Tuesday, August 15, 2023

Could the FTC's proposed ban on noncompete clauses curb private equity incursions in healthcare?

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“Then,” I cried, half desperate, “grant me at least a new servitude!”

The corruption of U.S. healthcare by the profit motive reaches a kind of apotheosis in the incursions of private equity into industry subsectors (hospice, nursing homes) and targeted physician practice specialties — e.g., the PEAR specialties (pathology, emergency, anesthesiology, radiology), dermatology, ophthalmology gastroenterology, orthopedics, and others. It’s common PE practice to load an acquisition with debt and then laser-focus on cutting costs and maximizing revenue.

In Private Equity and the Corporatization of Health Care, a paper posted in March 2023 (with a 2024 publication date in the Stanford Law Review), Erin C. Fuse Brown and Mark A. Hall acknowledge that “it remains unclear whether private equity investment is fundamentally more threatening to health policy than other forms of acquisition and financial investment,” but at the same time assert:

Even if PE investment in health care poses risks that are not unique to PE, it appears to heighten those risks by being more adept or ruthless at identifying profit opportunities and economies of scale among previously fragmented providers, consolidating physician specialty markets and raising costs as they go.’

Fuse Brown and Hall offer a detailed assessment of several legal and regulatory tools available to curb a “corporatization” of healthcare that is not limited to but epitomized by private equity-owned practices and healthcare institutions. They summarize exploitive business strategies that raise “a core set of public policy concerns” including

consolidation and attendant price increases; overutilization, overbilling, and aggressive coding practices; shirking unprofitable services or patients; threats to physicians’ clinical decisions and independence; and compromising the quality of patient care. In human terms, these threats manifest as unmanageable medical bills and harsh collection practices, clinicians experiencing moral distress and burnout under pressure to put profits over patients, and, in extreme cases, alarming declines in the quality of patient care.

PE incursions into targeted practice specialties in targeted locales is galloping apace. According to a recent analysis by scholars (Richard M. Scheffler et al.) at the University of California’s Petris Center and the Washington Center for Equitable Growth, published by the American Antitrust Institute, PE deals for physician practices have increased from 75 in 2012 to 484 in 2021. In more than a quarter of metropolitan statistical areas (MSAs), a PE firm has at least 30% market share in a targeted practice area. In several of the specialties studied, the study found statistically significant price increases in MSAs where a PE firm had achieved at least 30% market share.

Does a rusting regulatory arsenal include a sleeper nuke?

To curb these trends, Fuse Brown and Hall call on federal and state regulators to “dust off,” update, and aggressively deploy legal tools including antitrust enforcement, fraud and abuse enforcement, and state laws restricting the corporate practice of medicine and physician employment. Key recommendations include to lower the dollar threshold at which health industry acquisitions must be reported to regulators; increase antitrust scrutiny of serial small acquisitions (roll-ups) that enable practice area dominance in a given region; apply the False Claims Act more aggressively, e.g. by holding PE firms liable for their acquisitions’ billing practices; enforce and update little-used and often somewhat archaic state laws purporting to ban the “corporate practice of medicine,” for example by going after widely-used Management Service Organizations (MSOs) if they are effectively controlling how the physicians practices they serve actually practice medicine; and enforce state “fee-splitting” laws that purportedly prevent unlicensed corporations (e.g., MSOs) from profiting from physicians’ professional income.

While Fuse Brown and Hall gamely detail how these legal tools might be deployed and strengthened — by vigorous use, new administrative rule-making, and new legislation — they also imply that regulators are generally outgunned and engaged in whack-a-mole against corporate juggernauts focused on maximizing revenue. Given that pessimistic undertone, I was intrigued by their rather brief treatment of one more regulatory tool: limitation of noncompete clauses for physicians. Noting the FTC’s proposed rule banning almost all noncompete clauses across all industries (issued on January 5 this year), the authors rather laconically report:

analysts predict that the FTC’s ban on noncompetes could cause a dramatic collapse of investment in physician practices if investors could not prevent the core value of the investment (the physicians) from walking away. [256]

Wait, what? Antitrust and fraud enforcement are glacial and under-resourced; CPOM laws are archaic and loophole-ridden — but pulling the thread that binds physicians to their employers could unravel the whole vast profit-mining enterprise?

The sources that Fuse Brown and Hall cite for the potential “dramatic collapse” claim include corporate attorneys and — most directly — Blade Madden, author of the Hospitalogy blog at WorkWeek. Madden notes (scroll to the third story here) that if the rule is finalized as written, nonprofit hospital systems would get a major leg up because they are not subject to FTC regulation (though some commenters on the proposed rule have suggested that the FTC could team with other agencies to reach nonprofits). That limitation is also stressed by many physician trade groups and individual physicians who submitted comments in response to the proposed rule to the FTC. As to private equity, however, Madden speculates that under a noncompete ban:

Physician practice M&A would fall apart. Would PE-backed groups crumble? Physicians would have no obligation to stay and constantly tell their financial backers, “we can leave whenever we want” = this creates an incredibly risky asset on the investment side. Why provide capital for a business whose core asset could leave the next day? That dynamic leads me to believe that in a future with no non-competes, more organizations might become physician-led, or investment would change drastically…

In all likelihood, given the level of uncertainty and the need for some level of retention and stickiness in the relationship between employers and employees, the non-compete will narrow in scope but stay in the picture.

Corporate medicine in a post-noncompete world

Would a near-full ban on noncompetes lead to a collapse in physician practice M&A? Katherine Gudiksen, executive editor for The Source on Healthcare Price and Competition at UC San Francisco, points out that California has long had a full ban on noncompete clauses, as well as a strong law banning the Corporate Practice of Medicine. But the state is not an outlier with respect to the level of private equity investment in physician practices — in part because many major private equity firms are located in the state.

As to the larger question of corporate owners creating intolerable working conditions for healthcare workers generally, Gudiksen says that while noncompetes are an important factor, “consolidation is the bigger issue.” If you work in a region where one hospital group is dominant (e.g., as a hospital nurse or physician in a practice area that works only in hospitals), “it doesn’t matter if you can leave.” (I would add, though, that freedom from noncompetes is salient in concentrated markets with two or three major hospital groups.) Big picture: constraint of noncompetes is “necessary but not sufficient” to curb corporate degradation of working conditions in healthcare.

Gudiksen stresses that physicians are only one type of healthcare employee (albeit the most powerful) constrained by noncompetes. Nurses, nurses’ aides, and other workers in hospitals, nursing homes, physician practices are also bound by noncompetes, and equally if not more stressed, by working conditions imposed by corporate owners.

Loren Adler, associate director at the Brookings Schaeffer Initiative on Health Policy, says that if the proposed rule does in fact go through in a form that bans most noncompete clauses for physicians, private equity-owned practices would likely find other contractual means to retain physicians — for example, by offering a wage increase if the physicians stays in place for a certain amount of time. Adler suggests that while such positive incentives might be effective for retention, they might disincentivize imposing policies that make working conditions deteriorate.

As Scheffler et al. note, while making a case for requiring physician groups to report on key quality measures, “PE firms often respond better to financial incentives than other owners, so better aligning these incentives has the potential to make PE ownership a driver of increased healthcare quality.” Similarly, if the restrictive noncompete clauses that are the current norm were replaced by positive incentives to stay with a current employer — making departure somewhat expensive but not ruinous — PE firms might have a stake in creating attractive working conditions for their employees.

A major question about the FTC proposed rule

Scholars who have studied the extent and effects of private equity’s incursions into healthcare markets don’t seem particularly focused on the FTC’s proposed noncompete rule. The apparent lack of interest may stem from skepticism about the rule being finalized and withstanding court scrutiny, given the current conservative cast of the Supreme Court and the federal judiciary generally.

The FTC has historically pursued its mandate (in Section 5 of the FTC Act) to prevent “unfair methods of competition” through adjudication of abuses rather than through rulemaking. Section 6 (g) of the FTC Act does empower the FTC to “make rules and regulations” with respect to “unfair methods of competition in or affecting commerce.” But that terse authorization could fall afoul, as a Congressional Research Service report rather delicately suggests, of either the nondelegation doctrine, holding that legislators can’t essentially outsource legislation to government agencies with vague directives, or the major questions doctrine recently promulgated by the Supreme Court’s conservative majority, which cautions agencies against issuing rules of “vast economic and political significance” not clearly authorized by statute.

Less delicately, in a dissent issued in tandem with the proposed rule on January 5, then-FTC Commissioner Christine Wilson laid out the legal case against the rule’s constitutionality, including evidence of alleged Congressional intent not to empower the FTC to issues rules governing competition. Wilson resigned from the FTC in March 2023.

In short, the FTC’s proposed noncompete ban could be a ripe sacrifice for the many federal judges (including six Supreme Court justices) who don’t look kindly on federal agencies asserting sweeping new regulatory authority based on new interpretations of terse provisions in decades-old statutes.

Conversely, a trio of law professors, Bill Araiza, Jeffrey Lubbers and Peter Shane, argue in a comment on the proposed rule that regulating unfair methods of competition (UMC) is squarely within the FTC's writ; that the FTC has ruled on many occasions that noncompete clauses constitute UMC; and that "canonical Supreme Court precedent" holds that "agencies may freely choose between rulemaking and adjudication" for matters within their purview. Araiza, Lubbers and Shane argue that the proposed rule does not run afoul of the nondelegation doctrine because the FTC Act's mandate to regulate UMC meets the "intelligible principle" test, setting boundaries to the authority delegated. They assert that the "major questions" doctrine does not apply, because that doctrine has been applied only when an agency brings new matters under its purview ( (e.g., classifying greenhouse gasses as "pollutants") , not when it undertakes "a new approach to a problem long within its substantive purview." It seems that most observers, however, expect that the right-tilting lower federal courts where plaintiffs will doubtless file their suits, and ultimately the conservative Supreme Court majority, will assert their characteristic hostility to a federal agency launching a highly consequential “new approach” to a problem it has long dealt with by other means.

Doctors flood the comment line

On the other hand, the wealthy “dear friends” with whom the oligarchic wing of the Supreme Court apparently spends its extensive leisure time may include the odd physician. Leaving the justices’ personal relationships aside, physicians collectively have wielded considerable clout in U.S. policymaking (see: national health insurance: lack thereof in the United States). And physicians — although they constitute the largest occupational group in the nation’s top 1% of earners — are not happy with current work conditions. To judge from the more than 5,660 comments with which physicians and physician practice trade groups have flooded the FTC (more than a quarter of the 21,200 comments submitted in response to the proposed noncompete ban), doctors broadly consider themselves indentured servants — mostly to hospital systems, but also to private equity-owned and other corporate practice groups. In a chorus of thousands, their submitted comments all but unanimously (excepting a few corporate-own practices) urge the FTC to follow through with an end to noncompete agreements in doctors’ employment contracts.

The proposed rule specifically addresses the impact of noncompete agreements on physicians, one of four sample employment markets the rule spotlights (see pp. 3523-24 here). While the proposed rule’s analysis of the effects of noncompetes on physicians focuses on estimates of suppressed wages, physicians’ comments focus more on the frequent impossibility of leaving a job with intolerable work conditions without moving out of state or ceasing practice for 1-3 years. The dominant claims are that noncompete clauses contribute to physician burnout, restrict supply of a given practice within a given area, degrade the quality of care in various ways, and cause moral harm by forcing physicians to compromise their commitment to patients’ welfare . (In February, Luke Goldstein at The American Prospect relayed accounts of physicians who were prevented by noncompetes from working at overburdened hospitals other than their employer or ex-employer at the height of the pandemic.)

Noncompetes, writes one physician anonymously, “force physicians to stay in toxic work environments for the sake of family or their community, and this leads to burnout and ultimately leaving the workforce. Physicians should have the freedom to leave an unsustainable work environment. Noncompete clauses “give the freedom for employers to focus less on employee retention and more on profits, driving increased burnout and unfair labor environments.” Another physician writes that noncompetes “lock young physicians into practices/hospitals whether or not these institutions continue to align with a physician's goals. They give institutions free rein to abuse physicians.” “I do not have a non-compete now,” a third doctor writes, “but I have signed contracts with a non-compete before as a physician and had to move when administration abruptly changed the terms of compensation and the way the practice was run. I was rapidly burning out after the changes were implemented, and it was hurting my health. I knew that if I kept going, I was going to hurt my patients by not delivering the best possible care that I knew I could provide. I know what it feels like to have my autonomy suddenly challenged and have nowhere to go without having to move from the area entirely. But that was exactly what I had to do for my sanity - I moved.”

A pediatric eye surgeon who reports that a noncompete banned her from practicing in half of her state of residence should she leave her job, avers, “The physician non-compete causes BURNOUT TO OUR PHYSICIANS by forcing them to remain in jobs that leave them otherwise unfulfilled and unwell. The physician non-complete is likely leading to a higher physician intent to leave the field of medicine all together, in a country in which is already seeing an ever-increasing physician shortage.”

Focus on moral harm

The American Academy of Emergency Physicians broadens the allegations of social harm — and moral harm for doctors:

the combination of noncompete clauses with a lack of due process, is a powerful malignant force serving to intimidate physicians against speaking out for patient rights. The recent COVID pandemic has provided multiple examples of physicians being fired, removed from the schedule, or otherwise relegated for speaking out about patient safety issues. The goal of noncompete clauses is to intimidate the emergency physician into unquestioning servitude to business interests. Given physicians’ ethical obligation to patients, many continue to speak out for patient safety; however, knowing that they can be fired at will and then forced to relocate their family to another city or state can have a chilling effect on physicians advocacy for patients.

The American College of Cardiology also charges that noncompete agreements enable the degradation of medical practice, claiming, “It is much easier to enforce clinically unattractive utilization policies and fail to fund or develop clinical programs when physicians have strong non-compete clauses.”

As many doctors testify, they are subject to noncompetes even when the employer terminates them, e.g., for lack of work during the pandemic.

Who pays physicians, and who can regulate which employers?

While the FTC cites research from circa 2018 finding that 45% of physicians are subject to noncompete agreements, many physician groups suggest that those numbers are out of date, as the percentage of physicians who own their own practices wholly or partly continues to shrink. A Michigan branch of the American Academy of Family physicians reports, “The proportion of family physicians who are employed continues to grow each year, with 73% of all AAFP members and 91% of new physicians…working as employees” — up from 59% in 2011. The American College of Cardiology claims that while 90% of cardiologists were in private practice in 2008, by 2018 84% were employees; 68% were subject to restrictive covenants; and only 10% reported the ability to negotiate any change in those covenants. Overall, according to Avalere Health, 74% of physicians were employed by hospitals, health systems or corporate entities in January 2022, up from 62% just three years prior.

Since hospitals and hospital systems are the largest employers of doctors, many commenters criticize the proposed rule’s apparent inability to reach “nonprofit” employers - i.e., the majority of hospitals. Many worry that large, powerful nonprofit systems will gain a competitive advantage. The American Osteopathic Association asks the FTC to find a regulatory path to avoid this large hole in the proposed rule: “We strongly urge the FTC to identify a pathway, including through potential collaboration with other federal agencies, to ensure that nonprofit entities are also prohibited from misusing non-compete clauses.”

At least one other federal government entity has recently concerned itself with noncompete agreements. This past May, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo declared in a memo to agency lawyers that most noncompete agreements infringe on employees’ right to organize, interfering with Section 7 of the National Labor Relations Act. Abruzzo cites the threat of being cut off from finding new employment if efforts at collective action cost employees their jobs. Physician efforts to unionize are in fact increasing, albeit mainly among interns, for whom union membership has surged in the past two years. The Prospect’s Harold Meyerson, delving into recent unionization efforts, cites a February 2023 poll in which almost two thirds of 1600 responding practicing physicians said they were willing to join a union. A finding that noncompete clauses violate the NLRA is germane to physicians’ working conditions — and more germane to more heavily unionized healthcare workers, including nurses and nurses’ aides.

Knock-on effects of a long legal battle

Whether or not some version of the FTC’s proposed rule is finalized and upheld by the courts, the spotlight the proposed rule turns on the effects of noncompetes, in healthcare as elsewhere, is likely to shine for several years and could lead to significant changes. By way of analogy, while the Supreme Court in 1972 rejected baseball player Curt Flood’s challenge to Major League Baseball’s notorious reserve clause, enabled by MLB’s antitrust exemption, the case highlighted the effective indentured servitude of professional athletes and helped pave the way for a negotiated modification of the reserve clause in 1976, allowing players to become free agents after six years with the team with which their major league career started. Over time, that negotiated adjustment utterly transformed the player-owner relationship.

The FTC’s proposed rule may stimulate states to increase restrictions on noncompetes, generally or for physicians and/or other healthcare workers specifically. Four states — California, Minnesota, North Dakota and Oklahoma — ban all or nearly all noncompetes. Minnesota just passed its ban this year, effective July 1. In New York, a near-total ban is on Governor Kathy Hochul’s desk. Another 20 states ban or restrict noncompetes for physicians, though some restrictions are quite limited — e.g., in Florida, to physicians in rural areas. In Texas, the physician employee must be given a buyout option, though the buyout price may be in six figures. A bill passed by the Texas Senate this spring would limit the buyout to a year’s salary and the noncompete to a year’s duration. Gudiksen notes that “states are looking at passing laws in this area.”

If the FTC finalizes some version of the noncompete ban in April 2024 as anticipated, years of litigation are likely to follow. Long-running legal battles involving high-stakes national policy raise awareness and legislative metabolism. If the FTC rule is struck down, or if states perceive the rule as eventually finalized as being weak, she says, noncompetes “will definitely come up” in legislative session.

While noncompetes may not be on the brink of extinction in the U.S., physician groups, nurses’ unions and service unions may be primed to reduce their hold in the healthcare industry. Given current staffing shortages, Gudiksen points out, “hospital staff has more negotiating leverage than before Covid.” And while individual physicians may often not be in a position to avoid or negotiate noncompete provisions with regionally dominant hospital systems (particularly in practice areas that can function only in hospitals), heightened awareness may render onerous noncompetes a poison pill of sorts for private equity buy-out offers when the target practice is physician-owned. Short of seismic change, an extended battle over noncompetes could conceivably slow the pace of practice acquisitions and improve corporate owners’ behavior.

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