Earlier this week, a federal court enjoined the federal Centers for Medicare and Medicaid Services (“CMS”) from enforcing a rule, promulgated on September 28, 2016, which barred pre-dispute arbitration agreements between nursing facilities in the Medicare or Medicaid programs and their nursing home residents, commencing November 28, 2016 (the “Rule”).¹  Am. Health Care Ass’n v. Burwell, No. 3:16-CV-00233 (N.D. Miss. Nov. 7, 2016), ECF No. 44. ²  The court concluded that in promulgating the Rule, CMS had failed to prove that a ban on pre-dispute arbitration agreements was necessary to protect nursing home residents and within its existing statutory authority.

This ruling means that nursing homes would not be in regulatory jeopardy while the preliminary injunction is in place if they do not act by November 28, 2016 to conform their admission agreements to omit pre-dispute binding arbitration.  However, as the court’s decision is preliminary only, the Rule may be reinstated in future legal proceedings in the case.

Background

In our September 30, 2016 Clients and Friends Memorandum, we discussed the new CMS regulations, and anticipated an industry legal challenge to CMS’ authority to promulgate the ban.   Indeed, shortly afterwards, one of the leading national provider associations, the American Health Care Association (“AHCA”), along with three member nursing homes, filed suit in federal district court in Mississippi, and moved for a preliminary injunction against CMS’ enforcement of the Rule.

Preliminary Injunction Ruling

The court’s decision granting the preliminary injunction was based on its findings that the following requisite elements for interim relief were supported by the motion record:  

• there was a substantial likelihood that AHCA and the other plaintiff nursing homes would succeed on the merits of their legal challenge;

• there was a substantial threat of irreparable injury to nursing homes if the preliminary injunction were not issued;

• the threatened injury, if the preliminary injunction were denied, outweighed any harm that would result if the preliminary injunction were granted; and

• the grant of the preliminary injunction would not disserve the public interest.

1. Likelihood of Success.

The court held that the plaintiffs were likely to prevail on two grounds:  (i) that the Rule is pre-empted by the Federal Arbitration Act (9 U.S.C.A. Section 1 et seq.) (the “FAA”); and (ii) that CMS does not have the authority to ban arbitration agreements under its generalized statutory mandate to promote resident “health, safety and welfare.”  In the court’s view, “CMS does not appear to have conducted its own independent study of whether arbitration agreements harm resident health.  Such a study would clearly be helpful in this context.”  Id. at 24.

Specifically, the court found fault with the “sparse” administrative record created by CMS when it promulgated the Rule.  According to Judge Mills, CMS had not made the “requisite efforts to actually prove that nursing home arbitration had the sort of negative effects which [CMS] quoted various commenters as saying it had.”  Responding to one of CMS’ arguments, the court stated that the agency’s reliance on the 1,000 or so public comments to the Rule concerning nursing home arbitration was a “questionable method of proving anything.”  Had CMS conducted an “independent and reliable investigation” of, for instance, the impact on the efficiency and fairness of such arbitration agreements, where the mental competency of the resident entering an arbitration agreement is often at issue, CMS may have justified singling out nursing home arbitration agreements for prohibition, notwithstanding the FAA.  The court noted, however, that CMS would have to actually prove such a negative impact.  Id. at 27.

Absent such proof, CMS lacked the statutory authority to ban nursing home arbitration agreements, and had “crosse[d] the line” of the separation of powers between the legislative and executive branches of government, through an “unprecedented exercise of agency power.”  The court cautioned that CMS cannot “take shortcuts” to justify what the court viewed as statutory overreach, under the guise of resident “health, safety and welfare,” without an independent study or investigation to demonstrate that mandating arbitration would negatively impact residents’ health.

2. Irreparable Injury.

The court held that the plaintiffs would suffer irreparable injury if the preliminary injunction were not granted before the Rule goes into effect on November 28, 2016.  The court reasoned that nursing homes will lose signatures on arbitration agreements from residents admitted to the facility, which they will likely never regain, and “will incur immediate, substantial administrative expenses to revise admissions agreements and re-train staff on admissions and dispute resolution processes.”  Id. at 33.

3. Threatened Injury if the Preliminary Injunction is Denied.

The court also held that CMS would not be harmed by delaying the implementation of what may be an invalid Rule, as CMS has permitted the use of arbitration agreements in nursing homes for many years.  From the Court’s perspective, CMS is in a “poor position” to argue that the Rule must go into effect immediately given its long history of acquiescing to arbitration agreements in nursing facilities.

4. The Public Interest.

The court likewise concluded that the public interest would not be harmed by essentially preserving the status quo and delaying implementation, and found no compelling reason for implementing the Rule immediately.

What Will CMS Do Next?

As for possible next steps, CMS may seek an “interlocutory appeal” and ask the Fifth Circuit Court of Appeals to reverse the district court’s grant of preliminary injunction.  In connection with such an appeal, CMS may also ask the court to stay the preliminary injunction pending the appeal.  It may be difficult for CMS to convince a court to issue a stay under the circumstances.  That is because lifting the preliminary injunction and allowing the Rule to go into effect would actually upset the status quo, and prevent nursing homes from continuing to obtain arbitration agreements as part of the admissions process. 

Another option for CMS would be to take the invitation from the district court and essentially reopen the administrative rule-making process, in order to try developing a record of resident harm with investigations and studies along with proof of the negative impact of arbitration agreements on resident rights.  If CMS pursues that option, it may ask the court to dismiss the case as moot, or to put the litigation on hold until the revived rule-making process has been complete.

For these reasons, nursing homes that enjoy a temporary reprieve from compliance with the Rule can take little comfort that CMS’ ban on mandatory arbitration will not be reinstated.

_{1   The regulations were first published in 80 Fed. Reg. 42168 (July 1 6, 2015) and are now codified at 42 CFR Section 483.70(n).} 

_{2   The U.S. Supreme Court has recently agreed to hear another nursing home arbitration case in Kindred Nursing Centers Limited Partnerships et al. v. Clark et al., 478 S.W.3d 306 (Sup. Ct. KY Sept. 2015), cert. granted, 2016 WL 3617216 (Oct. 28, 2016).}