The Centers for Medicare and Medicaid Services (CMS), an agency within the U.S. Health and Human Services Department, has issued a final rule that includes prohibiting nursing homes and other long-term care facilities from utilizing pre-dispute arbitration agreements, as a requirement for participating in Medicare and Medicaid programs. The rule would not apply to already-existing or post-dispute arbitration agreements, but would bar the use of pre-dispute arbitration agreements in contracts finalized on or after November 28, 2016. The rule also includes changes and updates to the resident rights statements, staffing requirements, hospital discharge plans and infection prevention and control programs.

Critics have argued that the rule conflicts with the Federal Arbitration Act, which makes pre-dispute arbitration agreements “valid, irrevocable and enforceable.” In a 2012 per curiam opinion, Marmet Health Care Center, Inc. v. Brown, the U.S. Supreme Court held that the FAA preempted a West Virginia Supreme Court of Appeals decision that refused to enforce pre-dispute arbitration agreements in nursing home contracts that required personal injury and wrongful death claims to be arbitrated. The Marmet Court emphatically held that the FAA “includes no exception for personal-injury or wrongful-death claims” and that “[s]tate and federal courts must enforce the [FAA] … with respect to all arbitration agreements covered by that statute.”

Nevertheless, CMS concluded that its anti-arbitration rule does not conflict with the FAA. It reasoned that the FAA only applies to existing arbitration agreements and does not restrict its ability to prohibit nursing homes from entering into future agreements if they want to participate in the Medicare and Medicaid programs. “We have only prohibited pre-dispute arbitration agreements between facilities and residents as a condition of participation in Medicare and Medicaid,” the rule states. “If a facility wishes to continue to utilize pre-dispute agreements, it is free to continue in business without Medicare or Medicaid residents.” CMS also found that Marmet was inapposite because that case, like the FAA, involved existing arbitration agreements, not future contracts.

It is anticipated that the new rule will face legal challenges. The nursing home industry might argue that since Congress enacted the FAA, only Congress can amend it. However, the Social Security Act, from which CMS purports to derive its authority, does not regulate arbitration agreements or delegate the authority to regulate such agreements to CMS. By contrast, the proposed rule recently issued by the Consumer Financial Protection Bureau (CFPB) that would prohibit consumer financial services companies from including class action waivers in their customer agreements derives from Section 1028 of the Dodd-Frank Act, in which Congress authorized the CFPB to regulate consumer arbitration agreements if certain criteria were satisfied.

The industry might also argue that the FAA protects not only existing arbitration agreements, but the right of parties to enter into such agreements in the first instance. In Allied-Bruce Terminix Cos., Inc. v. Dobson, the U.S. Supreme Court held that the FAA invalidated an Alabama statute making pre-dispute arbitration agreements invalid and unenforceable. The Supreme Court emphasized that “the basic purpose of the Federal Arbitration Act is to overcome courts’ refusals to enforce agreements to arbitrate.” Protecting the rights of parties to existing arbitration agreements would be a futile act if parties have no right to enter into such agreements in the first place solely because they concern arbitration. In Allied-Bruce Terminix and numerous subsequent decisions, the Supreme Court has emphasized that arbitration agreements cannot be singled out for special treatment and must be placed “upon the same footing as other contracts.”

Whether the CMS anti-arbitration rule survives any legal challenges will likely impact the growing volume of nursing home litigation in the state and federal courts. For example, state and federal courts in New Mexico sharply disagree on whether nursing home arbitration agreements are enforceable under the FAA. And, just days ago, in a lawsuit against a nursing home, a divided Pennsylvania Supreme Court, relying on Marmet, held as a matter of first impression that the FAA preempts a state law procedural rule requiring that survival and wrongful death actions be consolidated for trial. Arbitration issues such as these may sharply decline if the CMS anti-arbitration rule withstands any attempts to judicially overturn it.

Conversely, if the rule does stand, numerous issues may arise regarding the rule’s application to existing arbitration agreements, which CMS states are grandfathered. For example, if an existing nursing home contact with an arbitration agreement is amended after the effective date of the rule, will CMS contend that the contract is now subject to the rule? Questions such as this should be considered now since the rule takes effect in less than 60 days.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The CFS Group also produces CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments.

Attorneys in Ballard Spahr’s Health Care Group represent clients across the health care industry, including clinical laboratories, pharmacies, hospitals, long-term care facilities, insurance companies, and pharmaceutical manufacturers. Our attorneys counsel clients on regulatory, compliance, privacy and data security, transactional, financing, benefits and compensation, and labor and employment matters.