On November 7, 2016 a federal judge in Mississippi granted a request to temporarily enjoin CMS from implementing a federal rule, scheduled to take effect November 28, 2016, banning the use of mandatory pre-dispute arbitration agreements by federally-funded skilled nursing facilities (Rule). Despite noting the potential public policy arguments for the Rule, the court found that CMS had overstepped by attempting to act without statutory authority.

Background

The validity of arbitration clauses was first addressed almost 100 years ago in the Federal Arbitration Act (FAA). The FAA provides that an arbitration agreement is not invalid merely because it compels arbitration but that it can be nullified based on principles of contract law. Numerous laws designed to restrict the use of arbitration clauses in SNF admission agreements have been proposed over the years, and most have met with strong resistance from providers and other industry groups citing, among other things, that increased lawsuits and the costs associated with litigating disputes and paying claims would cause significant hardship for the industry.

The U.S. Supreme Court has also repeatedly upheld the use of arbitration clauses. In Marmet Health Care Center Inc. v. Brown, 132 S. Ct. 1201 (2010), for example, the Court invalidated a portion of the West Virginia Nursing Home Act that rendered null and void any waivers of the right to bring a court action against a nursing home. The Court remanded the case with instructions that a blanket ban on nursing home arbitrations is not enforceable, but left open the possibility that a court could consider whether or not a specific arbitration agreement is unenforceable under state common law contract principles not specific to arbitration agreements. Similarly, in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the Court interpreted the FAA as preempting the field of state law contract formation and enforcement rules as applied to arbitration clauses, so that state laws regarding the enforceability of contracts cannot overrule the parties’ privately agreed-upon terms for arbitration.

The Rule

The initial version of the Rule, proposed by HHS in July 2015, aimed to improve the disclosure of arbitration clauses in admission agreements. The final Rule, however, took a much harsher stance, cutting off funding to skilled nursing facilities that require arbitration clauses as a condition of admission. HHS enacted the Rule under its executive authority and did not seek congressional approval.

The Lawsuit

As expected, the industry reacted immediately and negatively to the Rule, citing, among other things, the risk of severe increases in litigation costs as well as litigation abuse, the costs of which would ultimately be borne by payers and consumers. The American Health Care Association and four other state and local healthcare groups then filed a class action lawsuit against the Rule, claiming that CMS had exceeded its authority and that the Rule violated the FAA. The government argued the Rule did not ban arbitration agreements outright, but merely provided a financial incentive not to use them. The plaintiffs further claimed that CMS exceeded its authority by effectively creating legislation on an issue that Congress had repeatedly declined to legislate and urged the court to prevent the Rule from taking effect on November 28, 2016.

The United States District Court for the Northern District of Mississippi issued a 40-page order granting the plaintiffs’ motion for a preliminary injunction, temporarily enjoining enforcement of the Rule. The court agreed that CMS did not have the authority to enact the mandate without statutory authority, stating that the Rule exemplified the “incremental creep of federal agency authority beyond that envisioned by the U.S. Constitution.” The court acknowledged the challenges in mandating arbitration clauses in the consumer context, but demurred these as congressional considerations, stating that “Congress’ failure to enact positive legislation should not serve as an excuse for the executive branch to assume powers which are properly reserved for the legislative branch.”

BakerHostetler is actively monitoring developments in this matter and assisting our clients in navigating this period of uncertainty for the industry.