The inefficiencies of arbitration clauses in healthcare provider contracts invalidate their value.
Healthcare providers frustrated with excessive denials from managed care payers have asked us to examine their provider service agreements. One question commonly asked is whether arbitration is beneficial to resolving disputes between hospitals and third party payers. In our experience, the answer is no.
Arbitration Looks Good (on Paper)
An arbitration provision in a contract is an agreement between the parties to avoid litigation in a court of law through use of an alternative dispute resolution (ADR) service. Rather than filing a complaint in court, the parties submit their disputes to an ADR service which will appoint an arbitrator to act as a judge. Indeed, many retired judges serve as arbitrators.
On paper, the simplified process of ADR sounds good. Much has been written about the benefits of arbitration, such as flexibility, reduced costs, confidentiality, and speed. But these short cuts are costly in the long run for healthcare providers. The attempt to collect payment for denied or disputed services often will require the arbitrator to carefully interpret a contractual term. Unfortunately, there is a good chance that the arbitrator who is making that determination so important to the financial viability of the hospital, has little, if any, experience in the field.
Even if they do have healthcare reimbursement experience, there are other looming risks for providers. There are no appeals in arbitrations. Because the arbitrator’s final decision is binding, there is no recourse for wrong decisions, unlike in the judicial system, in which a party may appeal an adverse decision as a matter of right. An appeals process has the advantage of allowing a panel of three or more Judges to remedy errors of law and set precedent. Precedent, in turn, allows the parties to understand their rights and obligations going forward.
An arbitrator’s decision is generally not intended to be of precedential value – that is, to be applied in other disputes between the parties. However, managed care payers will likely inform future arbitrators of prior, favorable decisions, in an attempt to gain advantage in the subsequent arbitration. As a result, one bad decision by an arbitrator, which cannot be appealed, may adversely affect the outcome of future disputes between the parties on similar issues.
It’s Not Just About the Money
Hospitals will often dispute the method by which the third party payer is administering the contract. These disputes may involve responsibilities with significant administrative overhead costs not directly involving patient care, and well-beyond payment of claims and often seek a specific interpretation of a contractual term. These issues include topics such as physician credentialing, use of electronic health records, and inappropriate imposition of prior authorizations. Of course, there is always the pressure from the payer placed on hospitals for patients to be treated in observation status and then promptly discharged without receiving any inpatient care.
For Provider agreements with arbitration clauses, the hospital’s only recourse is, again, to ask an arbitrator to consider its claim for relief. In that event, the arbitrator’s interpretation of the contract term might be binding upon the parties for the duration of the contract. However, the parties can never be sure of this because subsequent arbitrators are not bound by prior decisions; and even if they were, without an appeal process, there is no way to force an arbitrator to accept a prior decision.
The Costs Add Up
Proponents of arbitration embrace the purported reduced costs of arbitration. That may work with healthcare provided/payer disputes limited in number, involving just a few denied claims. But for cases involving a series of denied claims, the arbitral costs may be excessive. Unlike in court where the filing fee can be as little as a few hundred dollars, the arbitration fees are typically in the thousands of dollars. Judges cost nothing. Arbitrators typically charge $400 per hour or more, which in a complicated case where the arbitrator must learn the subject matter, can be every expensive.
The Burdens of ADR Also Add Up
While arbitration does limit the amount and types of discovery that can be conducted, complicated cases may still require some limited discovery, as allowed by the arbitrator. In fact, the limitations on discovery can serve as a handicap to preparing the case for arbitration. Said another way, the purpose of arbitration is to avoid litigation in a court of law. But if discovery is required – and payers will seek it – then a healthcare provider may have unwittingly entered the realm of judicial litigation, without the full benefits of appeal rights.
Summary
From our experience in representing healthcare providers in arbitral proceedings, we recommend the following considerations:
- Provider service agreements should be reviewed for arbitration clauses prior to execution;
- The venue should be where the provider cares for patients, not the payer’s main office;
- If ADR is agreed to, then it must be simplified;
- Consider retaining experienced counsel to review managed care contracts with you.
For additional information on this topic, please refer to our earlier article Key Reasons Why Arbitration Clauses are Costly to Providers.
Anderson & Quinn, LLC is a renowned law firm based in Rockville, Maryland, providing individuals, businesses, corporations, and healthcare institutions with the legal and litigation support they need.
