Speaker 1 (00:05): 

Welcome to Hospitals in Focus from the Federation of American Hospitals. Here’s your host, Chip Kahn. 

Chip Kahn (00:15): 

The Federal Trade Commission’s initiative to end non-compete clauses for employee contracts has potential to cause severe ramifications for healthcare. At the same time, the FTC continues to take a dim view of important hospital system integration. Both issues have powerful implications for the healthcare landscape. The latest controversial rule, which would ban employers from imposing non-compete clauses on their employees, would make it more difficult for healthcare systems to staff up, while possibly increasing already high workforce costs, all potentially affecting access to patient care and available services. Today we’re going to explore the intended and possible unintended consequences of a non-compete ban, and what effect it would have on American patient care. As well we will look at the agency’s work in the area of consolidation. 

(01:14): 

Joining me is Dr. Subbu Ramanarayanan. Subbu chairs NERA’s Economic Consulting Healthcare Antitrust Practice, and is a noted expert on antitrust issues. His work analyzing complex healthcare transactions makes him extremely qualified to walk us through the nuances of FTC’s non-compete proposed rule, as well as FTC’s latest thinking on the antitrust matter. Thanks for being with us today, Subbu. 

Subbu Ramanarayanan (01:47): 

Thank you, Chip. It’s a pleasure to be here. Thank you for having me on and for the kind introduction. 

Chip Kahn (01:52): 

Great. So let’s get started. From a high level and an economic standpoint, what is the purpose of non-compete agreements, and what are the trade-offs they cause? What does the research indicate here? 

Subbu Ramanarayanan (02:07): 

Let me start by maybe setting the stage a little bit for exactly what we mean by a non-compete clause so that all the listeners are on the same page. So these non-compete clauses, these are found in the context of employment agreements, like you were saying, Chip, and these clauses restrict an employee from going to work or starting a business that competes with his or her employer. So it’s often limited to a particular timeframe or a geographic area. So there are restrictions which are included within the clause. And these clauses are not new. They have been around for quite a while, although at least according to some observers, their usage seems to have grown more prevalent, and they’ve certainly come increasingly to the notice of antitrust enforcers like we are discussing today. 

(02:54): 

So that’s what we mean when we talk about these non-compete clauses. An interesting question that arises is what is the economic justification for having these clauses in the first place? Because if you just look at these clauses, it says, well, employees cannot go and work for another employer. Wouldn’t that be limiting competition in some way? That’s the first reaction it provokes in many people. But it’s important to understand first, what is the justification for having such an agreement? 

(03:23): 

So at a high level, what these clauses do, these non-compete clauses, when economists think about them, they can be thought of as a mechanism to solve a problem that often arises in economics. And this problem is what we call investment hold up. So let me give you an example of this. So for example, you may have employers who are looking to make investments in employees. And by investments we can think about on the job training, for example, providing on-the-job training for employees. And these employers when they’re providing this training, making these investments, they want to make sure that they’re able to get a fair return on the investments that they are making in these employees. And they may want to ensure that their investments in these employees, they’re not lost to a competitor. 

(04:11): 

So when you have situations like that, these non-compete clauses can encourage greater investment from employers than we would have otherwise if such agreements were not allowed. So that’s sort of the core idea behind why these non-compete clauses were formulated in the first place. This investment that I was mentioning, it can take on many forms. So it can be on the job training, like I was talking about, where employers may want to ensure that they invest a lot in training their employees, and once they do so, they want to ensure that the employee does not up and leave for a competitor or a future competitor. 

(04:52): 

Because if they did have such concerns, then they may not provide the optimal level of training. They may skimp on the level of training, or they may be reluctant to invest in the employee as much as they would if they did not have such concerns. So a non-compete clause can help address this issue here. And it’s could lead to beneficial outcomes because having more training makes the employees more productive. And so productivity goes up overall. So that’s one way in which these clauses can enhance productivity and make employees more efficient. 

(05:26): 

Another example could have to do with having trade secrets, protecting trade secrets. So if a firm has some secret sauce, or some proprietary know-how or assets, then having these non-compete clauses can help the employers protect these trade secrets. A final example would be customer relationships. So for many businesses, their customer lists are among their most valuable assets. So if you think about it in the context of healthcare, patient lists, patient relationships can be very important for physicians. So a non-compete clause can help ensure that an employee does not walk away with your entire customer base and then start a competing business. So there are many different justifications as to why we have these non-compete clauses in the first place. And you can see there are ways in which these clauses can encourage greater investment, can lead to higher productivity, more innovation and what have you. 

(06:24): 

Of course there is a trade off to consider here, like you were alluding to. And the flip side is there may be some costs that these agreements may impose on workers. Now what might these costs be? One, it could lead to reduced job mobility for workers because you are restricting these workers from taking up a job at a competitor within a certain radius of where they were working or within a certain timeframe. So it could impose restrictions on job mobility for employees. 

(06:56): 

And as a result, it could also lead to lower wages for them. Because if as an employee, I don’t have the option of going to a competing firm in the same region or within a certain timeframe, then that might reduce my ability to command higher wages from my current employer. So those are some of the possible negative impacts that non-compete clauses may have. It could lead to lower levels of entrepreneurship as well, if employees cannot leave and start their own business, again within a certain timeframe. 

(07:28): 

So overall, I think considering the impact of these clauses, one needs to balance these potential costs against what benefits might arise from having such clauses in place. So it’s a very fact specific inquiry, as a lot of these things often are. So one really needs to understand both sides of the equation in thinking through what the impact of this might be. 

Chip Kahn (07:53): 

Subbu, that’s very helpful in terms of laying a base here. So now let’s drill down on the FTC rule itself, the proposed rule, and I guess look at it from two aspects. One, I mean, what does it do to the process that you just described? And second, what are the nuances for an industry as complex as healthcare particularly, and would it potentially have, from your view, any effect on assuring access to cost effective health patient care? 

Subbu Ramanarayanan (08:28): 

Sure. So let me start by talking about the rule first. So in January of this year, the FTC proposed a new rule that would categorize employer’s use of non-compete clauses as an unfair method of competition. And the reason this is important is because, under section five of the FTC Act, the FTC has the authority to police unfair methods of competition. 

(08:54): 

So what does this rule include? I think, like you were alluding to at the beginning of this conversation, this proposed rule would ban employers throughout the US from entering into or attempting to enter into non-compete clauses with their workers. It would also prevent them from maintaining non-compete clauses with their workers. And in most circumstances, employers would not be able to represent to any workers that they are subject to a non-compete clause. So effectively, I mean you can think about this as banning non-compete clauses entirely for the employers that this rule is applicable to. And I think that’s an important nuance which I’ll get to. 

(09:36): 

So the thing that’s important to understand here is this rule makes these non-compete agreements what we call per se illegal, right? I’m not a lawyer, but essentially what this means is the existence of the agreement alone would violate the law. So one would not need to demonstrate that this non-compete agreement has any sort of negative impact. Just having the agreement itself would violate the law. So that’s how one would interpret this particular rule. 

(10:09): 

So the nuances in this rule would pertain to what would be considered a non-compete clause, and of course, who this rule would apply to. So on the first, what would be considered a non-compete clause? The FTC’s rule takes a fairly broad view. So basically they say it’s not just about clauses which would limit where employees can seek employment, so prohibiting employment. So it’s not just that. The rule also says there could be what they call defacto non-compete clauses. So these could be even non-disclosure agreements if they are very broadly drafted. The FTC says under the rule, such non-disclosure provisions could also be treated as defacto non-compete clauses, and they would be prohibited under this agreement. So they take a fairly broad view of what would be construed as a non-compete clause. 

(11:04): 

And the second nuance in this particular rule is that it pertains to who this would apply to. And there are limitations on the FTC’s jurisdiction in terms of who this would apply to. So for example, in this case, non-profit hospitals would not be affected. If you think about in the context of healthcare, the FTC has the jurisdiction to review all hospital mergers, including mergers entered into by for-profit or not-for-profit hospitals. But when thinking about enforcement of antitrust laws directed at anti-competitive practices by nonprofit entities, the FTC does not have that jurisdiction. So in thinking about who this rule would apply to, it would not apply to nonprofit entities within healthcare. 

Chip Kahn (11:54): 

So as you just described, it could potentially create an unlevel playing field between nonprofit hospitals and tax paying hospitals, which are subject to the rule. What are the implications of that? 

Subbu Ramanarayanan (12:09): 

Right. So basically because the rule uses section five as its legal underpinning, some employers like nonprofits would be exempt from this proposed rule. So I mean, it raises some interesting questions about how this impacts competition given not-for-profit hospitals compete with for-profit hospitals for the same pool of patients, for the same set of insurers, for the same talent. So there’s definitely a lot of competition between for-profits and not-for-profits. But it seems like, at least based on the current reading of the rule, it would not apply to not-for-profits within healthcare unless the non-profit is organized by and operates for the benefit of for-profit members. 

(12:52): 

So there are some situations where some entities may be subject to it, but again, based on the FTCs jurisdiction, for the most part, not-for-profit hospitals would not be subject to this. In thinking about this further, I mean the FTC rule itself would not apply to not-for-profits. Now, the not-for-profits would still be subject to, for example, state regulations. There are some states that prohibit the use of non-compete clauses, and the not-for-profits would still be subject to those sorts of regulations. They could still be subject to actions by private plaintiffs. So there are still some, I guess, avenues by which not-for-profits could be subject to some sort of restrictions in their ability to impose these non-compete clauses. 

(13:38): 

But the key difference there is when you look at the FTC rule, like I was saying before, it’s a per se application of the rule. So meaning anybody that’s in violation of the FTC rule, that action will be found to be per se illegal. Whereas with all of these other state regulations or actions bought by private plaintiffs against not-for-profits, the bar is higher in terms of what is needed in order to establish that this would be anti-competitive. So in that respect as well, even though they may be subject to no restrictions in their ability to impose non-compete clauses from other sources outside of the FTC rule, in all of those cases, the bar is higher in establishing that there has been some harm compared to what the for-profit entities would be subject to under the FTC rule.So I think we’ll have to wait and see if the rule itself would survive in its final form, or there would be some way in which it may be modified to address the disparity between for-profit and not-for-profit entities. I think that’s something we should have to wait and see. 

Chip Kahn (14:43): 

Clearly though, if I sort of give you a potential scenario, if you have a situation where, whether it’s anesthesiologists or emergency room physicians, if there are a limited number of physicians in a particular market, then access could really become an issue here if there weren’t these clauses. And wouldn’t that mean that institutions would have to pay them more in order to retain them. And that increases healthcare costs, right? 

Subbu Ramanarayanan (15:15): 

Absolutely. I mean, we spoke earlier about the types of issues that non-compete clauses are meant to address, and we see lots of examples of such issues in healthcare. Healthcare, as the listeners of this podcast are well aware of, it’s a complex setting. And a lot of the issues related to investment hold up apply in healthcare. And for example, let’s think about recruitment, to go to your example. If you’re looking at, say, particularly in rural regions, so if you’re looking at a rural hospital who’s looking to hire, you say anesthesiologists or sort of specialists, and they’re looking to attract them to a specific region, then a non-compete clause may help ensure that once this hospital attracts a physician to a rural region, then they don’t lose that physician to a competing provider in the same region. 

(16:07): 

So in that way, it helps ensure access to healthcare. Because again, it makes it easier for the provider to attract such talent and retain such talent. And I think that’s fairly critical in healthcare, particularly in rural areas where access issues are of particular concern. So especially given the current scenario where we see a lot of rural hospitals shutting down because lack of demand or lack of talent, and many hospitals and health systems are continuing to struggle to find staff, I think the imposition of this rule, and again, based on its current reading, it’s going to apply to all workers, whether it be a low skilled worker or a high skilled worker, whether it’s a specialist, a primary care, all sorts of workers, the imposition this rule are going to have, my view is that it is going to have pretty significant impacts on healthcare access. 

Chip Kahn (17:01): 

Thanks for elaborating on that issue. Let’s move on now and talk a bit about FTC and consolidation. What is your perspective on this issue of increasing healthcare system integration, and how important it is to assure a well-functioning healthcare infrastructure and access to care? 

Subbu Ramanarayanan (17:24): 

So we have seen a fairly steady trend in consolidation over time in the last few years, and it’s been interesting in the sense we do see continued examples of what we call horizontal consolidation, meaning two health systems combining with each other. But we are also seeing increasingly examples of vertical consolidation, meaning hospitals combining with physician groups or hospitals combining with insurers. So there are different flavors of health system integration that we are continuing to see. 

(17:59): 

And it’s interesting to think about what is driving all of this. So clearly there is an ongoing trend of restructuring in healthcare. Now, what is this restructuring being driven by? It’s driven by a few different factors. One is there are continuing changes in reimbursement. So there’s continued changes in the way Medicare or Medicaid in different states are thinking about reimbursing health systems, whether a shift away from reimbursing based on volumes to towards value-based care. And that’s coming not just from the government, but also increasingly from private payers. 

(18:37): 

There’s increasing focus on moving away from inpatient settings to outpatient settings, and continued implications for what that means in terms of your ability to manage care for a population of patients. There are continued changes in the amount of investment you need in electronic medical records and the scale that you need to operate to be able to make those investments. And there’s also a continued need for scale that we see that systems have pointed to in responding to shocks like the pandemic, for example. 

(19:13): 

So there are a number of different drivers of this restructuring. And one of the responses we’ve seen from health systems has been this integration, whether it’s in the form of horizontal consolidation or some sort of vertical consolidation, but the idea is that, based on what we hear from many of our clients, they are looking to come up with these structures that’ll better position them to respond to these changes in the external environment. And ideally then, put them in a better position to have increased care coordination, provide better care for patients, and improve the quality of care. 

(19:53): 

Now of course, this is all to be thought about in the context of, well, are there any negative impacts of this consolidation that particularly the antitrust agencies may be concerned about? Often the trade offs that we see that the agencies are looking at is there may be all these benefits that may come through, now, are there any impacts in terms of increases in patient costs that might occur because of this consolidation? So that’s the trade off that the agencies are looking to examine and that a lot of the economics literature is examining as well. 

(20:29): 

Of course, this is all, each merger or each one of these transactions is to be examined on a case by case basis to see how this trade off falls out. But ultimately, there are many reasons that VC that is driving this trend of healthcare consolidation all geared towards providing better patient care. I think the ultimate question is what is the extent of benefit that we are able to see coming out of these different types of consolidation, and how might that compare against any possible increases in costs that may be imposed on patients? 

Chip Kahn (21:06): 

Does the interest in healthcare that FTC has taken, and all kinds of consolidation, I guess it has sort of two effects, one is the direct effect if they take a case, but how does it affect the thinking of those who are considering integrating institutions, particularly in areas like rural America where there’s such difficulty today dealing with all the complexity and cost of maintaining and running hospitals, having sufficient workforce, meeting all regulatory compliance, hosting the electronic health record, all the difficulties of running a hospital today that have really, in a sense, I would argue, had such an effect on this trend towards hospitals consolidating? 

Subbu Ramanarayanan (21:54): 

Right. No, I mean we’ve definitely seen, at least in the last few years, the changes in antitrust enforcement, the increased degree of antitrust enforcement, and frankly, the increased uncertainty associated with antitrust enforcement have a bit of a chilling effect on consolidation. So health systems that we work with have expressed there’s definitely a greater degree of hesitation and reluctance in thinking through the costs associated with just getting through the antitrust review process, and the increased uncertainty associated with getting through the antitrust review process. 

(22:31): 

So particularly for these smaller systems, for many of whom these transactions or these combinations might be fairly critical to ensuring that they have access to sufficient funds, sufficient investments, sufficient talent, particularly for these smaller hospitals, it’s a real consideration. Because antitrust enforcement is not just more vigorous, it has also become more expansive. So the scope of antitrust enforcement has increased. And what that means, of course, is that the costs of going through the process have gone up, in some cases fairly dramatically. 

(23:08): 

And there’s also, to some extent, a greater degree of uncertainty because the scope of issues that the regulators are looking at, that has increased as well. So as you may be well aware of, the regulators have expanded beyond what they have traditionally looked at in the context of these healthcare transactions to look at other areas like the impact on labor, for example. So all of this implies much more drawn out antitrust reviews. It takes many months to go through it, sometimes years. And of course it takes a lot of effort on part of the healthcare systems to share data, to share information, and to engage with the agencies. And of course, all of this translates to a lot of costs, on top of managing their day-to-day business. 

(23:58): 

So it’s a real cost that’s imposed on these systems. And what we’ve seen in our experience, in our recent experience, is there’s definitely a greater degree of hesitation, reluctance compared to what we had seen earlier. Thinking about, well, does this really make sense for us to go through this process and incur all these costs when the outcome of that review process is more uncertain than what it used to be before? So in that sense as well, in many of these transactions, they’re motivated by trying to figure out a better way to compete and a better way to serve patients. And to the extent those don’t go through, I think patients may tend to lose because they aren’t able to get the benefits from these combinations. 

Chip Kahn (24:45): 

Do you have any experience either when they went through the process or through the gauntlet and didn’t succeed, or alternatively they did the cost benefit analysis that you’re sort of describing, and frankly decided not to, any experience of what then happens? Because usually a merger’s not taking place because you’ve got two strong systems or hospitals, it’s because you’ve got one strong and a weaker one. I mean, what kind of behavioral response do you see on the part of the care that’s being provided in the hospitals that are getting to the sort of edge of the cliff here, and not jumping off because of the ramifications of having to go through the FTC review? 

Subbu Ramanarayanan (25:29): 

Yeah, I mean, and I’ll say this Chip, I mean, in some cases we’ve even seen the extremes. So like you’re saying, a lot of these transactions we see are being motivated by a marginal competitor, somebody who is been doing fine taking care of patients, but clearly they need, say, either additional investments or additional scale in order to continue competing and continue being a viable competitor. In some of these cases, we’ve seen them either really scale down their operations. I think we recently had an example of a hospital which had to at least shut down temporarily because there were some uncertainties involved with there were certain terms put forward by the regulators, which they couldn’t reach agreement on. And this hospital is already struggling. And as a result of them not being able to reach an agreement and the transaction having to be abandoned, the hospital itself had to shut down, which of course has significant negative implications on access to care for patients. 

(26:37): 

So I think this is a very real consideration for many healthcare systems, and particularly those in rural areas or smaller systems going through these considerations of what is this cost benefit analysis? Do I really go through this or not? And in some cases, even when they choose to go ahead, the terms that are imposed might just not be palatable or might just not be workable. And we have some extreme cases of hospitals shutting down as a result. 

(27:09): 

So it’s an unfortunate consequence. And clearly, at least in my experience dealing with agencies, the agencies do their best to try to avoid these outcomes too because they don’t want hospitals shutting down on their watch because clearly that is not a good outcome for patients. But we have seen examples of that happen recently. So it’s an unfortunate consequence of just going through this process. 

Chip Kahn (27:33): 

Subbu, thank you so much for spending time with us today. Your observations both on the FTC proposed non-compete rule, as well as consolidation, are so important. What we are about is making sure there’s access to patients care and that people can get seamless service, and hopefully FTC will recognize that as it considers policy into the future. For us, patient care is job one and being available for patients is an imperative. So with that, thank you for the wonderful conversation and your insights. 

Subbu Ramanarayanan (28:11): 

Thank you so much for having me, Chip. It’s been a pleasure. 

Speaker 1 (28:19): 

Thanks for listening to Hospitals in Focus from the Federation of American Hospitals. Learn more at fah.org. Follow the Federation on Social media @FAHhospitals, and follow Chip @ChipKhan. Please rate, review, and subscribe to Hospitals in Focus. Join us next time for more in-depth conversations with healthcare leaders. 

 

Dr. Subbu Ramanarayanan

Education

PhD in managerial economics and strategy, Kellogg School of Management, Northwestern University
MBA, Indian Institute of Management (Calcutta)
B.Tech. in electrical engineering, India Institute of Technology

Experience

Dr. Subbu Ramanarayanan chairs NERA’s Health care Antitrust practice and is an adjunct Associate Professor of Competitive  Strategy at UCLA Anderson School of management.  Dr. Ramanarayanan has extensive experience advising clients on antitrust reviews of proposed mergers and acquisitions before the Federal (FTC and DOJ) and State antitrust agencies across a variety of settings in health care including hospital services, health insurance, physician services, medical devices, and Healthcare IT services. He is particularly experienced in the analysis of large and complex healthcare provider transactions, including addressing horizontal, vertical and cross-market issues raised by antitrust agencies in such matters.

Recently, he testified on behalf of the merging parties in the FTC’s challenge of the merger between Albert Einstein Health Network and Thomas Jefferson University, which was the first time the FTC lost a hospital merger challenge in nearly two decades. He was also the lead economist retained by counsel for the merging Parties in the formation of Beth Israel Lahey Health, a complex multi-billion dollar transaction involving five merging hospital systems that was ultimately cleared by the Federal Trade Commission after an in-depth investigation.

Dr. Ramanarayanan also has an active practice focused on litigation around liability and damages issues in health care antitrust, and has analyzed issues pertaining to market definition and market power, alleged monopolization, monopsony, exclusive contracting, price-fixing, tying, bundling and alleged foreclosure.

Dr. Ramanarayanan is recognized as one of the “most highly  regarded” Future Leaders in Who’s Who Legal: Competition, and was nominated as one of five finalists for “Competition Economist of the Year” by Global Competition Review in 2019. He is an Associate Editor of the Antitrust Law Journal and has written extensively on the nature of competition in health care markets and its impact on health care costs and quality.  He has published articles in the  Antitrust Law Journal, and Antitrust Magazine, as well as leading peer-reviewed economics journals, such as the American Economic Review and the Journal of Law and Economics.  Notably, he is a two-time winner of the Antitrust Writing Award from the Institute of Competition Law, for his articles examining potential competition mergers (2017) and innovation effects of mergers (2019).