The Federal Trade Commission's final rule banning noncompete clauses could hit nonprofit hospitals with more staffing complications at a time when they are still adapting to the upward reset of wages and have only begun to rein in labor costs, according to a May 2 report by Fitch Ratings.
The FTC said in its rule that nonprofit organizations are not "categorically beyond" its jurisdiction and that it assesses whether an entity or its members derive a profit. Employees of a physician group that work a nonprofit hospital would fall under the commission's jurisdiction and would be subject to the noncompete ban, according to the FTC.
The elimination of noncompetes complicates an already challenging labor environment for nonprofit hospitals.
"One potential benefit is the improvement in labor supply and enhancement of the labor and physician recruiting pool. On the other hand, the rule could place further upward pressure on wages and potentially introduce operating volatility if there were increased healthcare staff turnover," Fitch said in a May 2 report. "This may be especially true for smaller or rural [nonprofit] hospitals, which may struggle to keep staffing at adequate service levels without ramping up costs. No immediate rating impact is expected, and the effects of the FTC rule, if upheld in court, would not be felt until 2025."
Combined with other developments — such as California's minimum wage laws, state minimum nurse staffing ratio requirements and increased federal and state scrutiny of hospital M&As — the rule could maintain pressure on the hospital sector.
The American Medical Association estimates that between 35% and 45% of physicians are bound by noncompete clauses.
While staffing shortages and the use of contract labor for most health systems has dropped from the peaks of 2022, most hospitals continue to be challenged by staffing shortages, according to Fitch. Job openings remain high at 7.8% as of February compared with the 4.2% average rate from 2010 to 2019.
Nonprofit hospitals have tempered wage growth while growing payrolls. As of March, hospital payrolls have increased for 27 successive months, resulting in payrolls that are 5.3% above the levels immediately prior to the pandemic, compared with 4.2% for the broader private sector, according to Fitch.
"Healthcare providers' success in attracting and retaining permanent staff is key to reducing expenses and improving operating margins. A look at [nonprofit] hospital performance medians for hospitals with a FYE in 1H23 showed personnel costs slightly decreased to 55.4% of total operating revenues from 55.7% for the same cohort a year prior," according to Fitch. "We expect this metric to improve further in our full year FY 2023 medians, reflecting improvement in labor supply."
The rule would go into effect 120 days following publication in the Federal Register on April 30, but lawsuits challenging the noncompete ban have already begun to roll in and implementation is likely to be delayed as it is litigated.