Month: February, 2019

New Jersey Supreme Court’s Decision in Kernahan v. Home Warranty Administrator of Florida, Inc. May Be Another Step Towards the Evolution Away From the Courts and State Law Remedies

New Jersey recently acknowledged the diminished judicial role in contract disputes presented by arbitration clauses and federal preemption. 

            In Kernahan v. Home Warranty Administrator of Florida, Inc., A-15-17 (079680), decided on January 10, 2019, the New Jersey Supreme Court “sidestepped” an opportunity to confront whether its treatment of the validity of arbitration clauses collides with federal preemption under the United States Supreme Court decision in Kindred Nursing Ctrs, L.P. v. Clark, 137 S. Ct. 1421 (2017) and the Federal Arbitration Act, (“FAA”) 9 U.S.C. §§1-16. 

            New Jersey’s approach is embodied in Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014).   There, the New Jersey Supreme Court refused to enforce an arbitration provision in a consumer contract for debt adjustment services.  Applying contract law, the Court concluded that the arbitration agreement lacked mutuality of assent because it failed to adequately explain to a reasonable consumer that they waived their right to sue.

            Atalese can be viewed as the New Jersey Supreme Court’s effort to flex its jurisdictional muscle to control the review over contract disputes in response to the proliferation of arbitration clauses, especially in consumer contracts. Atalese can also be viewed as the Court’s effort to protect state law remedies against limits imposed in arbitration clauses.

            As a result, Kindred raises the question of whether New Jersey’s approach in Atalese has been overruled.

Unfortunately, Kernahan is not helpful in answering this question because the arbitration clause there had contradictory and confusing language that could not pass muster under ordinary contract principles.  The Kernahan arbitration provision was buried in a section entitled “Mediation” despite a basic difference between the two concepts. The section also contained smaller font size than that required by New Jersey’s Plain Language Act.  N.J.S.A. 56:12-1 to 13.  In recognition of these failures, the proponent of arbitration withdrew its challenge that Atalese was overruled by Kindred.  The result was that the New Jersey Supreme Court was able to invalidate the agreement in the context of that consumer contract because the parties lacked mutual assent to waive access to the courts and limit state law remedies.

            While Kernahan suggests that Atalese has survived for the time being, the tension between federal hostility toward invalidation of arbitration agreements and the states’ protectiveness over its consumers is palpable. 

            The FAA favors arbitration agreements, and Kindred prohibits states from targeting arbitration agreements and subjecting them to separate treatment and greater scrutiny. Federal law can require arbitration even on the question of whether the parties agreed to arbitrate.  Henry Schein, Inc v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).

 This resulting tension will require courts, including New Jersey’s, to dance around Kindred when exercising jurisdiction over contract disputes. 

            Given the proliferation of arbitration agreements, a direct challenge to New Jersey’s ability to determine these disputes pursuant to Atalese is inevitable. 

Kindred and the FAA have likely already led to a significant reduction in state court litigation. Kindred and Kernahan provide instruction on how to structure arbitration agreements to withstand challenges to their validity. 

Kindred also compels a review of current legal restrictions that have singled out arbitration clauses.  

            For instance, a question of validity may exist for the New Jersey Supreme Court’s discouragement of arbitration clauses in attorney engagement agreements. It could be argued that restrictions on such agreements unfairly single out arbitration provisions in violation of the holding in Kindred.  Another example is whether the limited scope of the attorney fee arbitration rules discriminates against the use of more expanded arbitration agreements between attorneys and clients and therefore violates the holding in Kindred.

            This tension in the law will fuel an eventual collision between government protections and the private sector’s desire to avoid courts and legal remedies.

This most likely will occur where a consumer wants to reject an arbitration provision, but is required to do so by the services or goods provider.  Ordinarily, a consumer is presented with only two choices when purchasing a service or product. One is “I agree.” The other is “I do not agree” to the seller’s terms. By checking “I do not agree,” the consumer is ordinarily denied the benefit of what is offered.  Absent is a selection for “amendment” and any ability to negotiate any of the terms.  Kindred offers nothing to suggest a different approach to enforcement would be permitted in such “take it or leave it” circumstances.

            As certain companies control an ever bigger piece of what we use and do, such clauses will enable them to limit consumer rights and entitlements and redirect the resolution of disputes away from the courts to a system they control. 

            The basic question to all of this is whether Kindred is another step in the evolutionary process away from courts entirely and whether Kernahan is New Jersey’s recognition of its limited ability to redirect that evolutionary process. 

            This is a story to be continued……

Hospital-With-Hospital Joint Ventures

In an era of uncertain reimbursement, increasing value-based care and consolidations, some hospitals have looked to joint venture with other hospitals on specific service lines or specific projects. Most common are independent community hospitals working with other community hospitals or community hospitals working with smaller health systems. Joint venturing allows hospitals to draw on the expertise of other hospitals, pool capital resources, achieve efficiencies and aim for better outcomes. Another reason may be to avoid merging with, or being purchased by, a larger system.

Examples of areas where hospitals have pursued joint ventures are oncology service lines, outpatient facilities, home health, rehabilitation facilities, imaging and skilled nursing facilities. Some systems have formed “across-the-board” joint ventures to partner on a number of projects over time with each hospital having the ability to “opt in” or “opt out” of individual ventures.

As with nearly everything in health care, legal and regulatory pitfalls abound, and it is important that hospitals consider the risks before sealing the deal. Some of those issues are as follows:

• Certificate of Need and Licensing: will the venture require a certificate of need to proceed? Is a license required? How much lead time is required for the applications and inspections? Which hospital will take the lead on pursuing the applications and licenses? Will the venture involve using space in one of the hospitals? That may trigger a transfer of a license.

• Contributions: Is one or more of the partners contributing assets, but others are not? Who will take the lead in obtaining valuations for the assets? Is intellectual property one of the assets being contributed? How will that be valued? Do the non-contributing partners have cash to make corresponding capital contributions? Or will the non-contributing partners allow redirecting of initial profits, if any and if permitted by applicable laws, until their contributions are paid off?

• Non-profit Considerations: Are there a mix of for-profit and non-profit partners? Has the non-profit partner ensured that there are the appropriate charitable considerations built into the venture’s governing documents? How will decision-making for the venture be affected? Does the venture fit into each non-profit partner’s charitable mission?

• Governing Document Considerations: What are the exit rights for the venture? What is the composition of the governing board? How are decisions made? Are there competitive restrictions?

• Anti-Kickback Considerations: Besides the regularly applicable federal Anti-Kickback Statute, do not forget state anti-kickback laws and regulations as well, although some folks sometimes think certain laws and regulations apply when they do not. It can be frustrating to automatically assume that a law applies and devise an overly complicated structure when it may not be necessary. Generally, any type of venture requires fair market value considerations and careful examination of how profits and losses will be shared to avoid running afoul of anti-kickback laws and regulations. If physicians will be involved in the venture, then the Stark Law as well as state self-referral laws may apply, but again, do not make that assumption. Remember that the Stark Law only applies to designated health services, and even within those eleven categories, only certain types (i.e. not every imaging service is a designated health service). The same can be true of certain state self-referral laws.

The above are merely some examples of the legal and regulatory issues for hospital-with-hospital joint ventures. A full description is beyond the scope of this blog post. However, given the popularity of these ventures, many projects that hospitals are now considering have likely already been done before, and there are folks out there who bring the experience to the table to help with construction. While this may be new to your hospital, it is likely not new to the world.

Will the Broadly Drafted Eliminating Kickbacks in Recovery Act Lead to Compliance Complications for Providers?

As opioid use continues to rise in the United States and the number of opioid related deaths increases year over year, the federal government and some state governments have enacted legislation to deal with an array of opioid related topics including, but not limited to, patient treatment and provider regulations. On October 24, 2018, Congress enacted the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment (“SUPPORT”) for Patients and Communities Act as a comprehensive bill to combat opioid use. One component of the SUPPORT Act is the Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”), eliminating kickbacks in arrangements with clinical treatment facilities, sober living homes, and laboratories or “patient brokering.” While similar to the current federal Anti-Kickback Statute (the “AKS”) that prohibits the knowing and willful payment of remuneration to induce or reward patient referrals of federal health care program business, the EKRA is not limited to services payable by federal health care programs. EKRA makes it a criminal offense to engage in the following: (a) solicit or receive any remuneration, directly or indirectly, in return for referring an individual to a clinical treatment facility, recovery home, or laboratory; or (b) offer or pay a kickback to induce a referral of an individual to a recovery home, clinical treatment facility, or laboratory, or in exchange for an individual using the services of a recovery home, clinical treatment facility, or laboratory.

While the intent of the EKRA seems straight-forward, the language contains many ambiguities leaving providers uncertain as to its scope. For example, EKRA adopts the definition of “laboratory” as used in the statute governing federal licensure of clinical laboratories, including facilities used to examine biological, microbiological, hematological, and pathological materials derived from the human body. Because EKRA chose to define laboratory in such a way, criminal liability under EKRA could extend to any clinical laboratory, even those that do not provide services related to substance abuse. Similarly, the definition for “clinical treatment facility” is overly broad. Under that definition, any facility that provides detoxification, risk reduction, outpatient treatment and care, residential treatment, or rehabilitation for substance use can be considered a clinical treatment facility. Like with laboratories, a medical provider could be subject to criminal charges due to the referral of patients to another medical provider that provides these types of treatments to patients.

The EKRA contains many safe harbors similar to those in the AKS. Most notably, the EKRA contains safe harbors for the following: (a) a payment to a bona fide employee or independent contractor, if the payment is not tied to the number of individuals referred, number of tests or procedures performed, or amount billed to or received from the referred individual’s health care benefit program; (b) a payment made as compensation under a personal services and management contract that meets the requirements of 42 C.F.R. § 1001.952(d); (c) a waiver or discount of any coinsurance or copayment by a health care benefit program if it is not routinely provided and is provided in good faith; and (d) discount or price reduction under a health care benefit program if properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity.

Unlike the AKS, which allows for incentive based compensation for employees, the safe harbor under the EKRA explicitly states that payment to bona fide employees or independent contractors cannot vary based upon the number of individuals referred, the number of tests performed, or the amount billed or received. Because of this narrow safe harbor, laboratories that were mentioned above (i.e., those that do not perform substance abuse testing) could be in violation of the EKRA while still in compliance with the AKS. Because of this potential compliance issue, clinical laboratories must be aware of the EKRA and ensure compliance with the strict requirements or risk violation of the statute. Clinical laboratories should evaluate their relationships with all referral sources to ensure that there is no remuneration in exchange for patient referrals. Similarly, laboratories should ensure that employees are not being paid on a per test performed basis or receive a bonus payment based on the number of tests performed or the amount billed for testing.