The Centers for Medicare and Medicaid Services (CMS), an agency within the U.S. Health and Human Services Department, recently issued a final rule 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. We predicted that the rule would face legal challenges because it conflicted with the Federal Arbitration Act (FAA) and was not authorized by Congress. Our prediction has now materialized.

Ruling for the plaintiffs in a lawsuit brought by health care industry groups, the U.S. District Court for the Northern District of Mississippi has enjoined CMS from enforcing the rule, which was set to take effect on November 28, 2016. In a lengthy opinion, the court agreed that the rule coerced health care providers into giving up their right to enter into arbitration agreements by threatening to withdraw Medicare and Medicaid funding from facilities that continue to use arbitration. The court found that nursing homes are so dependent on such funding that the rule “effectively amounts to a ban on pre-dispute nursing home arbitration contracts.” The court cited “powerful persuasive authority”—including the U.S. Supreme Court’s 2011 ruling in AT&T Mobility v. Concepcion —in concluding that the FAA preempts not only laws covering existing arbitration agreements but also laws prohibiting or regulating the formation of arbitration agreements.

Citing another landmark Supreme Court decision, CompuCredit Corp. v. Greenwood, the court also found that CMS likely overstepped its authority in issuing the rule because Congress did not clearly and directly grant it the authority to regulate or prohibit the use of arbitration agreements. Although the court was sympathetic to the agency’s argument that nursing home arbitration agreements may be susceptible to duress due to the “extreme stress many nursing home residents and their families are under during the admissions process,” it determined that adherence to separation of powers principles outweighed public policy considerations: “Congress did not enact the Rule in this case; a federal agency did, and therein lies the rub. As sympathetic as this court may be to the public policy considerations which motivated the Rule, it is unwilling to play a role in countenancing the incremental ‘creep’ of federal agency authority beyond that envisioned by the U.S. Constitution.” CompuCredit held that the FAA’s pro-arbitration mandate can only be displaced by an express contrary congressional demand in another federal statute.

The court’s decision is subject to interlocutory appeal because it is the grant of a preliminary injunction, not a final judgment. CMS has not announced whether it will pursue an appeal.

The court’s decision was issued shortly after the Supreme Court granted certiorari in Kindred Nursing Ctrs. LP v. Clark. That case presents the question of whether state contract law can prevent nursing homes from forcing arbitration on relatives of former residents who bring wrongful death claims and other allegations.

The court’s analysis may extend beyond the realm of nursing homes. Recently, the U.S. Department of Education issued a final rule that includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act. That rule may also be vulnerable to arguments that it is preempted by the FAA and beyond the agency’s constitutional authority. The decision may also impact the National Labor Relations Board’s efforts to prohibit employers from including class action waivers in employment arbitration agreements.

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.