AHCA Sues to Enjoin Prohibition on Binding Arbitration

On October 4, 2016 CMS issued its Final Rule entitled “Reform of Requirements for Long Term Care Facilities” which updates the requirements for all SNFs and NFs participating in Medicare and Medicaid. Many of the changes impact quality of care, discharge, behavioral health issues and related issues associated with the general direction of CMS to more value based payment methods evidenced by ACO’s, bundled payments and other initiatives.

One component of the new rule scheduled to go into effect on November 28 of this year prohibits any form of pre-dispute binding arbitration. For several years, many skilled facility operators have included binding arbitration in their admission protocols/documentation supported by the guidance in the Federal Arbitration Act (FAA) ; the latter overrides contrary State laws restricting arbitration, unless the arbitration provision is the result of fraud or otherwise is unconscionable under State law (the CMS position is the latter). Whether a provision in a certain setting is unconscionable under State law has been the subject of extensive litigation. However, most States have allowed pre dispute binding arbitration, some with certain disclosure conditions.

The Final rules would allow post-dispute arbitration but only with certain conditions observed including clear disclosure, site and arbitrator neutrality , joint selection and removal of any condition on continued occupancy . As is pointed out in the rule commentary however, barring pre-dispute binding arbitration essentially guts the extent to which arbitration will be used since it is de facto post dispute when the parties are in conflict.

Significantly, the Rule prohibits binding pre-dispute arbitration in any certified Medicare or Medicaid facility even if the resident in question is private pay.  Facilities that are pure private pay (AL, for example) are exempt.

Since the Final Rule was released, AHCA has initiated a declaratory action and injunction in Mississippi US D CT, seeking to enjoin the Rule.

The primary argument advanced by AHCA for the injunction is that in the absence of express legislative authority permitting a preclusion of binding arbitration , CMS lacks the authority to override the FAA. Legislative action in the securities (eg Dodd Frank) and DOD areas (subcontractors) which allowed an override of the FAA (allowing a bar against binding arbitration) are cited as examples of cases where Congress knows when to allow the FAA to be overridden and specifically does so. Additionally, prior bills before Congress to implement the Final Rule as to arbitration have failed, expressing further intent of Congress in this area favoring binding arbitration.

Perhaps one of the more interesting arguments in the AHCA complaint is that CMS admits it did not perform a Regulatory Flexibility Act (“ RFA”) analysis—each federal regulation is required to be tested by the issuing agency against alternatives that have a lesser economic impact on the sector regulated unless the agency deems the costs of implementation not material. Here CMS estimated the costs to be less than 1% of the revenue per SNF and did not perform an RFA review. Industry is challenging that finding given an expected increase in insurance premiums, legal defense costs of tort claims, and overall implementation costs. In effect, SNFs that prefer to keep pre-dispute binding arbitration risk losing all federal funding—this includes facilities that use binding arbitration only in the case of private pay patients as long as the SNF is Medicare or Medicaid certified.

CMS’ primary arguments in favor of arbitration are associated with the general authority of CMS to issue regulations that protect the health and safety and advance the rights of residents.

The many pros and cons of alternative dispute resolution have been debated extensively and are discussed in the commentary. Whether arbitration is a cost effective form of justice that benefits both sides (and converts costly litigation to funds for care) or imposes on consumers a forum that some feel should be elective, is a matter of perspective.

Ultimately, the road forward will likely be decided on legal not policy grounds.