On September 28, 2016, the Centers for Medicare & Medicaid Services (“CMS”) released its first major rule affecting long-term care facilities since 1991. The rule lays out certain improvements in training and quality of care that must be made by facilities over a three-year period. In particular, the rule also specifically bans the inclusion of pre-dispute arbitration clauses in admissions agreements with residents. CMS enacted this rule in order to improve the safety and care of residents and to protect resident rights. CMS believes that pre-dispute arbitration agreements are detrimental to the health and safety of residents as subpar patient care may result from the perceived lack of threat of substantial jury verdicts.

The pre-dispute arbitration prohibition will take effect on November 28, 2016. Although this rule prevents long-term care facilities from entering into new agreements containing pre-dispute arbitration provisions on or after this date, any current agreements that are in place before November 28, 2016 will continue to be enforceable. Additionally, long-term care facilities can still enter into post-dispute arbitration agreements as long as (i) the agreement is explained to the resident in a manner understood by the patient, (ii) the resident acknowledges that they understand the agreement, and (iii) the resident voluntarily enters into the agreement. Furthermore, post-dispute arbitration agreements must allow the parties to select a mutually agreed upon arbitrator and venue.

As a practical matter, this new rule may not have a significant impact upon the industry as in many cases the dispute cannot be arbitrated. In several states, wrongful death plaintiffs cannot be forced into arbitration despite the existence of a pre-dispute arbitration agreement as they are not parties to the agreed upon arbitration agreement and wrongful death claims are separate from claims that occur during the lifetime of the patient.

On October 17,2016, the American Health Care Association along with four long-term care facilities filed a lawsuit against CMS challenging the pre-dispute arbitration ban and seeking an injunction to stop this portion of the rule from taking effect in November. The challenge claims that the regulation exceeds the statutory authority granted to CMS and the Department of Health and Human Services and contradicts the Federal Arbitration Act and Supreme Court rulings upholding arbitration agreements in several industries, including long-term care. The plaintiffs seek a declaratory judgment that the rule is unlawful and request that the Secretary of Health and Human Services be prevented from enforcing it this November.

As far as the financial impact that will be felt by providers, assuming the final rule does take effect, CMS estimates the cost to each facility to be approximately $62,900 for the first year of implementation and $55,000 each year thereafter. It is noteworthy that CMS did not directly respond to the assertion that the prohibition in pre-dispute arbitration could cause insurance premiums to increase and it is not known if CMS factored this potential increase into their estimated costs. Further, any potential costs that arise due to arbitration will vary drastically and are partially dependent upon the quality of the care provided at each facility. In the event a claim does give rise to litigation, there may not be cause for alarm. A 2015 study by Aon Risk Solutions found that for long-term care facilities, the nationwide average cost of an arbitrated claim was $180,000 versus $194,000 for a non-arbitrated claim. Therefore, if the rule takes effect as is, it may have little operational and financial impact on long term care facilities aside from requiring providers to remove pre-dispute arbitration provisions from admissions agreements.