthcare industry has made them a common element in physician employment contracts. Having invested heavily in acquiring physicians' practices and in recruiting and training physicians, hospitals and health systems use them to prevent doctors from leaving after a short time and setting up a competing clinic down the street.

Getting out of a noncompete agreement can be difficult. Almost a quarter (23%) of survey respondents said that they were unsuccessful when they tried to negotiate their way out of a noncompete agreement. Another 30% did not even try.

As a result, many, such as Purath, are forced to make accommodations to abide by the terms of the contract. Forty-two percent of physicians who left a job while under the terms of a noncompete agreement found work similar to their previous work outside of the noncompete area. Six percent found work of a different type, and 4% did not work during the time in which the noncompete agreement was active.

"In my market, noncompete clauses are still very much respected," writes a family physician in Indiana who commutes 45 minutes daily to comply with the 25-mile noncompete radius stipulated in her previous employer's contract.

Stringent as that may sound, it's less restrictive than the clause in her current employer's contract, which prohibits her from working in any county in which the health system currently has a practice. The restriction would necessitate moving at least 2 hours away if she changed jobs again. "This essentially makes me feel stuck, at least until my children are out of school," she laments.

It's not just physicians trying to change jobs who are affected. Last year, the Federal Trade Commission (FTC) invited the public to weigh in on the subject of noncompetes. One Pennsylvania physician used the opportunity to describe how healthcare corporations use the agreements and bait-and-switch tactics to "trap" doctors.

"The healthcare corporation offers a job, and then adds expectations and removes resources over time," she says. Forcing physicians to remain in positions contributes to low morale and burnout.

A Philadelphia physician who submitted anonymous comments to the FTC said that noncompete clauses stifle physicians' ability to speak out against their employers. "I am actually too afraid to post my name, lest my statement of opposition to this practice results in difficulties for me at the workplace," the physician wrote.

Despite the grim stories, there is a positive and often overlooked upside to physician noncompetes, says Kurt Lavetti, PhD, a labor economist at the Ohio State University.

"The anecdotes you hear about noncompete agreements are almost universally negative," he says, but they're also misleading. That's because until the agreements become a negative constraint, most doctors view them as neutral.

Lavetti and his fellow researchers surveyed 2000 primary care physicians. Their research shows that employed physicians with noncompete agreements are more likely to benefit from inter-firm referrals and to have a more lucrative patient mix. Employed doctors with noncompetes treat substantially more privately insured and Medicare patients (70.4%) compared with physicians who do not have noncompetes (55.2%). As a result, they generate 17% more revenue per hour.

Their contracts typically contain stronger productivity-based incentives that could counteract the potential decline in physicians' bargaining power. Over time, those incentives translate to significantly higher compensation: After 14 years, physicians with noncompetes earn nearly 20% more than those without, Lavetti says.

Not surprisingly, many within the medical community dispute the supposed "benefits" of having a noncompete agreement.

James Madara, MD, CEO of the American Medical Association, wrote a letter in February 2020 in which he urged the FTC to refrain from taking action on the topic: "physicians who are employers and owners in physician practices or leaders in integrated delivery systems may favor the use of reasonable noncompetes, while physicians who are employees of practices, hospitals, health systems, or other organizations may have concerns about being subject to overly restrictive noncompetes that limit employment opportunities and may impact patient access to care."

But what constitutes "reasonable" is open to debate. David A. Farcy, MD, president of the American Academy of Emergency Medicine, wrote a letter urging the FTC to prohibit noncompetes, which he called "anti-competitive and abusive": "No hospital or contract management group has ever invested money to build the patient base of an individual emergency physician."

Do noncompetes harm patients? Many argue that noncompete agreements disrupt continuity of care. Conversely, Lavetti's research suggests that employment tenure is longer for physicians with noncompetes. Because their mobility is restricted and they are more likely to practice in the same place for a long period, their noncompete agreements may in fact be promoting continuity of care.

"We don't know," Lavetti says. "The missing piece here is what happens to patients."

The Debate Continues

In recent years, that missing piece has attracted the attention of governing bodies. Historically, states have used legislation and case law to frame the rules governing noncompetes. The result is a wild and inconsistent patchwork, says David Clark, an employment attorney with Epstein Becker Green in New York City. Some states, such as California and North Dakota, ban them outright. Others allow them, and a growing number have implemented carve-out provisions that specifically apply to physicians.

"There is one school of thought that says physicians are considered to be generally sophisticated people: they know what they are getting into when they sign a contract, and they have negotiating power," Clark says. "But there is also the consideration ― and in the medical context, I think it's the paramount consideration ― that there should be patient choice and that patients should be able to see the doctor that they want."

In light of the potential impact of noncompete agreements on patients, Colorado, Delaware, Massachusetts, New Hampshire, and Rhode Island prohibit enforcement of physician noncompetes, as does New Mexico, although its law includes a few twists. Connecticut, Tennessee, and Texas have cobbled together statutes that limit physician noncompete agreements. In July, Indiana likewise passed a law restricting them.

With such a hodgepodge of laws, it's no surprise that physicians are confused about the rules they play by. Nearly 1 out of 5 doctors responding to the Medscape poll said they were not sure whether or not the clauses in their contracts are enforceable, and only about half knew that the enforceability of noncompete clauses depends on the state in which they practice.

Where the laws go from here may end up having less to do with physicians and patients than with low-wage workers. In 2016, the fast-food franchise Jimmy John's came under fire with several states' attorneys general for including noncompete clauses in the employment contracts of its frontline, sandwich-making employees that would preclude them from taking jobs with competitors.

That's the type of overreach that has attracted federal attention. Last year, the FTC invited public comments on the issue of noncompete agreements, and President Biden has vowed to eliminate noncompete clauses "that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers."

For Purath, who is busy running her headache and neurology clinic in Greenfield, Wisconsin, it's all water under the bridge. Still, she calls the whole situation "sad."

"There is room for everybody. If you do a good job and do right for you patients, you shouldn't have to worry about this. Patients should have a choice," she says.

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