Will an Executive Order Limit Physician Non-compete Clauses?

On July 9, 2021, President Joe Biden signed the Executive Order (EO) on Promoting Competition in the American Economy.  

The EO would impact the healthcare industry by lowering the cost of prescription drugs and hearing aids, revising hospital merger rules, and standardizing health insurance. The EO also seeks to limit the use of non-compete clauses, which are common in physician employment agreements.

Approximately 90% or more of the physician employment agreements that Merritt Hawkins’ reviews include a non-compete clause. Virtually all hospitals and most medical groups include them in their contracts, though there are a few private practice groups that do not. 

The standard term of physician non-compete agreements is one to two years, during which time the physician cannot open or join a competing practice within a stipulated geographic area. The geographical restriction usually depends on the density of the service population.  In high-density metro areas it is generally less than eight miles, in mid-sized cities it is usually less than 15 miles, and in remote and/or rural communities it is up to 50 miles.

Physician employment contracts typically have buy-out language that gives the employee a monetary sum that could be paid the employer to void the covenant. Agreements usually also have a paragraph outlining that the covenant not to compete has been discussed with the employee and the parties confirm the reasonability of the non-compete covenants. This is done in an attempt to convince courts that discussions were had and that the employee agreed to the non-compete covenant.

Physicians generally accept non-compete clauses provided that the term and the geographic limitations are reasonable. Some physicians negotiate to reduce the term, the geographic restriction or both. 

How the EO will be accomplished is not yet clear. In the Order, President Biden encourages the Federal Trade Commission (FTC) to adopt rules which would “curtail the unfair use of non-compete clauses and other clauses and agreements that may unfairly limit worker mobility.” The language of the EO is somewhat general, giving the FTC latitude in how the EO will be carried out.

At this point, it appears the FTC is unlikely to impose a total ban on non-competes and may focus more on limiting non-competes in contracts applying to lower-wage workers or those in rural areas where skilled workers are scarce. At least in the near-term, and probably longer, non-compete clauses will likely remain a fixture in most physician employment contracts. 

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