The Shifting Landscape of Healthcare Noncompete Agreements

Noncompete agreements have long been a contentious issue in healthcare, often woven into the fabric of physician employment contracts. Occasionally cited as being emblematic of the “broken” healthcare system, they are seen by some as giving hospitals an unfair advantage. However, with federal and state governments enacting changes to noncompete agreements, the dynamics of healthcare noncompetes are changing.

What Is a Physician Noncompete Agreement?

A noncompete agreement typically contains restrictive covenants to prevent an employed physician from joining a competitor unless they pay to be released from the agreement. The details vary, but there are typically stipulations on who is a competitor, how long the employment prohibition lasts, and how the fee is calculated. For many physicians, the presence of a noncompete often means relocating to a different market or accepting a drop in compensation – and sometimes both.

Several states have healthcare-specific restrictions on noncompete agreements. For example, Colorado, Maryland, and Oregon enforce income thresholds for noncompetes, allowing only highly compensated healthcare workers to be bound by such agreements. States like Indiana, Delaware, and Tennessee have outright banned or heavily restricted noncompetes for specific healthcare roles, including primary care physicians, temporary healthcare staff, and physicians generally. Meanwhile, states such as Texas and Pennsylvania impose conditions to ensure agreements are reasonable, such as requiring buyout provisions or limiting duration and scope.

A Changing Legal Landscape

Noncompete agreements in many states are evolving. Take Indiana, for instance. In Indiana, noncompete agreements have been curtailed twice in the last five years. In 2020, the state introduced legislation requiring noncompetes to include a buyout provision and additional mechanisms to ensure patients have continued access to their medical records and physicians. In 2023, Indiana banned future noncompetes for primary care and limited the enforcement of any noncompete in certain situations.

Most recently, IU Health, the largest health system in the state, removed noncompetes from existing primary care physician contracts. This symbolic gesture essentially levels the playing field between current IU Health primary care physicians and their new hires. Although other health systems have yet to follow suit, Indiana’s primary care landscape has undeniably shifted, with new hires no longer bound by noncompete agreements.

Adapting Health System Strategies in a Post-Noncompete Era

The prevailing health system strategy has been to secure a primary care base, which then directs patients to aligned specialists. The specialists then perform procedures and hospitalize patients as needed. Securing a primary care base has largely meant employment with a combination of carrots (financial and other incentives) and sticks (employment agreements and noncompetes).  Without the stick of a noncompete, health systems will need to reassess how they secure their primary care physician network.

While primary care physicians in Indiana can now change employers without legal peril, there is still a switching cost that can be substantial. Some physicians may consider returning to private practice, but the managed care contracting challenges can be significant.

KSM has worked with several hospital physician networks to evaluate their options in light of this evolving dynamic. Reviewing hospitals’ current primary care compensation models and recruitment and retention strategies often reveals opportunities for improvement. Ideally, removing noncompetes can also create stronger collaboration between primary care physicians and hospitals, fostering participatory governance and increased operational autonomy.

Practical Solutions for an Evolving Dynamic

Navigating the complexities of physician contracting can be complex, but KSM is here to help. Our team of healthcare consultants works with physician networks across the country to build collaborative and vibrant business models. From redesigning compensation structures to enhancing physician engagement, we provide tailored solutions to meet your organization’s unique needs. Contact us to see how we can help your organization.