New CMS Rule Bans Pre-Dispute Arbitration Agreements for Nursing Home Residents

In one of the biggest rule changes regarding skilled nursing facilities since 1991, the Center for Medicare and Medicaid Services (CMS) announced in late September that it was banning pre-dispute arbitration agreements in nursing home residency agreements, effective November 28, 2016.  This rule change protects the rights of nursing home residents (and their families) to access the legal system in cases of abuse or neglect of a resident by a facility.  This blog entry seeks to explain the battle behind the rule change, and why that battle may not yet be over.

The initial CMS rule, which was proposed in July 2015, received more than 10,000 comments.  According to CMS Acting Administrator Andy Slavitt, many of these comments concerned pre-dispute arbitration clauses.  Such clauses are contained in a nursing home admissions agreement that is signed by the prospective resident and/or his family member, guardian or conservator, or Agent under a Durable Power of Attorney. These  binding arbitration clauses require that if there is ever a dispute regarding the care the facility provided to the resident, the resident and anyone acting on the resident’s behalf waives the right to a jury trial and limits or eliminates the range of legal remedies available.  Instead, residents and those acting for them are often limited to pursuing binding arbitration, meaning that a single arbitrator or a small panel of arbitrators (often three) will hear from both the facility and from the resident and then issue a decision that is binding.

Many businesses (including nursing home facilities) typically favor arbitration agreements because these agreements provide a predictable process for resolving disputes in which litigation costs and timelines can otherwise spiral out of control.  In contrast, resident’s rights groups, trial attorneys, and others argue that depriving a resident or others acting for a resident from the right to access to trial by jury is unfair, and prevents residents and their families from recovering for wrongs that the residents have suffered at the hands of negligent facilities.

The origin of the new CMS rule can be found in the outcry following a controversial 2012 U.S. Supreme Court decision, Marmet Health Care Center, Inc. v Brown.  Marmet involved three negligence lawsuits that were brought by the family members of deceased former nursing home residents against nursing homes in West Virginia.  In Marmet, all nine justices of the Supreme Court joined together to issue a rare “per curiam” (unanimous) decision that a West Virginia state law which prohibited all binding pre-dispute arbitration clauses in nursing home admission contracts was not enforceable.  Rather, the Court reiterated that state and federal courts must enforce the Federal Arbitration Act (which allows for such arbitration clauses in business contracts) and that the federal Act pre-empted the laws of West Virginia or any other state that wanted to ban such binding arbitration clauses.  Students of the U.S. Constitution will note that Article VI, Clause 2 of the Constitution, the Supremacy Clause, states that:

“This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.”

While the 2012 Marmet decision was met with praise from skilled nursing facility operators across the country and the long-term care industry in general, nursing home residents’ rights groups, trial attorneys, and others quickly recognized that overturning a Supreme Court decision would require the Court to grant a writ of certiorari and thus agree to hear a case on the same issue and, they should instead focus their collective efforts on the Center for Medicare and Medicaid Services (CMS), and lobby for a new CMS rule that would enshrine and protect the rights of residents to the legal process, and end the use or enforceability of binding arbitration agreements in nursing home admissions contracts.

This lobbying approach raises an important question:  How could CMS issue a rule that directly conflicts with a U.S. Supreme Court decision?  In the case of the new rule, CMS did so by distinguishing the facts of Marmet (which arose from three negligence lawsuits against nursing home facilities), and instead grounding the rule change in authority granted under the Social Security Act to the Secretary of Health and Human Services to issue “such rules as may be necessary to the efficient administration of the functions of the Department,” which includes supervision of all providers, including long-term care providers, who “participate in the Medicare and Medicaid programs.”   CMS further explains (at page 399 of the 700 (!) page commentary to the new rules):

“Based on the comments received in response to this rulemaking, we are convinced that requiring residents to sign pre-dispute arbitration agreements is fundamentally unfair because, among other things, it is almost impossible for residents or their decision-makers to give fully informed and voluntary consent to arbitration before a dispute has arisen. We believe that LTC residents should have a right to access the court system if a dispute with a facility arises, and that any agreement to arbitrate a claim should be knowing and voluntary. . . .

We recognize that an argument could be made that Medicare and Medicaid beneficiaries can assert in Court the FAA’s saving clause if they believe that a pre-dispute arbitration agreement should not be enforced. However, the comments we have received have confirmed our conclusion that pre-dispute arbitration clauses are, by their very nature, unconscionable. As one commenter noted, it is virtually impossible for a resident or their surrogate decision-maker to give fully informed or voluntary consent to such arbitration provisions. That same commenter 402 also noted that refusing to agree to the arbitration clause, in most cases, means that care will be denied.

Furthermore, Medicare and Medicaid beneficiaries are aged or disabled and ill. Many beneficiaries lack the resources to litigate a malpractice claim, much less an initial claim seeking to invalidate an arbitration clause. Rather than requiring Medicare and Medicaid beneficiaries to incur the additional fees, expense, and delay that would be the direct cost of opposing a motion to enforce arbitration, we have concluded that this is precisely the type of situation envisioned by the Congressional grant of authority contained in sections 1819(d)(4)(B) and 1919(d)(4)(B) of the Act authorizing the Secretary to establish “such other requirements relating to the health, safety, and well-being of residents or relating to the physical facilities thereof as the Secretary may find necessary.”

     Significantly, just hours before the final long-term care rules were issued by CMS, the Pennsylvania Supreme Court enforced pre-dispute arbitration agreements for nursing home residents in Taylor v. Extendicare Health Facilities (decided September 28, 2016).

The long-term care industry did not take kindly to the new CMS rule, as reported by long-term care industry insiders at McKnight’s News on September 29, 2016:

“That provision [of the new CMS rule] clearly exceeds CMS’s statutory authority and is wholly unnecessary to protect residents’ health and safety,” said Mark Parkinson, president and CEO of the American Health Care Association, the industry advocacy group for skilled nursing care facilities.

Similarly, Leading Age, the industry advocacy organization for Continuing Care Retirement Communities (CCRCs)  states that supported arbitration agreements that are “properly structured and allow parties to have a speedy and cost-effective alternative to traditional litigation,” but believes CMS’s outright ban of arbitration agreements is a step too far.   “Arbitration agreements should be enforced if they were executed separately from the admission agreement, were not a condition of admissions, and allowed the resident to rescind the agreement within a reasonable time frame,” LeadingAge added in its statement on the new CMS rule.

It may be many months before the next salvo of this ongoing battle over how long-term care providers can shape or limit the legal processes available to their residents to resolve disputes about care.  We will certainly follow up with updates as they are available.