Recently, in a closely-watched and highly-contested case out of the Western District of Arkansas, the U.S. District Court ruled in favor of the Department of Health and Human Services striking down a challenge to the enforceability of the 2019 Final Rule that imposes several requirements and restrictions on the use of pre-dispute arbitration agreements in skilled nursing facilities participating in the Medicare and Medicaid programs. These facilities, referred to herein as LTC facilities, represent the vast majority of long term care facilities in the United States.
By way of history, changes to the rules surrounding arbitration in LTC facilities date back to October 2016. The Centers for Medicare & Medicaid Services (“CMS”) published a prior Final Rule prohibiting LTC facilities from entering into any pre-dispute arbitration agreements with a resident or a resident’s representative. That rule was challenged and, in November 2016, the United States District Court for the Northern District of Mississippi enjoined the implementation of the previous rule. Rather than appeal the injunction or pursue further litigation in the District Court, CMS chose to revisit the Rule altogether and invited stakeholder comments. CMS proposed to withdraw its ban on pre-dispute arbitration agreements and instead place various conditions on their use. CMS suggested that the new proposal “will achieve a better balance between the advantages and disadvantages of pre-dispute arbitration for residents and their providers.” 82 Fed. Reg. 26649, 26650.
On July 18, 2019, CMS promulgated an updated Final Rule (“2019 Final Rule”) that went into effect on September 16, 2019. The 2019 Final Rule permits the use of pre-dispute arbitration agreements between LTC facilities and their residents/resident representatives but places several substantive and procedural requirements limiting the use of such agreements. For example, under the 2019 Final Rule, a pre-dispute arbitration agreement cannot be a condition for admission to the facility, the agreement must contain a 30-day right of rescission, it must be explained in a language the resident or his/her representative understands, it may not contain language prohibiting or discouraging communication with federal, state or local officials, and a copy must be retained by the facility for a 5-year period. For facilities operating in Colorado, state law already contains the same, and in some respects more stringent, requirements. There remains a question, however, whether the state law requirements are preempted by the Federal Arbitration Act; an issue beyond the scope of this discussion.
On September 4, 2019, a number of LTC facilities filed a lawsuit in the U.S. District Court for the Western District of Arkansas seeking an injunction against the application of the 2019 Final Rule. Northport Health Services, et. al. v. United States Department of Health and Human Services, et. al., W.D. Ark., Case No. 5:19-cv-05168 (Sept. 4, 2019). The LTC facility Plaintiffs asserted several challenges to the requirements under the Rule arguing that the rule was arbitrary and capricious, violated the FAA, and exceeded the Department’s authority. In October 2019, both parties filed Motions for Summary Judgment. On April 7, 2020, the Court ruled in favor of the government, dismissing the case with prejudice. In the Memorandum Opinion and Order issued by Judge Timothy Brooks, the Court held the following:
- The 2019 Final Rule does not violate the Federal Arbitration Act (“FAA”). Plaintiffs argued the 2019 Final Rule’s imposition of special requirements on the formation of enforceable arbitration agreements that do not apply to other contracts violates the FAA requirements. The FAA mandates that “[a] written provision . . . to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The Court was not persuaded, holding that the Rule merely places requirements on the use of arbitration agreements that do not undermine the validity or enforceability of the agreement when it comes before a court, but merely establishes conditions of the facility’s receipt of federal subsidies. The government concedes, as it has done in the past, that a facility can still enter into arbitration agreements in violation of the Final Rule, and courts should compel those agreements. The issue, of course, is that compliance is a condition of participation. While participation is technically voluntary, it is realistically a requirement of doing business. In its opinion, however, the Court rejected the argument that the financial impact makes the decision to participate in the Medicare/Medicaid programs any less voluntary. A facility opens itself to possible corrective action by CMS including fines and possible disqualification from participation.
- The 2019 Final Rule is a valid condition on federal funds. Plaintiffs argued that the Department lacked express authorization from Congress to promulgate a rule that violated the FAA. The Court held that explicit authorization from Congress was not needed since the rule did not violate the FAA and that the “conditions in the Rule are reasonably related to the federal interest in the Medicare and Medicaid programs,” and, thus, within the authority of the Department to impost. Moreover, the economic impact to LTC facilities should they choose not to participate in the Medicare/Medicaid programs did not invalidate the Final Rule, since LTC facilities are private entities and participation remained voluntary.
- The 2019 Final Rule is within DHHS’s statutory authority. The court held that the 2019 Final Rule was within the broad statutory authority granted to the Department under the Medicare and Medicaid statutes, 42 U.S.C. §§ 1395i-3(f)(1) & 1396r(f)(1); 42 U.S.C. §§ 1395i-3(d)(4)(B) & 1396r(d)(4)(B); and 42 U.S.C. §§ 1395i-3(c)(1)(A)(xi) & 1396r(c)(1)(A)(xi).
- The rulemaking was not arbitrary and capricious. Plaintiffs argued that the lack of empirical data to support the rule and the lack of justification for the change in policy rendered the 2019 Final Rule arbitrary and capricious. The court held that empirical data was not necessary, that “there are good reasons for the new policy” and a court is not permitted to substitute its judgment for that of the agency.
- The rulemaking did not violate the federal Regulatory Flexibilities Act. Finally, the Court held that the 2019 Final Rule did not violate the Regulatory Flexibilities Act (“RFA”). The RFA requires that “[w]hen an agency promulgates a final rule, . . . the agency shall prepare a final regulatory flexibility analysis” containing a variety of descriptions and assessments described in the statute. 5 U.S.C. § 604(a). Such an analysis is not required where “the head of the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities.” 5 U.S.C. § 605(b). The Court found that the government did not violate the RFA, because the secretary made a good faith certification in its notice of the Final Rule that the Rule would not have a significant economic impact on a substantial number of small entities. Further, the Court ruled that the government could rely on the entire administrative record, including analysis previously published in connection with a prior version of the rule.
Overall, the decision evidences the Court’s acceptance of the government’s argument that the 2019 Final Rule does not prohibit arbitration agreements, but merely imposes conditions on participation in the Medicare and Medicaid programs over which the Department of Health and Human Services and CMS have broad authority. Unfortunately, the “choice” to participate in Medicare and Medicaid is not a luxury that most long-term care facilities have and are left with no alternative but to comply with the rule.
This may not be the final challenge to the 2019 Final Rule and Plaintiffs have not yet announced whether they intend to file an appeal. The Court’s decision, however, does represent a hurdle that further challenges will need to overcome. And, the future remains uncertain to the extent that a new Administration or even Congress acts. For the time being, however, facilities participating in Medicare/Medicaid should comply with the Final Rule.
For questions regarding the Final Rule or your facilities’ compliance, please contact David Gelman.