Do nonprofit hospitals sidestep FTC’s noncompete ban?

Alan Condon – Becker’s Hospital Review

The Federal Trade Commission voted to implement a sweeping noncompete ban that would have seismic effects on the healthcare industry and the U.S. economy more broadly. But questions remain around which nonprofit hospitals and other providers may be affected by the ban and how far the FTC’s jurisdiction reaches under its final rule.

The American Hospital Association has argued against the rule and pushed the FTC to limit the reach of its authority specifically for the healthcare industry.

Pointing to hospitals registered under section 501(c) of the Internal Revenue Code claiming tax-exempt status as nonprofits, the AHA argued that these entities are outside the FTC’s jurisdiction — a claim the commission categorically refutes.

On the other hand, some for-profit stakeholders argued that healthcare should be exempt altogether from the noncompete ban. Their argument is that healthcare is so different from other industries and it would not be fair to prohibit for-profit entities from noncompetes while allowing them for at least certain IRS tax-exempt nonprofits.

“The FTC’s claimed jurisdiction doesn’t depend on the IRS definition of nonprofits; it instead asks the question of whether or not the entity is set up to carry out business for its own profit or the profit of its members,” Timothy Fry, a partner at law firm McGuireWoods, told Becker’s. “So, the FTC rule provides that you can have a tax-exempt nonprofit that is in fact a profit-making enterprise. Claiming tax-exempt status is not enough for the FTC.”

A “portion” of the estimated 3,000 nonprofit hospitals and 900 state and local government hospitals in the U.S would fall under the IRS tax-exempt category, according to the FTC. Then there are profit-making hospitals and enterprises, some of which are also categorized as tax-exempt entities.

“The FTC is saying that it is not excluding tax-exempt nonprofit hospitals from this rule,” Mr. Fry said. “If the FTC’s jurisdiction overlaps, those entities are subject to the noncompete ban.”

What nonprofit tax-exempt hospitals will need to analyze — outside of nonprofit tax law — is whether they are within the FTC’s jurisdiction, which extends to nonprofit entities that may operate in some ways in a for-profit capacity.

Similarly, the FTC has previously exercised jurisdiction over an independent physician association claiming tax-exempt status as a nonprofit.

“Independent physician groups may technically be nonprofits, but because they collaborate to make more money for their physician members, they too could fall under this rule,” Mr. Fry said. “Hospital-physician joint ventures may also be within its gambit since they make money on behalf of their members.”

What about an entire health system?

That is a controversial question and one that the FTC does not speak clearly, according to Mr. Fry.

“There haven’t been a ton of cases here historically. The commission knows it has a limit; it has to be within the entity engaged in profit-making, but there have been cases where nonprofits fall within its jurisdiction,” Mr. Fry said. “Assuming the rule takes effect, this is going to be heavily litigated because now this distinction — which historically hasn’t mattered a lot — is going to matter to determine if a noncompete is allowed.”

Questions also surround noncompetes for senior executives, which the FTC defines as “workers earning more than $151,164 a year and who are in policymaking positions.”

The final rule would allow existing noncompetes for senior executives (less than 0.75% of workers) to remain in effect but would prohibit employers from entering into or attempt to enforce any new competes — even if they involve senior executives. 

“The FTC explained that this very limited group of senior executives are those that were in a position to bargain for benefits in exchange for the noncompete. For example, they may have been paid more or gotten certain severance packages or equity grants,” Mr. Fry said. “Someone in that position, leading an organization, may have more leverage or involvement in their negotiations than even a highly compensated physician who is one of many employed physicians or part of a large practice. They may not have had as much room to negotiate.”

Invalidating noncompetes for this small portion of senior executives would present significant logistical challenges, hence why the FTC is allowing these existing noncompetes to stand under the final rule. However, if the rule takes effect, the agency will not allow new noncompetes to be initiated with this subset of senior executives.

Notably, partners in a business, including physician partners of an independent physician practice, may also generally qualify as senior executives under the duties prong, assuming the partners have authority to make policy decisions about the business.

“Such partners would also likely fall under the sale of business exception if the partner leaves the practice and sells their shares of the practice,” the FTC said in its final rule. “In contrast, a physician who works within a hospital system but does not have policymaking authority over the organization as a whole would not qualify.”

Lawsuits challenging the noncompete ban have already begun to roll in, and a lengthy legal battle is likely in the cards.