The United States Court of Appeals for the Eighth Circuit (“Federal Appellate Court”), in its opinion dated October 1, 2021, affirmed the decision of the district court granting summary judgment in favor of the U.S. Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) with regard to challenges to the 2019 Revised Rule regarding long term care (LTC) facilities’ use of arbitration agreements.
In 2015, CMS initiated notice and comment rulemaking to comprehensively revise the requirements for LTC facilities to participate in the Medicare and Medicaid programs. The regulatory reforms were intended to “improve the quality of life, care, and services in LTC facilities, optimize resident safety, reflect current professional standards, and improve the flow of the regulations” in light of “evidence-based research . . . [that] enhanced [CMS’s] knowledge about resident safety, health outcomes, individual choice, and quality assurance and performance improvement.” In that vein, CMS noted the potential benefits of alternative dispute resolution, including arbitration, but also expressed its concern that LTC facilities’ “superior bargaining power could result in a resident feeling coerced into signing the agreement,” that residents might be waiving the right to judicial relief without full understanding, and that the prevalence of pre-dispute arbitration agreements “could be detrimental to residents’ health and safety.” CMS therefore proposed certain limitations on LTC facilities’ use of arbitration agreements, including requirements that the facilities explain such agreements to residents in a form, manner, and language that they understand and that they not treat arbitration agreements as a “condition of admission, readmission, or the continuation of [one’s] residence at the facility.” In addition, reflecting a more general concern regarding the use of such agreements by LTC facilities, CMS stated it was considering and soliciting comments on “whether binding arbitration agreements should be prohibited” in the case of nursing home residents.
On October 4, 2016, after an extended comment period, CMS published the final version of the rule (Original Rule) in the Federal Register. In a shift from the proposed rule, the final rule prohibited LTC facilities from entering into pre-dispute, binding arbitration agreements with residents or their representatives. CMS clarified further that, “[a]fter a dispute arises, the resident and the LTC facility may voluntarily enter into a binding arbitration agreement if both parties agree and comply with the relevant requirements” of the final rule.
Several weeks later, before the Original Rule was to take effect on November 28, 2016, a group of Mississippi nursing homes sued to preliminarily and permanently enjoin enforcement of the rule’s arbitration provision. The nursing homes claimed that the rule’s blanket prohibition of LTC facilities’ use of pre-dispute arbitration agreements violated the APA, the FAA, and the RFA. Finding that the nursing homes were likely to prevail, the district court granted a nationwide preliminary injunction of the challenged provision of the Original Rule.
Rather than appeal the district court’s decision, CMS initiated another round of notice and comment rulemaking several months later to revise the enjoined portion of the Original Rule. CMS proposed removing the requirement that precluded LTC facilities from entering into pre-dispute, binding arbitration agreements, reasoning that, “[u]pon reconsideration, [it] believe[d] that arbitration agreements are, in fact, advantageous to both providers and beneficiaries because they allow for the expeditious resolution of claims without the costs and expense of litigation.” CMS nevertheless acknowledged some concerns about the use of arbitration agreements in LTC facilities and proposed strengthening some requirements “to ensure the transparency of arbitration agreements in LTC facilities” and to strike the “best policy balance.”
After the comments period concluded, CMS published the final version of the rule (Revised Rule) in the Federal Register, to go into effect on September 16, 2019. It provided: (n) Binding arbitration agreements. 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 all of the requirements in this section. (1) 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. (2) 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. (3) 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. (4) 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. (5) 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). (6) 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.
On September 4, 2019, Northport Health Services of Arkansas, LLC (“Northport”) and other nursing homes filed a lawsuit challenging multiple aspects of the Revised Rule: (i) the requirement that a binding arbitration agreement not be made a condition for the admission to, or the continuation of care in, an LTC facility, 42 C.F.R. § 843.70(n)(1); (ii) the requirement that residents be granted a right to rescind a binding arbitration agreement within 30 days of signing, id. § 843.70(n)(3); (iii) the requirement that any arbitration agreement (a) be explained to the resident so he or she understands it and (b) explicitly state that signing it is not a condition of admission to the LTC facility, id. § 843.70(n)(2)(i)–(ii), (4); and (iv) the requirement that the LTC facility retain copies of the signed arbitration agreement and any final arbitration decisions for five years, id. § 843.70(n)(6). Northport moved to preliminarily enjoin the enforcement of the Revised Rule or, in the alternative, to stay enforcement pending judicial review. While that motion was pending, the parties agreed to stay enforcement of the Revised Rule until the district court ruled on the merits of the case, and they cross-moved for summary judgment based on the administrative record.
On April 7, 2020, the district court denied Northport’s motion for summary judgment and granted the government’s motion for summary judgment, upholding the Revised Rule. The court reasoned that the rule (i) did not violate the FAA, 9 U.S.C. § 2; (ii) was a permissible exercise of HHS’s statutory authority under the Medicare and Medicaid statutes; (iii) was not “arbitrary and capricious” under the APA, 5 U.S.C. § 706(2)(A); and (iv) was promulgated in compliance with the RFA, 5 U.S.C. § 605(b). Northport appealed and the Federal Appellate Court granted a stay of the Revised Rule’s enforcement pending resolution of the appeal.
Federal Appellate Court Opinion
Northport expansively argued that the FAA established “a liberal federal policy favoring arbitration agreements” that is frustrated by the Revised Rule’s regulation of nursing homes’ use of arbitration agreements. The Federal Appellate Court responded that “courts do not apply federal policies; they apply federal statutes, and the FAA speaks only to the validity, irrevocability and enforceability of arbitration agreements … Because the Revised Rule does not, in words or effect, render arbitration agreements entered into in violation thereof invalid or unenforceable, it does not conflict with the FAA.”
The Federal Appellate Court further stated, “We disagree with Northport’s arguments that the statutes are sufficiently unambiguous to conclude that Congress did not intend for HHS to have the authority to regulate the use of arbitration agreements … Moreover, Northport’s argument would suggest that HHS lacks the authority to regulate admissions practices beyond that specified in the pertinent statutory provisions, a claim undermined by other HHS regulations that do just that … Reviewing the provisions of the Revised Rule, we conclude that they are reasonable interpretations of the Medicare and Medicaid statutes. As noted by CMS, the Revised Rule reflects the agency’s belief that “arbitration has both advantages and disadvantages” and permits LTC facilities “to ask their residents to sign arbitration agreements so long as they comply with the [Revised Rule’s] requirements” … In our view, it is reasonable for CMS to conclude that regulating the use of arbitration agreements in LTC facilities furthers the health, safety, and well-being of residents, particularly during the critical stage when a resident is first admitted to a facility … Likewise, we think the Revised Rule is a reasonable exercise of CMS’s authority to protect residents’ rights … In summary, the Revised Rule “represents a reasonable accommodation of manifestly competing interests and is entitled to deference” … We affirm the district court’s conclusion that it is not ultra vires.”
The Federal Appellate Court further stated: “Having reviewed the regulatory record of both the Original Rule and the Revised Rule, we are satisfied that the evidence CMS relied upon is sufficient to support the Revised Rule … To the extent the Revised Rule departs from these prior policies, we find that CMS has provided a sufficiently reasonable explanation for doing so … Under the Revised Rule, existing arbitration agreements will continue to be enforceable, and LTC facilities can still enter into arbitration agreements with their residents and obtain federal funding so long as they comport with the rule’s requirements. Therefore, the availability of arbitration and any associated cost savings are largely unaffected by the Revised Rule, and LTC facilities can continue to rely on historical economic models … We conclude that the Revised Rule reflects CMS’s reasoned judgment in light of competing considerations.”
Nonetheless, the Federal Appellate Court further held “looking to the Revised Rule and the certification provided therein, we conclude that CMS failed to comply with the procedural requirements of the RFA [Regulatory Flexibility Act]. However, we conclude that such an error is harmless … as a factual matter, the Revised Rule unquestionably has less of an economic impact than the Original Rule had.”
Source Northport Health Services of Arkansas, LLC v. U.S. Department of Health and Human Services, No. 20-1799.
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