cmslogo1The Centers for Medicare and Medicaid Services (CMS) – the government entity that runs Medicare and Medicaid – has proposed a rule change that takes effect this month. For the first time, it bans pre-dispute arbitration clauses from nursing home admissions contracts. As you can imagine, elder advocates are applauding the return of the right to sue for patients and nursing homes are understandably up in arms. A recent federal suit was filed by a nursing home industry trade group intent on stopping the ban from taking effect.

What does the rule change actually mean? Let’s start out with the nursing home admissions process. If you need to go into a nursing home, you start by signing a small stack of papers which include an admissions contract that spells out the rights and obligations of both the nursing home itself and the patient going into the facility. This includes things like the services covered by the payment for care and how much will actually be charged to the patient, usually a daily rate, for those services. It is inside of these contracts that nearly all nursing homes include a pre-dispute arbitration clause.

Mind you, people are not necessarily choosing to go into a nursing home, they’re being forced by their health circumstances to seek admission to these facilities – often from a discharge from a hospital stay. The admissions contracts are contracts of adhesion, basically take it or leave it. It’s not like the patient can negotiate with the nursing home upon entry because patients are typically taking the next available bed in a system that often has shortages of beds and waiting lists for entry. Many would say that unfairly causes the agreement to give away lawsuit rights to be done under duress. From that standpoint, banning them seems like a proper thing to do to help balance the scales between the patient and the facility.

A pre-dispute arbitration clause is just that, a clause in the admissions contract that says if the patient has a problem with the nursing home, he or she must file their grievance with an arbitrator rather than go to court. Arbitration is an alternative dispute resolution technique that avoids the expense and public nature of typical court proceedings. In arbitration, the dispute is submitted to a third party (the arbitrator) who resolves the dispute after hearing a presentation by both parties. This is usually considered less expensive and faster than litigation, but many consider it a disadvantage to a potential plaintiff because there is limited recourse if they lose. Additionally, the lack of transparency of arbitration leads many to wonder if the process is truly objective.

The rule change is significant to patients in that it now opens up litigation for grievances and mistreatment perpetrated by nursing home operators. It is expected to create a new cottage industry of nursing home negligence lawsuits as soon as the pathway to the courthouse is cleared. Most consider that it would lead to higher awards, which in our system of consumer protection, is meant to serve as a deterrent against future nursing home abuse issues. In short, if nursing homes know they’re going to have to pay, they’ll be more careful and less likely to allow patients to be cared for so poorly.

That all sounds well and good, and very well may be. Nursing homes use arbitration clauses as a way to mitigate risk, which is also a way to mitigate costs. If the abolition of arbitration clauses opens the floodgate of litigation, it’s likely to get costly for nursing home providers. Their cost of defending lawsuits will go up. Their cost of resolving disputes, in terms of higher judgments, will also go up. The end result, prices for care in an already costly system will have to go up to compensate.

Nursing homes are a mixture of for-profit and non-profit entities. Because over half of all care is provided for by government benefits in the form of Medicare and Medicaid, the care provided has to stay within the fixed rates that the government pays. Compared to the actual cost of care charged to a paying customer, compensation from Medicare and Medicaid take a major haircut. For instance, the average daily rate for a nursing home for 2016 in Pennsylvania is $302.42 per day, but the average Medicaid reimbursement rate is only $211.79 per day, a nearly 30% reduction.

No matter your position on whether nursing home should or shouldn’t be allowed to include arbitration bans, there’s one thing that both sides agree upon: prohibiting arbitration will cost the nursing homes more money. CMS knows this, but it’s not doing anything to increase its reimbursement rate for care. So the nursing homes are left to do the only thing they can when faced with higher cost of doing business, raise prices on those that actually pay the bill or stop providing services to Medicaid and Medicare patients altogether.

The net effect for the individual harmed by the nursing home is likely a come-up from whatever paltry award they would have received from arbitration. The net effect on seniors as a whole will be to either drive up nursing home prices for those that pay or reduce the amount of government subsidized beds available, neither of which are a good outcome in a system already struggling to meet the rising tide of seniors in need.

EDITOR’S NOTE: On November 7, 2016, the U.S. District Court for the Northern District of Mississippi granted a request by the American Health Care Association to bar CMS from implementing the rule that bans nursing home arbitration agreements.  For a full copy of the 20-page opinion, click here.

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