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Up Front | Jul 2003

Arbitration Agreements in the Healthcare Context

These contracts may be an attractive concept to physicians, but those who use them must have an understanding of federal and state law.

In Pennsylvania, they were not antiwar protestors or AIDS activists demonstrating on the Capitol steps; they were physicians! Nothing like the sight of 3,000 to 4,000 doctors and other healthcare professionals marching in protest can fully illustrate the frustration felt by members of the medical community regarding medical liability issues. Not only are malpractice insurance premiums rising astronomically, but many physicians feel they are being held to a standard of perfection while practicing an imperfect science. Medicine cannot guarantee a cure or a good result for every patient, and physicians believe they are potentially subject to a lawsuit every time a patient does not achieve the standard of health for which he hoped, even if his doctor was not negligent in his performance of services.

There have been many discussions among physicians regarding how best to control the crisis in medical liability. Tort reform has become a favored topic among lawyers, legislators, and healthcare practitioners, and it will continue to be argued for many years. The use of medical services contracts is also under debate. A growing number of physicians, however, are considering adopting arbitration agreements—as part of medical services contracts or as separate agreements—as a means by which to control their risk and the cost of medical malpractice claims.

Arbitration agreements have been employed in the commercial context and even in consumer agreements for many years, and public policy favors their use.1 Individuals often prefer arbitration to litigation for many reasons. First, they typically consider the arbitration process to be quicker, more cost effective, less formal, and more flexible. Second, they often view arbitrators as less prone than a jury to basing their decisions on emotion versus the law or actual damages incurred by the plaintiff. Third, arbitrators with specific expertise may be chosen.

Despite their potential benefits, arbitration agreements were not common within the personal injury arena until fairly recently, and their use remains controversial. In fact, the American Arbitration Association distinguishes situations involving patients undergoing healthcare treatment from all other situations concerning individuals involved in arbitration. The American Arbitration Association will not administer an arbitration involving an individual patient unless the agreement to arbitration was made after the dispute arose.2

The one area in healthcare in which the use of arbitration agreements has risen is the nursing home industry. An increasing number of providers are including arbitration provisions within their admissions agreements. In fact, this practice has become so common that the Centers for Medicare and Medicaid Services recently issued a letter to state regulators regarding the appropriateness of these documents. Although they did not prohibit the use of an arbitration agreement, the Centers for Medicare and Medicaid Services did state that discharging a resident based solely upon his refusal to sign an arbitration agreement would constitute a violation of the Medicare certification standards.3

There are many factors a physician must consider before deciding whether to ask a patient to sign an arbitration agreement. None should consider using such an agreement without at least some comprehension of both the state and federal laws that will govern the arbitration agreement he employs.

The Federal Arbitration Act (FAA) essentially provides that a contract that contains a provision requiring the settlement of disputes through arbitration will be valid, enforceable, and irrevocable. In addition, it preempts other state laws that may restrict or otherwise limit the use of arbitration agreements. Of course, the FAA is not the end-all to discussions on arbitration agreements. The FAA applies only to a “contract evidencing a transaction involving commerce” or, in not entirely plain English, a contract involving interstate commerce.4

Physicians should be able to make a credible argument that they are involved in interstate commerce. Most participate in the Medicare and Medicaid programs, and a majority of cataract surgeries are paid for under these programs.5 Further, many of the medical supplies, pieces of equipment, and drugs used by medical practices are manufactured and shipped from other states. In an ophthalmology practice involving only refractive surgery, where there is no governmental reimbursement, whether a physician is involved in interstate commerce may be a more complex question. Again, however, he should be able to argue that supplies used in the practice involve interstate commerce, and some third-party payors are almost certainly located out of state.

Nevertheless, what constitutes interstate commerce can be debatable, and some courts have been reluctant to declare that healthcare contracts involve interstate commerce.6 For that reason, it may be beneficial to include a provision specifically stating that the parties agree the arbitration agreement relates to a transaction involving commerce and is governed by the FAA.

State law governs contracts that do not involve interstate commerce, and many states have placed restrictions on the use of arbitration agreements by physicians or other healthcare providers. For example, Texas law states that no physician may request or require a patient to sign an agreement to arbitrate a healthcare liability claim unless (1) specific language is included within the agreement and (2) an attorney has reviewed and signed the agreement along with the patient. Failure to comply with these requirements is considered a violation of the state's Medical Practices Act.7 Other states, including Georgia and Arkansas, do not allow arbitration agreements to cover future medical malpractice or personal injury claims.8 Colorado permits patients a 90-day rescission period.9

It is extremely important for physicians to fully understand any limitations that may be in place in their state. Those who practice in a state or jurisdiction that specifically limits the use of arbitration agreements should seriously consider whether they wish to proceed with an agreement that may violate state law. An ophthalmologist in Houston, for instance, could assume that the FAA preempts the Texas requirements, but a judge could rule that he is not involved in interstate commerce. Because this physician did not obtain a signature from the patient's attorney, he will not only lack an arbitration agreement, but he will also have violated the state's Medical Practices Act.

Physicians must also realize that the use of arbitration agreements will not guarantee limited judgments or the complete avoidance of malpractice claims by their patients. These documents may not be used to deny patients their rights to file claims for harm that they may believe they have incurred. Furthermore, physicians' staff members should be adequately trained to present and explain an arbitration agreement to a patient.

Arbitration agreements must be fair. Those that contain overreaching terms and are simply handed to patients could be viewed as contracts of adhesion, which would potentially be void in almost any state. (Another limitation of the FAA is that it does not govern the issues of validity, enforceability, or revocability of a contract. These matters are left to state law interpretation.) Essentially, an adhesion contract is an agreement presented in a “take it or leave it” situation in which the individual has no choice and no true bargaining power.

In the circumstance I have described, it is likely that many patients will argue that they did not believe they would receive treatment if they refused to agree to arbitration. Further, such an argument may be compelling to a judge if the patient is a frail, elderly individual who was going blind due to cataracts (this should not be as significant an issue with relation to refractive surgery, which is a purely elective procedure). Indeed, the courts have voided arbitration agreements handed to patients immediately before surgery, and a court will be particularly reluctant to enforce them when it believes the patient has been forced to choose between forever waiving a right to a jury trial or foregoing necessary medical treatment.10

Physicians must not engage in unconscionable or sharp practices. An arbitration agreement should not be hidden in small print at the end of several lengthy forms, nor should it be written in convoluted or overly legalistic language. Many states have consumer protection statutes that prohibit unfair or misleading business practices, and many state licensure statutes contain similar prohibitions. No physician wants a complaint filed against him because he tried to get patients to sign arbitration agreements without their full knowledge or understanding of what they were signing. Courts have upheld agreements as fair and reasonable, however, when the patients were provided with explanations of the agreements, given opportunities to question their terms, and permitted a time period within which to revoke the arbitration agreement.11

Physicians interested in implementing arbitration agreements should carefully consider placing a limitation on the choice of arbitrators. One of the most frequently cited benefits of arbitration is neutral decision makers. Requiring that only ophthalmologists or physicians be chosen as arbitrators or be on an arbitration panel may cause some courts to void the arbitration agreement as unconscionable. Even designating the use of the American Health Lawyers Association Dispute Resolution Services caused one court to hold an arbitration agreement unenforceable.12 A panel including at least one ophthalmologist should not be objectionable, however, given the technical nature of most malpractice disputes and the need for specialized knowledge.

Arbitration certainly may be a method by which to limit runaway judgments and nonmeritorious lawsuits. The use of arbitration agreements by physicians with their patients is not a fully developed area of the law, however, and any ophthalmologist who implements an arbitration agreement within his practice needs to keep abreast of current legal developments. What appears to be a sound legal agreement today may be totally unacceptable 2 years from now. Physicians should also educate themselves about the arbitration process. They should decide what goals they hope to achieve through the implementation of an arbitration agreement and fully understand whether an arbitration agreement can or cannot meet their goals.

Finally, physicians should understand the risks, both legally and operationally, of using an arbitration agreement. They will certainly encounter patients unwilling to sign the agreement who will choose to receive services elsewhere. Additionally, those doctors who are the pioneers in their communities may be the ones defending complaints before the local board of medical examiners or setting the law in their states. Nevertheless, given the current crisis within the healthcare industry over medical liability, the time may have come to consider the use of arbitration agreements.

Catherine Greaves, JD, is a shareholder in Clark, Thomas & Winters, PC, in Austin, Texas. Ms. Greaves may be reached at (512) 472-8800; cmg@ctw.com.
1. Surplus, Inc. v. Home State County Mutual Insurance Company, 1995 WL 785155 (Tex. App.-Dallas)
2. American Arbitration Association, Health Care Policy, http://www.adr.org/index2.1jsp?JSPssid=15728
3. Letter from Director, Survey and Certification Group, Centers for Medicare and Medicaid Services, to Survey and Certification Group Regional Office Management and State Survey Agency Directors (Jan. 9, 2003) (Reference S&C-03-10)
4. 9 U.S.C.S. §2
5. McGuffey Health and Rehabilitation Center v. Gibson, 2003 WL 2104059 (Ala.)
6. Timms v. Greene, 427 S.E. 2d 642 (S.C. 1993)
7. Tex. Rev. Civ. Stat. Ann., art. 4590i, sec. 15.01(a), (b)
8. Ga. Code Ann. §9-9-62; Ark. Code Ann. §16-108-201
9. Colo. Rev. Stat. §13-64-403
10. Howell v. NHC Healthcare-Fort Sanders, Inc, Tenn. Ct. App. 2003 (Feb. 25, 2003)
11. McGuffey Health and Rehabilitation Center v. Gibson, 2003 WL 2104059 (Ala.)
12. Chapman v. Gainesville Healthcare Center, Order Denying Motion to Stay and Compel Arbitration, 01-2001-CA-3277 (Apr. 3, 2002)
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