Federal District Court Upholds CMS Pre-Dispute Arbitration Rule

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On April 7, 2020, the U.S. District Court for the Western District of Arkansas granted summary judgment in favor of the U.S. Department of Health and Human Services (“DHHS”) in the closely-watched Northport case. In this case, certain nursing facility industry plaintiffs challenged the enforceability of the most recent iteration of the Centers for Medicare & Medicaid Services’ (“CMS”) rule governing the use of pre-dispute arbitration agreements with residents in long-term care (“LTC”) facilities that participate in the Medicare or Medicaid programs. In finding for the government, the Northport court held that the rule was a valid exercise of CMS’s authority under the Administrative Procedures Act (“APA”), was adopted in accordance with federal procedural rules, and does not conflict with the Federal Arbitration Act (“FAA”).

 Background on Underlying CMS Rulemaking

On October 4, 2016, as part of its restructuring of the consolidated Medicare and Medicaid requirements for LTC facilities, CMS adopted a final rule prohibiting the use of pre-dispute arbitration agreements by LTC facilities receiving Medicare and Medicaid funding (the “2016 Final Rule”). Soon thereafter, the American Health Care Association and multiple LTC facilities sought a preliminary injunction against the application of the 2016 Final Rule in a federal district court in Mississippi, asserting various arguments under the APA and FAA. The court granted the plaintiffs’ request for preliminary injunction.

Rather than appealing the preliminary injunction, CMS went back to the drawing board, inviting stakeholder comments on potential revisions to the 2016 Final Rule.  On July 18, 2019, CMS promulgated an updated final rule (“2019 Final Rule”) that went into effect on September 16, 2019. This time around, CMS permitted the use of pre-dispute arbitration agreements between LTC facilities and their residents; however, the 2019 Final Rule contains several substantive and procedural requirements that limit the use pre-dispute arbitration agreements in the LTC setting.

Northport Lawsuit

On September 4, 2019, Northport Health Services of Arkansas, LLC and several other LTC facilities filed a lawsuit against the government seeking a preliminary injunction against the application of the 2019 Final Rule. In their complaint, the Northport plaintiffs claimed to be harmed principally by four requirements of the 2019 Final Rule: (1) the requirement that an agreement to arbitrate not be made a condition for admission to the facility; (2) the requirement that the agreement be explained in a language the resident or her representative understands; (3) the 30-day right of rescission for residents who sign pre-dispute arbitration agreements; and (4) the requirement to retain a copy of the arbitration agreement for a 5-year period. The plaintiffs challenged these requirements of the 2019 Final Rule under APA, principally arguing that the rulemaking was arbitrary and capricious, exceeded CMS’s statutory authority, and failed to comply with certain procedural requirements. Both the Northport plaintiffs and the government filed for summary judgment.

Northport Decision  

On April 7, 2020, the Northport court found in favor of, and granted summary judgment to, the government with respect to all claims asserted by the plaintiffs. Specifically, the Northport court held that: (1) the 2019 Final Rule does not violate the FAA; (2) the 2019 Final Rule is a valid condition on federal funds; (3) the 2019 Final Rule is within DHHS’s statutory authority; (4) the rulemaking was not arbitrary and capricious; and (5) the rulemaking did not violate the federal Regulatory Flexibilities Act.  Writ large, the Northport court’s decision in this case appears to be premised in large part on the government’s argument that the 2019 Final Rule does not prohibit the enforcement of otherwise valid arbitration agreements between LTC facilities and their residents; rather, the 2019 Final Rule merely imposes conditions on participation in, and funding from, the Medicare and Medicaid programs, over which, the government argues, DHHS and CMS have broad authority.

As of the date of this posting, it is unclear whether the Northport plaintiffs intend on appealing the Northport court’s finding. However, even if this case is not appealed, we do not anticipate that this will be the final challenge to the 2019 Final Rule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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