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Is Arbitration of Skilled Nursing Facility Disputes Headed into the Sunset?

by posted by on November 07, 2016

A body of Arizona law on the enforceability of pre-dispute arbitration provisions in skilled nursing facility contracts may be headed into the sunset due to new federal regulations proposed by the Centers for Medicare and Medicaid Services (“CMS”) that take effect November 28, 2016. Section 483.70(n) of the regulations prohibits skilled nursing facilities that participate in Medicare and Medicare programs from entering into binding arbitration agreements with their residents until after a dispute arises between the parties.

Volume 81 of the Federal Register, Number 192, published October 4, 2016, discusses the new regulations. There, CMS pointed out that the use of arbitration agreements by skilled nursing facilities has significantly increased since the 1990’s and that the American Bar Association, the American Health Lawyers Association and the American Arbitration Association had expressed concerns about the fairness of pre-dispute binding arbitration clauses in the long-term care context.

The regulations state that to continue receiving Medicare and Medicaid funds skilled nursing facilities must not enter into an agreement for binding arbitration with a resident until after a dispute arises between the parties. Thus the regulations prohibit the use of pre-dispute binding arbitration agreements in contracts entered into after November 28, 2016.

In addition to that overarching requirement, the regulations also require skilled nursing facilities to explain arbitration agreements to their residents in a form, manner and language that they understand and that the residents be informed that they are waiving the right to judicial relief for any potential cause of action covered by the agreement. Further, an agreement for binding arbitration cannot be contained in any other agreement.

Among the nearly one thousand comments CMS received on the proposed regulations was a letter from 16 state attorneys-general stating that pre-dispute arbitration agreements were harmful to residents in skilled nursing facilities because of the coercive nature of having the resident sign an agreement during the admission process before a dispute has arisen; the cost of arbitration to the residents; and the secrecy of the arbitration process.

CMS contends that there is significant evidence that pre-dispute arbitration agreements have a deleterious effect on the quality of care for Medicare and Medicaid patients, which clearly warrants their regulation for the following reasons:

  1. It is almost impossible for residents and their representatives to give fully informed, involuntary consent to arbitration before a dispute has arisen.
  2. Residents should have a right to access the court system if a dispute with a facility arises.
  3. The rule does not affect already existing pre-dispute arbitration clauses but prohibits skilled nursing facilities from using them in the future as a condition of participating in the Medicare and Medicaid programs.
  4. The comments CMS received lead them to the conclusion that pre-dispute arbitration clauses are by their very nature unconscionable.
  5. The literature suggests evidence that pre-dispute arbitration agreements were detrimental to the health and safety of SNF facility residents because of the unequal bargaining power between the resident and the facility; inadequate explanation of the arbitration agreement; the inappropriateness of presenting the agreement upon admission which is an extremely stressful time for residents; and negative incentives on staffing and care as a result of not having the threat of a substantial jury verdict for substandard care.
  6. The disadvantages to the residents in arbitration, i.e., lack of judicial review, lack of choice of arbitrators, the venue for the arbitration, and limitations on discovery and damages, such as punitive damages.

CMS responded to comments that it should not be interfering in a matter that is a private contract by stating that in many cases, Medicare and Medicaid are the sole payors for skilled nursing facilities’ services.

Residents raised additional issues including: the resident’s competency to enter into such agreements upon entry into a facility; the extent of a representative’s authority to bind the resident to an arbitration provision; unconscionability; the doctrine of reasonable expectations; whether arbitration provisions can be enforced against statutory beneficiaries in a wrongful-death claims; the skilled nursing facility’s breach of fiduciary duty in obtaining a signature; the amount of explanation of the arbitration provision, if any, before signing; and whether the arbitration provisions apply to claims brought under Arizona’s Adult Protective Services Act, A.R.S. §46-451 et. seq.

For a discussion of some of these issues see, Duenas v. Life Care Centers of America, Inc. 236 Ariz. 130, 336 P. 3d 763 (App. 2014), and Cortez v. Avalon Care Center Tucson, L.L.C., 226 Ariz. 207, 245 P.3d 892 (App. 2010).

Arguably, the new regulations may violate the Federal Arbitration Act (“FAA”) 9 U.S.C. §1 et seq. The U.S. Supreme Court unequivocally held in Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201, 182 L. Ed. 2d 42 (2012) that state and federal courts must enforce the FAA, reversing a West Virginia Supreme Court of Appeal decision that an arbitration clause in a nursing home admission agreement adopted prior to an occurrence of negligence shall not be enforced to compel arbitration.

CMS argues that, notwithstanding the Supreme Court’s ruling in Marmet, supra, the FAA does not prohibit CMS from issuing regulations concerning pre-dispute arbitration clauses in admission contracts for these reasons:

  1. The plain language of the FAA applies only to existing arbitration agreements voluntarily made between parties;
  2. The regulations will have no legal effect on the enforceability of existing pre-dispute arbitration agreements;
  3. The new regulations only bar the receipt of federal funds if pre-dispute arbitration is required in admission contracts, rather than absolutely prohibiting arbitration; and
  4. The regulations allow post-dispute arbitration agreements.

It remains to be seen whether courts will strictly apply Marmet, supra, to find
that the new regulations operate to prohibit arbitration in skilled nursing facility disputes or accept CMS’s arguments that the new regulations do not prohibit all arbitration but only affect CMS’s payments to skilled nursing facilities.

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