Legal & Regulatory

Will the CMS Arbitration Ban Prevail?



The Centers for Medicare and Medicaid Services (CMS) and the American Health Care Association are currently in a dispute concerning the viability of arbitration in the long-term care setting. A federal district judge issued a preliminary injunction to halt the implementation of a new rule imposed by CMS that prohibits pre-dispute arbitration agreements in resident contracts and admissions documents. The decision brings into sharp focus the debate as to whether arbitration as a means of alternative dispute resolution should be permitted in the long-term care environment as well as the ability of CMS to issue rulings on this subject. Certainly the court’s decision has potential ramifications for the future of arbitration in the long-term care setting.

What is at stake is not simply whether pre-dispute arbitration should be permitted in long-term care. Rather, the court’s decision raises larger concerns about whether CMS expanded its authority beyond Congressional intent; if arbitration impacts the quality of patient care; and ultimately, whether Congress needs to address this issue specifically beyond the Federal Arbitration Act.

The use of arbitration agreements in the long-term care industry is expanding nationwide. However, this method of alternative dispute resolution is not without its critics. In its commentary to support the ban of pre-dispute arbitration agreements, CMS echoed the sentiments of the critics, largely supported by the Plaintiffs’ Bar, who argue that arbitration favors corporations that draft the provisions. Also, critics assert that arbitration reduces damage awards and unlike the court system, leads to less transparency. In contrast, proponents of arbitration contend that the federal government has already spoken on this issue and favors arbitration whole-heartedly via the enactment of the Federal Arbitration Act (FAA). Arbitration is consistently used in consumer disputes and is generally more expeditious than litigation, thus having particular benefit to an aging population who should be amenable and desirous for prompt resolution of disputes. It is also asserted that arbitration is also cost effective and financial resources can be put toward patient care rather than exorbitant litigation costs.

Clearly, there are credible considerations presented by both advocates and opponents of pre-dispute arbitration. However, when it adopted the ban, CMS conceded that it was less than neutral and stated that they believed arbitration was unfair to residents. CMS reached this conclusion by suggesting that arbitration clauses are impermissibly slipped into admissions agreements without any explanation to the resident as to its content and the impact arbitration has on their rights. The main concern was that arbitration waives the right to a jury trial in a public forum and, instead, places the dispute before a private, confidential arbitrator. Per CMS, any such waiver must be voluntary and knowing. CMS also emphasized the stressful nature of the admissions process and that most residents were not experienced consumers of legal services and have little to no bargaining power. CMS also accepted the argument that patients who signed arbitration agreements do not receive the same quality care as those who decline such provisions. Clearly, CMS seeks transparency in the admissions process. In that respect, the ban questioned the level of disclosure in the admissions process and CMS concluded this has an impact on patient safety.

The Federal District Court, though, was not persuaded by the safety argument. In pointed criticism of CMS, the Court concluded that CMS failed to cite any empiric evidence that arbitration actually harmed residents. Rather than use the considerable economic resources at its disposal and cite to concrete examples of such harm, CMS relied solely on public commentary, specifically legal commentators. The Court characterized this evidence as highly questionable as the commentators were admittedly biased against arbitration and thus, CMS’s evidence was not based on reliable, independent analysis.

CMS adamantly believes that tort litigation leads to improved health and safety. By allowing residents to sue in court, CMS reasoned that access to the public litigation creates incentives for improving the quality of care in nursing homes. Thus, per CMS, nursing homes engaging in substandard or abusive practices have an incentive to improve patient care because of the threat of negative publicity from lawsuits, especially jury verdicts, which impacts profitability. The Court, however, did not comment on the merits of the foregoing proposition. Rather, the Court concluded that CMS failed to provide empiric evidence, i.e., actual proof, to support its contention and conclusions.

The Court also enjoined the ban because it believed that CMS lacked explicit authority to regulate the use of arbitration. Had Congress granted CMS the power to issue a blanket prohibition against pre-dispute arbitration, Congress would have clearly provided that authority via specific legislative language. Here, by contrast, CMS claimed its authority based on general statutory language. The Court was quite dubious of CMS’s interpretation of the scope of its powers and reprimanded CMS for impermissibly crossing the line between the separation of powers of the legislative and executive branches of government.
Yet, the Court did not say that CMS actually lacked the authority to implement the rule. Instead, the Court held that it was not clear based on the record before it whether CMS had the authority it claimed to possess under its general rule-making powers. So, we can expect CMS to go back to the drawing board to establish to the Court that it does have such authority.

In sum, The Federal Court did not invalidate CMS’s rule, nor endorse arbitration wholesale. It merely issued a preliminary injunction to prevent the rule from taking effect until the merits of the dispute could be decided. Thus, CMS still has the ability to prove that a pre-dispute arbitration ban is proper and within its statutory authority, but now must do so by other means before the court.

Therefore, the future of the proposed ban remains uncertain but, for the time being, the status quo remains. Long-term care facilities can continue to employ arbitration agreements in their admissions process. We caution, however, that such agreements are still routinely challenged on a case-by-case basis and healthcare providers should assure the language in these agreements and the procedures by which arbitration agreements are executed meet all the established legal requirements to permit enforcement.

Steven D. Weiner and Mario Giannettino are partners in the Long-Term Care Practice Group of Kaufman Borgeest & Ryan LLP.




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