CMS Finalizes Rules on Nursing Home Arbitration Agreements
The uncertainty surrounding the use of arbitration agreements in nursing homes has finally ended—at least for now. On July 16, 2019, CMS released its long-awaited final rule, which updates the requirements nursing homes must meet to use binding arbitration agreements. CMS published the official version of its final rule in the federal register on July 18, 2019. See 84 Fed. Reg. 34718.
For over two decades, the long-term care industry has offered arbitration agreements as a means of resolving disputes. Arbitration has been an encouraged form of dispute resolution since Congress passed the Federal Arbitration Act of 1925 (the “FAA”). Arbitration is a streamlined process for resolving disputes. The parties present their dispute to one or more independent neutrals who issue a decision that is legally binding on both sides. Arbitration offers an efficient means of resolving disputes, as opposed to enduring the time and expense of protracted litigation. Arbitration agreements permeate almost seventy percent of consumer financial transactions in the United States, ranging from cellular phone contracts, to credit cards, and checking accounts.
Like these numerous other business segments throughout the country, many nursing facilities offer their residents the opportunity to select arbitration as a means of resolving future disputes, i.e., before any dispute has arisen or “pre-dispute.” Pre-dispute arbitration agreements allow parties to agree to settle future disputes through an arbitration process rather than through litigation. In October 2016, the Obama administration banned the use of pre-dispute binding arbitration agreements in long-term care facilities, but in response to a legal challenge, a federal judge declared the attempted ban illegal and issued an injunction halting CMS from enforcing the rules.
In June 2017, in accordance with the injunction, CMS published a proposed rule that would remove the ban on pre-dispute arbitration agreements, and the agency solicited public comments on the rule. At that time, CMS determined that it could best protect resident rights by allowing residents the ability to choose their method of dispute resolution, including arbitration. CMS has been studying the comments and updating its rule, which it has now finalized. As with its 2017 proposed rule and consistent with the federal court’s injunction, the final rule reverses the prior administration’s wholesale ban on pre-dispute arbitration agreements in nursing facilities.
In its comments to the final rule, CMS rejected the argument that its current stance is politically motivated, stating that there was “very little statistical data” and “little solid social science research evidence” to support the prior administration’s attempted ban on arbitration. (In fact, the only “stakeholder” consulted for the 2016 attempted ban on arbitration was the American Trial Lawyers Association n/k/a the American Association for Justice (AAJ), which itself relied on only one citation in support of its arbitration comments—a link to a 2011 self-published article that remains labeled and watermarked as a “DRAFT.”) Therefore, in its final rule, CMS authorizes nursing facilities to use binding arbitration agreements, subject to certain conditions, most of which the industry had previously adopted voluntarily without any regulatory compulsion. Now, CMS has incorporated many of those industry best-practices into law.
It remains an open question whether CMS actually has authority to regulate arbitration as part of its conditions of participation, so this final rule may face a lawsuit similar to the one that struck down the Obama administration’s arbitration ban. And, even if these conditions of participation regulations do survive any potential court challenge, it remains an open question whether these regulations create only survey risk, or whether they may affect the validity or enforceability of non-compliant agreements. There is a very strong argument that these conditions of participation regulations would not affect the actual validity or enforceability of arbitration agreements that would otherwise be enforceable under the FAA and applicable contract law. However, providers can expect that plaintiff lawyers will take a different position, and providers should therefore minimize their risk. Now is the time to update admission agreements and packets.
Voluntary Arbitration. The most notable provision in the final rule requires arbitration agreements to be a voluntary, versus a mandatory, part of the admissions process. Thus, facilities whose admissions agreements contain arbitration provisions that must be accepted by residents as a condition of admission will need to update their agreements for new patients or risk survey deficiencies and challenges to the validity or enforceability of their arbitration agreements.
Inform Resident and Representative that Arbitration is Voluntary. As a corollary to the ban on mandatory arbitration agreements, CMS is requiring facilities to “explicitly inform the resident or his or her representative of his or her right not to sign the agreement as a condition of admission to, or as a requirement to continue to receive care at, the facility.” Most providers’ agreements, if voluntary, already include this type of language. While it should be enough to include the language in the arbitration agreement, providers will probably want to go one step further and include this disclosure as part of the oral explanation checklist for arbitration, discussed in more detail below.
Explain the Agreement. The most challenging aspect of the final rule—and one that the industry unsuccessfully urged CMS to remove—is the requirement that facilities explain arbitration agreements “to the resident and his or her representative in a form and manner that he or she understands, including in a language the resident and his or her representative understands.” On the surface, this provision does not appear too controversial, but in practice, it may prove difficult to implement. An explanation “in a form and manner that [the resident] understands” may require customized explanations of legal contracts by non-lawyer admission staff. What “forms” and “manners” could be used to explain a contract? Besides a signature, how can one measure and evaluate the resident’s understanding? Demonstrating compliance with this requirement in the survey context, which may be fairly close in time to when the agreement was explained and signed, will be challenging enough. But the dilemma will become even further magnified when the parties attempt to enforce the agreement years after the explanation and signature, by which time memories will have faded and competent witnesses may be unavailable. And, of course, plaintiff attorneys will try to capitalize on this provision by deposing admission staff on their processes for explaining the agreement, as well staff members’ recollections of individual resident and representative’s understanding.
In short, the explanation requirement is inconsistent with the established principle that each person has a duty to read and understand the terms of a contract before he or she signs it. But for the time being, facilities will need to implement procedures in order to avoid survey tags and possibly to preserve the enforceability of their agreements. One such practice is a short summary sheet that admissions staff may read to residents and resident representatives and then include in the admission packages with the signed arbitration agreements. A sample form is available here. Facilities will need to have this form reviewed by their own legal counsel and tailored to their specific needs.
Option to Revoke. For years, most members of the long-term care industry have included a provision in their arbitration agreements allowing residents thirty days to revoke or rescind the agreement. Indeed, the model agreements adopted by the American Health Care Association and the American Health Lawyers Association include such a provision. With its final rule, CMS has now made the thirty day revocation requirement a condition of participation. The rule is silent on whether the revocation must be in writing. Arguably, the better practice is to require a written revocation so that there is a proper record of the revocation and ability to track, rather than creating the potential for residents or their representatives claiming years after the fact that they orally revoked.
Communications with Officials. Addressing a problem that does not exist, CMS disallowed language in arbitration agreements that prohibits or discourages the resident or anyone else from communicating with federal, state, or local officials, including federal and state surveyors, other federal or state health department employees, and representatives of the Office of the State Long-Term Care Ombudsman. Again, this has been part of the industry’s self-regulating model agreements for years, and CMS offered no evidence that any facilities were actually attempting to limit communications with officials or even that this had occurred as an unintended consequence.
Maintaining Agreements and Arbitration Awards. In a new provision, CMS is requiring facilities that resolve a dispute through arbitration to retain a copy of the signed arbitration agreement and the arbitrator’s final decision for five years after the resolution of that dispute. The agreement and the decision must be available for inspection upon request by CMS or its designee. For most facilities, their in-house or outside law firms should typically retain the arbitration agreements and awards in their long-term files, so this new five year retention provision is not particularly onerous. At the facility level, however, it may prove challenging to maintain these records in a readily accessible location for surveyors to review, whether electronically or manually. Facilities should consider adopting procedures within their risk management or compliance departments to track and retain the arbitration decisions and the corresponding agreements. The penalty for non-compliance on this condition of participation, like the others, is a survey tag, so facilities will not run the risk of having the decisions invalidated if they cannot be located. Also, expect plaintiff attorneys to begin requesting these same files through discovery, even though objectionable and not relevant to their cases.
Existing Agreements Unaffected. For arbitration agreements already in place, CMS recognized in the comments to its final rule that it has no authority to annul those contracts. According to CMS: “Current arbitration agreements that are valid under the applicable state or other relevant jurisdiction’s laws are still valid.” While CMS suggested that providers may want to offer residents updated arbitration agreements that conform to the final rule, this is not necessary and may come with risks of its own, especially if residents refuse to sign or sign but then revoke the new agreements.
Signing Agreements After Admission. Some commentators sought to ban facilities from presenting arbitration agreements to existing residents, but CMS rejected this request. CMS explained that if a long-term care facility complies with the new provisions of the final rule, then residents should feel that they have free choice in whether to sign the arbitration agreement. CMS is confident that residents are protected from being transferred or discharged because of a refusal to sign an arbitration agreement, as any such transfer or discharge would result in a citation. With this guidance, facilities now have CMS’s permission to enter into arbitration agreements with existing residents, so facilities could implement routine schedules for presenting agreements facility-wide.
Venue of Hearing. The final rule requires that arbitration agreements provide for hearing venues that are convenient to both parties. To accomplish this purpose, industry agreements have traditionally called for the hearing to be near the facility or at a mutually agreeable location, with the presumption that a location near the facility would accommodate resident transfer needs if the resident needed to participate. The lack of clarity in CMS’s new provision could create uncertainty, especially in those circumstances when one of the parties is an out-of-state representative. Going forward, facilities may prefer to use the vague language specified by CMS, along with an option for the arbitrator to exercise discretion, as follows: “The venue of the arbitration hearing shall be in a location that is convenient to the parties, and the arbitrator is authorized to specify a venue that accounts for the travel costs and burdens of the parties and witnesses, the health needs of the resident, the location of the facility, and the proximity of events giving rise to the dispute.”
Effective Date. The provisions of the final rule become effective sixty days after the July 18 official publication. Thus, providers should complete their admission package and processes updates by September 16, 2019.
Conclusion. As part of good business practices and customer service, the industry has previously self-implemented many of the requirements of the final rule. For most providers, the final arbitration rule should not trigger massive overhauls in the admission packets or processes. For those providers, however, who require arbitration agreements as a condition for admission or who include arbitration as a mandatory part of the admission agreement, some significant and prompt changes are required, as CMS allowed only sixty days for compliance. For everyone else, the most challenging new requirement will be the duty to explain the agreement in a form and language that the resident and the resident’s representative understand. To that end, we hope that a variant of the attached explanation form will prove useful. In addition, we have included below a short restatement of the final rule’s main requirements, which include a few other straightforward provisions that we did not cover in this article. For more information or for help updating your facility’s arbitration program, please contact Jason Bring or Jerad Rissler.
Summary Restatement of Final Rule Provisions
If a facility chooses to ask a resident or his or her representative to enter into an agreement for binding arbitration, the facility must comply with the following requirements:
- The facility must not require any resident or his or her representative to sign an agreement for binding arbitration as a condition of admission to, or as a requirement to continue to receive care at, the facility and must explicitly inform the resident or his or her representative of his or her right not to sign the agreement as a condition of admission to, or as a requirement to continue to receive care at, the facility.
- The facility must ensure that:
i. The agreement is explained to the resident and his or her representative in a form and manner that he or she understands, including in a language the resident and his or her representative understands;
ii. The resident or his or her representative acknowledges that he or she understands the agreement;
iii. The agreement provides for the selection of a neutral arbitrator agreed upon by both parties; and
iv. The agreement provides for the selection of a venue that is convenient to both parties.
- The agreement must explicitly grant the resident or his or her representative the right to rescind the agreement within 30 calendar days of signing it.
- The agreement must explicitly state that neither the resident nor his or her representative is required to sign an agreement for binding arbitration as a condition of admission to, or as a requirement to continue to receive care at, the facility.
- The agreement may not contain any language that prohibits or discourages the resident or anyone else from communicating with federal, state, or local officials, including but not limited to, federal and state surveyors, other federal or state health department employees, and representatives of the Office of the State Long-Term Care Ombudsman, in accordance with §483.10(k).
- When the facility and a resident resolve a dispute through arbitration, a copy of the signed agreement for binding arbitration and the arbitrator’s final decision must be retained by the facility for 5 years after the resolution of that dispute on and be available for inspection upon request by CMS or its designee.
- Jason E. Bring
- W. Jerad Rissler