Hospitals could see more financial pressure from ban of non-compete agreements, Fitch Ratings says

The Federal Trade Commission has moved to eliminate non-compete agreements, and Fitch Ratings says the rule could pose more staffing challenges for nonprofit hospitals.

Nonprofit hospitals could see higher labor costs if the Federal Trade Commission rule barring non-compete agreements survives legal challenges. But hospitals may also benefit from a bigger pool of talent, Fitch says.

The FTC announced the final rule last week, much to the chagrin of hospitals and health systems. Hospitals have said the rule would make it more difficult to retain clinicians, and they contend the commission lacks the authority for such a wide-sweeping change. The rule is facing legal challenges and some analysts say it may not survive court battles.

Fitch projects that the elimination of non-compete agreements would potentially lead to higher wages at nonprofit hospitals. In addition, Fitch suggests that the rule could lead to more turnover, particularly at rural hospitals and systems. Small hospitals and rural facilities “may struggle to keep staffing at adequate service levels without ramping up costs,” Fitch said.

However, Fitch also outlined some positive ramifications for nonprofit hospitals if non-compete agreements are eliminated.

“One potential benefit is the improvement in labor supply and enhancement of the labor and physician recruiting pool,” Fitch said in an analysis this week.

• Read more: Nonprofit hospitals still have negative outlook, but Fitch Ratings sees better times ahead

Many physicians have been clamoring for the elimination of non-compete agreements. Doctors say such clauses hamper their ability to pursue better career opportunities. The American Medical Association has pushed for the elimination of non-compete agreements for doctors employed by for-profit hospitals and non-profit hospitals.

The AMA has said non-compete agreements affect as many as 37% to 45% of physicians.

The FTC’s authority typically covers for-profit companies. However, the commission has said some nonprofit organizations, or their subsidiaries, could fall under the regulation banning non-compete agreements.

In the ruling, the commission states, “entities that claim tax-exempt nonprofit status may in fact fall under the Commission’s jurisdiction.”

Notably, the FTC mentioned that even if a physician group is affiliated with a nonprofit hospital, the physician group would be subject to the FTC ruling barring non-compete agreements.

While some hospitals are having more success in recruiting and retaining workers, Fitch says vacancies at nonprofit hospitals remain well above pre-pandemic levels.

“Job openings remain high at 7.8% as of February 2024 compared with the 4.2% average rate from 2010 to 2019,” Fitch said.

The FTC says the rule barring the vast majority of non-compete agreements is slated to take effect 120 days after publication in the Federal Register. But given lawsuits that have already emerged, some analysts expect there will at least be a delay in implementation while legal issues are sorted out.

Fitch says there’s no immediate impact on ratings from the non-compete rule, and said even if it is upheld, the effects wouldn’t be seen until 2025.

Hospitals have had to pay more to attract and retain workers, although labor increases have eased somewhat, Fitch notes. But hospitals are paying more in labor.

“Hospital payrolls have risen for 27 consecutive months as of March 2024, resulting in payrolls that are 5.3% above the levels immediately prior to the pandemic,” Fitch said.

While the fate of the non-compete ban remains unknown, it’s possible that hospitals could face more pressure to offer more attractive pay and working conditions for clinicians.

Steven P. Furr, MD, president of the American Academy of Family Physicians, said last week that he hopes eliminating non-compete agreements will spur organizations to look at new strategies “to retain physicians and become employers of choice.”

Furr also pointed to the FTC’s statement that the rule could apply to the entities of nonprofit organizations.

“Nonprofit health systems often have significant financial assets and employ a large portion of physicians and clinicians,” Furr said. “They should not be permitted to continue to restrict patient access and physician choice in employment.”

The American Hospital Association and the Federation of American Hospitals both assailed the FTC’s ruling to bar non-compete agreements, saying it will hurt hospitals and health systems.

Chad Golder, general counsel for the American Hospital Association, said the FTC’s ban of non-compete agreements is “bad law, bad policy, and a clear sign of an agency run amok.”