In Final Rule, CMS Acts to Bar Pre-Dispute Binding Arbitration Agreements With Nursing Home Residents Effective November 28, 2016
On September 28, 2016, the federal Centers for Medicare and Medicaid Services (“CMS”) issued its long-awaited final rule that, among other things, prohibits skilled nursing facilities (“SNFs”) and nursing facilities (“NFs”) participating in the Medicare or Medicaid programs from requiring pre-dispute binding arbitration in any new admission agreements executed on or after November 28, 2016. The regulatory prohibition is not limited to conditioning a resident’s admission to the nursing home on an agreement to arbitrate. It also prohibits the inclusion of a binding arbitration clause in the admission agreement, even if the resident is given the opportunity at the time of admission to “opt out” of the arbitration agreement.
According to CMS, the regulatory bar to mandatory arbitration is grounded in (i) federal statutes permitting the Secretary of the Department of Health and Human Services (“HHS”) to establish additional requirements “relating to the health, safety, and well-being of SNF and NF residents respectively, as the Secretary finds necessary”; and (ii) the agency’s statutory authority to impose conditions for payment to providers under the Medicare and Medicaid programs. Relying on that authority, CMS determined that there is significant evidence that pre-dispute arbitration agreements have a “deleterious impact on the quality of care of residents” warranting a regulatory response.
The final rule does not directly apply to admission agreements containing mandatory arbitration clauses that were in place prior to November 28, 2016. Nevertheless, CMS believes that any such agreements are “unconscionable” and potentially unenforceable as well.
The Proposed Regulations
On July 16, 2015, CMS issued proposed regulations (the “Proposed Regulations”) (found at 80 Fed. Reg. 42168) that included criteria for the enforceability of any binding arbitration clause contained in a nursing home’s admission agreement, as summarized in the Federal Register:  “the facility be required to explain the agreement to the resident in a form, manner and language that he or she understands and have the resident acknowledge that he or she understands the agreement”;  “[t]he agreement . . . not contain any language that prohibited or discouraged the resident or any other person from communicating with federal, state, or local officials. . . .”;  the “facility would be required to inform the resident, at a minimum, that the resident was waiving his or her right to judicial relief for any potential cause of action covered by the agreement”; and  “the agreement could only be entered into by the resident voluntarily and would have to provide for the selection of a neutral arbitrator and a venue convenient to both parties, the resident and the facility.” 80 Fed. Reg. 42211 (7/16/15).
CMS Final Regulations
In the final rule, CMS -- responding to much criticism among the one-thousand comments to the Proposed Regulations -- determined to bar pre-dispute arbitration agreements altogether, while retaining some of the other resident protections for any agreements entered into, subsequent to admission and after a dispute has arisen.
The final rule, codified at 42 CFR § 483.70(n) (Binding Arbitration Agreements), provides --
a facility must not enter into a pre-dispute agreement for binding arbitration with any resident or resident’s representative;
a facility must not require that a resident sign a binding arbitration agreement as a condition of admission; and
if, after a dispute between the facility and a resident arises, a facility chooses to ask a resident or the resident’s representative to enter into an agreement for binding arbitration, the facility must ensure that:
the agreement is explained to the resident/resident’s representative in a form and manner that he or she understands, including in a language the resident/resident’s representative understands, and
the resident acknowledges that he or she understands the agreement.
The arbitration agreement itself must also provide basic protections for the resident, including that the agreement --
be entered into by the resident voluntarily;
provide for the selection of a neutral arbitrator agreed upon by the parties; and
provide for selection of a venue convenient to both
Additionally, the arbitration agreement may not:
condition a resident’s right to remain in a facility upon the resident/resident’s representative signing a binding arbitration agreement;
contain any language that prohibits or discourages the resident or anyone else from communicating with federal, state, or local officials, including but not limited to federal and state surveyors, other federal or state health department employees, and representatives of the Office of the State Long-Term Care Ombudsman, in accordance with 42 CFR § 483.10(k).
The final rule further provides that the arbitration agreement may be signed by an individual other than the resident (i.e. the resident’s representative or guardian) only if:
allowed by state law;
all of the requirements in the final rule are met; and
the individual signing the arbitration agreement has no interest in the facility.
Finally, when a dispute is resolved through arbitration, a copy of the signed arbitration agreement, and the arbitrator’s final decision, must be retained by the facility for five years and available for inspection upon request by CMS or its designee. CMS noted that although arbitration proceedings themselves could still be confidential, the retention requirement will enable CMS to evaluate the impact of arbitration agreements on residents and the long term care industry.
Prospect for Legal Challenges to the Final Rule
A number of courts have invalidated state-law initiatives to ban binding arbitration agreements between residents and nursing homes as contrary to the Federal Arbitration Act (9 U.S.C.A. Section 1 et seq.) (the “FAA”). Moreover, the Supreme Court in Marmet Health Care Center, Inc. v. Brown, 132 S.Ct. 1201 (2012), vacated a state court’s holding that pre-dispute arbitration agreements pertaining to claims of personal injury or wrongful death were unenforceable as against public policy, citing to the FAA.
Legal action to challenge the validity of the final rule thus remains a distinct possibility. The outcome of any such litigation, however, is uncertain. In this regard, the FAA contains a “saving clause”, which provides that agreements to arbitrate may be invalidated under common-law grounds such as “fraud, duress or unconscionability”. In its preamble to the final rule, CMS acknowledges that an argument could be made that a pre-dispute arbitration agreement should not be enforced based on the “savings clause”. For its part, CMS notes that the negative comments it received to the Proposed Regulations “confirmed our conclusion that pre-dispute arbitration clauses are, by their very nature, unconscionable. . . [i]t is virtually impossible for a resident or their surrogate decision-maker to give fully informed or voluntary consent to such arbitration provisions [when] refusing to agree to the arbitration clause, in most cases, means that care will be denied.” Under CMS’ view, the enforceability of all nursing home admission agreements containing arbitration clauses -- including existing agreements signed prior to November 28, 2016 -- would be vulnerable to challenge as “unconscionable”.
Key Takeaway: At the very least, nursing home providers should review and revise their form admission agreements now, where necessary, so as to ensure that, on and after November 28, 2016, they do not contain mandatory arbitration provisions and otherwise are compliant with the final rule.