Northport Health Svcs. of Ark. v. USDHHS

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 20-1799
___________________________
Northport Health Services of Arkansas, LLC, doing business as Springdale Health
and Rehabilitation Center; NWA Nursing Center, LLC, doing business as The
Maples; Ashland Place Health and Rehabilitation, LLC; Aspire Physical Recovery
Center at Cahaba River, LLC; Aspire Physical Recovery Center at Hoover, LLC;
Aspire Physical Recovery Center of West Alabama, LLC; Athens Health and
Rehabilitation, LLC; Civic Center Health and Rehabilitation, LLC; Columbiana
Health and Rehabilitation, LLC; Cordova Health and Rehabilitation, LLC;
Crossville Health and Rehabilitation, LLC; Florala Health and Rehabilitation,
LLC; Georgiana Health and Rehabilitation, LLC; Gulf Coast Health and
Rehabilitation, LLC; Hunter Creek Health and Rehabilitation, LLC; Huntsville
Health and Rehabilitation, LLC; Jacksonville Health and Rehabilitation, LLC;
Legacy Health and Rehabilitation of Pleasant Grove, LLC; Lineville Health and
Rehabilitation, LLC; Luverne Health and Rehabilitation, LLC; Moundville Health
and Rehabilitation, LLC; Northport Health Services of Arkansas, LLC, doing
business as Covington Court Health and Rehabilitation Center, doing business as
Fayetteville Health and Rehabilitation Center, doing business as Springdale Health
and Rehabilitation Center, doing business as Legacy Health and Rehabilitation
Center, doing business as Paris Health and Rehabilitation Center; Northport
Health Services of Florida, LLC, doing business as Crystal River Health and
Rehabilitation Center, doing business as Ocala River Health and Rehabilitation
Center, doing business as Daytona Beach Health and Rehabilitation Center, doing
business as St. Augustine Health and Rehabilitation Center, doing business as
West Melbourne Health and Rehabilitation Center; Northport Health Services of
Missouri, LLC, doing business as Joplin Health and Rehabilitation Center, doing
business as Webb City Health and Rehabilitation Center, doing business as
Carthage Health and Rehabilitation Center, doing business as Warsaw Health and
Rehabilitation Center, doing business as Pleasant Hill Health and Rehabilitation
Center; Northway Health & Rehabilitation, LLC; Oak Knoll Health and
Rehabilitation, LLC; Opp Health and Rehabilitation, LLC; Ozark Health and
Rehabilitation, LLC; Palm Gardens Health and Rehabilitation, LLC; Park Manor
Health and Rehabilitation, LLC; Prattville Health and Rehabilitation, LLC; South
Haven Health and Rehabilitation, LLC; South Health and Rehabilitation, LLC;
Sumter Health and Rehabilitation, LLC; Tallassee Health and Rehabilitation,
LLC; Valley View Health and Rehabilitation, LLC; Wetumpka Health and
Rehabilitation, LLC; AFNC, Inc., doing business as Eaglecrest Nursing and
Rehab; Beebe Retirement Center, Inc.; BNNC, Inc., doing business as Alcoa Pines
Health and Rehabilitation; BVNC, Inc., doing business as Alcoa Pines Health and
Rehabilitation; CNNC, Inc., doing business as Corning Therapy and Living
Center; FPNC, Inc., doing business as Twin Lakes Therapy and Living; GVNC,
Inc., doing business as Gassville Therapy and Living; HBNC, Inc., doing business
as Southridge Village Nursing and Rehab; HLNC, Inc., doing business as Heritage
Living Center; HSNC, Inc., doing business as Village Springs Health and
Rehabilitation; JBNC, Inc., doing business as Ridgecrest Health and
Rehabilitation; Jonesboro Care and Rehabilitation Center, LLC, doing business as
St. Elizabeths Place; JRNRC OPS, Inc., doing business as James River Nursing
and Rehabilitation; Linco Health, Inc., doing business as Gardner Nursing and
Rehabilitation; MHCNC, Inc., doing business as Care Manor Nursing and Rehab;
MLBNC, Inc., doing business as Pioneer Therapy and Living; MMNC, Inc., doing
business as The Lakes at Maumelle Health and Rehabilitation; MSNRC OPS, Inc.,
doing business as Magnolia Square Nursing and Rehab; Nashville Nursing &
Rehab, Inc.; Northwest Health and Rehab, Inc., doing business as North Hills Life
Care and Rehab; OCNC, Inc., doing business as Silver Oaks Health and
Rehabilitation; OR OPS, Inc., doing business as Oak Ridge Health and
Rehabilitation; PM OPS, Inc., doing business as Dierks Health and Rehab; RTNC,
Inc., doing business as Rector Nursing and Rehab; Salco NC, Inc., doing business
as Evergreen Living Center at Stagecoach; Salco NC 2, Inc., doing business as
Amberwood Health and Rehabilitation; SCNC, Inc., doing business as Spring
Creek Health & Rehab; Senior Living Management Group, LLC, doing business
as Birch Pointe Health and Rehabilitation; SLNC, Inc., doing business as
Southfork River Therapy and Living; SRCNC, Inc., doing business as The
Crossing at Riverside Health and Rehabilitation; Timberlane Care and
Rehabilitation Center, LLC, doing business as Timberlane Health &
Rehabilitation; TXKNC, Inc., doing business as Bailey Creek Health & Rehab;
WCNC, Inc., doing business as Katherines Place at Wedington; Westwood Health
and Rehab, Inc.; Windcrest Health and Rehab, Inc.; WRNC, Inc., doing business
as Chapel Woods Health and Rehabilitation; Apple Creek Health and Rehab, LLC;
Ashton Place Health and Rehab, LLC; Atkins Care Center, Inc.; Belvedere
Nursing and Rehabilitation Center, LLC; Bradford House Nursing and Rehab,
-2-
LLC; Briarwood Nursing and Rehabilitation Center, Inc.; Cabot Health and
Rehab, LLC; Chapel Ridge Nursing Center, LLC; Colonel Glenn Health and
Rehab, LLC; Dardanelle Nursing and Rehabilitation Center, Inc.; Nursing and
Rehabilitation Center at Good Shepherd, LLC; Greenbrier Care Center, Inc.;
Greystone Nursing and Rehab, LLC; Heather Manor Care Center, Inc.; Hickory
Heights Health and Rehab, LLC; Innisfree Health and Rehab, LLC; Jamestown
Nursing and Rehab, LLC; Johnson County Health and Rehab, LLC; Country Club
Gardens, LLC; Lakewood Health and Rehab, LLC; Legacy Heights Nursing and
Rehab, LLC; Lonoke Health and Rehab Center, LLC; Oak Manor Nursing and
Rehabilitation Center, Inc.; Perry County Care Center, Inc.; Quapaw Care and
Rehabilitation Center, LLC; Robinson Nursing & Rehabilitation Center, LLC;
Russellville Car Center, Inc.; Salem Place Nursing and Rehabilitation Center, Inc.;
Sherwood Nursing and Rehabilitation Center, Inc.; Shiloh Nursing and Rehab,
LLC; Stella Manor Care Center, Inc.; Superior Health & Rehab, LLC; Eufaula
Care Center, Inc.; Cherokee County Nursing Center, Inc.; Parks Edge Care Center,
Inc.; Hendrix Health Care Center, Inc., doing business as Hendrix Health &
Rehabilitation; Glen Haven Health and Rehabilitation, LLC
lllllllllllllllllllllPlaintiffs - Appellants
v.
U.S. Department of Health and Human Services; Xavier Becerra,1 in his official
capacity as Secretary of the U.S. Department of Health & Human Services;
Centers for Medicare & Medicaid Services; Chiquita Brooks-LaSure,2 in her
official capacity as the Administrator of the Centers for Medicare & Medicaid Services
lllllllllllllllllllllDefendants - Appellees
------------------------------
1
Xavier Becerra is automatically substituted pursuant to Federal Rule of
Appellate Procedure 43(c)(2).
2
Chiquita Brooks-LaSure is automatically substituted pursuant to Federal Rule
of Appellate Procedure 43(c)(2).
-3-
Public Citizen
lllllllllllllllllllllAmicus on Behalf of Appellee(s)
____________
Appeal from United States District Court
for the Western District of Arkansas - Fayetteville
____________
Submitted: January 15, 2021
Filed: October 1, 2021
____________
Before SMITH, Chief Judge, KELLY and ERICKSON, Circuit Judges.
____________
KELLY, Circuit Judge.
Northport Health Services of Arkansas, LLC, and other similarly situated long-
term care (LTC) facilities (collectively, Northport) appeal the decision of the district
court3 granting summary judgment in favor of the U.S. Department of Health and
Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS,
and collectively, the government). Northport argues that a regulation promulgated
by CMS through notice and comment rulemaking is unlawful and should be set aside
for violating the Administrative Procedure Act (APA), 5 U.S.C. § 706, the Federal
Arbitration Act (FAA), 9 U.S.C. § 1 et seq., and the Regulatory Flexibility Act
(RFA), 5 U.S.C. § 601 et seq. Having jurisdiction under 28 U.S.C. § 1291, we affirm.
3
The Honorable Timothy L. Brooks, United States District Judge for the
Western District of Arkansas.
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I. Background
A. Factual and Regulatory Background
The federal government subsidizes eligible individuals’ health care through
two large programs: Medicare and Medicaid. Medicare, the second largest federal
program, spends approximately $800 billion annually “to provide health insurance
to nearly 60 million aged or disabled Americans.” Azar v. Allina Health Servs., 139
S. Ct. 1804, 1808 (2019); see NHE Fact Sheet, Ctrs. for Medicare & Medicaid Servs.,
https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-
Reports/NationalHealthExpendData/NHE-Fact-Sheet (last modified Dec. 16, 2020).
“Medicaid is a cooperative federal-state program through which the Federal
Government provides [approximately $600 billion in] financial assistance to States
so that they may furnish medical care to needy individuals.” Wilder v. Va. Hosp.
Ass’n, 496 U.S. 498, 502 (1990); see NHE Fact Sheet, supra. The Secretary of HHS
administers both programs through CMS, a sub-agency of HHS. To provide services
to Medicare- and Medicaid-covered individuals, medical providers must enter into
provider agreements that establish treatment standards and set reimbursement rates
for available services. See 42 U.S.C. §§ 1395cc, 1396a.
Medicare and Medicaid provide coverage for long-term residents of nursing
homes, commonly referred to as LTC facilities. Participating LTC facilities must
comply with the requirements set forth in 42 U.S.C. § 1395i-3 (Medicare) and 42
U.S.C. § 1396r (Medicaid), as well as the regulations promulgated thereunder, see 42
C.F.R. §§ 483.1–.95. The plaintiffs in this matter are “dually-certified” LTC
facilities, meaning they provide long-term care under both the Medicare and
Medicaid programs.
In 2015, CMS initiated notice and comment rulemaking to comprehensively
revise the requirements for LTC facilities to participate in the Medicare and Medicaid
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programs. See Reform of Requirements for Long-Term Care Facilities, 80 Fed. Reg.
42,168, 42,168–69 (proposed July 16, 2015). The regulatory reforms were intended
to “improve the quality of life, care, and services in LTC facilities, optimize resident
safety, reflect current professional standards, and improve the flow of the regulations”
in light of “evidence-based research . . . [that] enhanced [CMS’s] knowledge about
resident safety, health outcomes, individual choice, and quality assurance and
performance improvement.” Id. at 42,169. In that vein, CMS noted the potential
benefits of alternative dispute resolution, including arbitration, but also expressed its
concern that LTC facilities’ “superior bargaining power could result in a resident
feeling coerced into signing the agreement,” that residents might be waiving the right
to judicial relief without full understanding, and that the prevalence of pre-dispute
arbitration agreements “could be detrimental to residents’ health and safety.” Id. at
42,211. CMS therefore proposed certain limitations on LTC facilities’ use of
arbitration agreements, including requirements that the facilities explain such
agreements to residents in a form, manner, and language that they understand and that
they not treat arbitration agreements as a “condition of admission, readmission, or the
continuation of [one’s] residence at the facility.” Id. In addition, reflecting a more
general concern regarding the use of such agreements by LTC facilities, CMS stated
it was considering and soliciting comments on “whether binding arbitration
agreements should be prohibited” in the case of nursing home residents. Id.On October 4, 2016, after an extended comment period, CMS published the
final version of the rule (Original Rule) in the Federal Register. See Reform of
Requirements for Long-Term Care Facilities, 81 Fed. Reg. 68,688 (Oct. 4, 2016). In
a shift from the proposed rule, the final rule prohibited LTC facilities from entering
into pre-dispute, binding arbitration agreements with residents or their representa-
tives. See id. at 68,690. CMS clarified further that, “[a]fter a dispute arises, the
resident and the LTC facility may voluntarily enter into a binding arbitration
agreement if both parties agree and comply with the relevant requirements” of the
final rule. Id. at 68,800.
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Several weeks later, before the Original Rule was to take effect on November
28, 2016, see id. at 68,688, a group of Mississippi nursing homes sued to preliminar-
ily and permanently enjoin enforcement of the rule’s arbitration provision. See Am.
Health Care Ass’n v. Burwell, 217 F. Supp. 3d 921, 926 (N.D. Miss. 2016). Similar
to this case, the nursing homes claimed that the rule’s blanket prohibition of LTC
facilities’ use of pre-dispute arbitration agreements violated the APA, the FAA, and
the RFA. See id. at 929–42. Finding that the nursing homes were likely to prevail,
the district court granted a nationwide preliminary injunction of the challenged
provision of the Original Rule. See id. at 946.
Rather than appeal the district court’s decision, CMS initiated another round
of notice and comment rulemaking several months later to revise the enjoined portion
of the Original Rule. CMS proposed removing the requirement that precluded LTC
facilities from entering into pre-dispute, binding arbitration agreements, reasoning
that, “[u]pon reconsideration, [it] believe[d] that arbitration agreements are, in fact,
advantageous to both providers and beneficiaries because they allow for the
expeditious resolution of claims without the costs and expense of litigation.”
Revision of Requirements for Long-Term Care Facilities: Arbitration Agreements,
82 Fed. Reg. 26,649, 26,650–51 (proposed June 8, 2017). CMS nevertheless
acknowledged some concerns about the use of arbitration agreements in LTC
facilities and proposed strengthening some requirements “to ensure the transparency
of arbitration agreements in LTC facilities” and to strike the “best policy balance.”
Id. at 26,651.
After the comments period concluded, CMS published the final version of the
rule (Revised Rule) in the Federal Register, to go into effect on September 16, 2019.
See Revision of Requirements for Long-Term Care Facilities: Arbitration Agree-
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ments, 84 Fed. Reg. 34,718, 34,718 (July 18, 2019) (codified at 42 C.F.R.
§ 483.70(n)). It provided:
(n) Binding arbitration agreements. If a facility chooses to ask a resident
or his or her representative to enter into an agreement for binding
arbitration, the facility must comply with all of the requirements in this
section.
(1) The facility must not require any resident or his or her
representative to sign an agreement for binding arbitration as a
condition of admission to, or as a requirement to continue to
receive care at, the facility and must explicitly inform the resident
or his or her representative of his or her right not to sign the
agreement as a condition of admission to, or as a requirement to
continue to receive care at, the facility.
(2) The facility must ensure that:
(i) The agreement is explained to the resident and his or her
representative in a form and manner that he or she under-
stands, including in a language the resident and his or her
representative understands;
(ii) The resident or his or her representative acknowledges
that he or she understands the agreement;
(iii) The agreement provides for the selection of a neutral
arbitrator agreed upon by both parties; and
(iv) The agreement provides for the selection of a venue
that is convenient to both parties.
(3) The agreement must explicitly grant the resident or his or her
representative the right to rescind the agreement within 30
calendar days of signing it.
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(4) The agreement must explicitly state that neither the resident
nor his or her representative is required to sign an agreement for
binding arbitration as a condition of admission to, or as a
requirement to continue to receive care at, the facility.
(5) The agreement may not contain any language that prohibits or
discourages the resident or anyone else from communicating with
federal, state, or local officials, including but not limited to,
federal and state surveyors, other federal or state health depart-
ment employees, and representatives of the Office of the State
Long-Term Care Ombudsman, in accordance with § 483.10(k).
(6) When the facility and a resident resolve a dispute through
arbitration, a copy of the signed agreement for binding arbitration
and the arbitrator’s final decision must be retained by the facility
for 5 years after the resolution of that dispute on and be available
for inspection upon request by CMS or its designee.
Id. at 34,735–36 (quoting proposed 42 C.F.R. § 483.70(n)).
B. Procedural History
On September 4, 2019, Northport filed this lawsuit challenging multiple
aspects of the Revised Rule: (i) the requirement that a binding arbitration agreement
not be made a condition for the admission to, or the continuation of care in, an LTC
facility, 42 C.F.R. § 843.70(n)(1); (ii) the requirement that residents be granted a right
to rescind a binding arbitration agreement within 30 days of signing, id.§ 843.70(n)(3); (iii) the requirement that any arbitration agreement (a) be explained
to the resident so he or she understands it and (b) explicitly state that signing it is not
a condition of admission to the LTC facility, id. § 843.70(n)(2)(i)–(ii), (4); and (iv)
the requirement that the LTC facility retain copies of the signed arbitration agreement
and any final arbitration decisions for five years, id. § 843.70(n)(6). Northport moved
to preliminarily enjoin the enforcement of the Revised Rule or, in the alternative, to
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stay enforcement pending judicial review. While that motion was pending, the parties
agreed to stay enforcement of the Revised Rule until the district court ruled on the
merits of the case, and they cross-moved for summary judgment based on the
administrative record.
On April 7, 2020, the district court denied Northport’s motion for summary
judgment and granted the government’s motion for summary judgment, upholding the
Revised Rule. The court reasoned that the rule (i) did not violate the FAA, 9 U.S.C.
§ 2; (ii) was a permissible exercise of HHS’s statutory authority under the Medicare
and Medicaid statutes; (iii) was not “arbitrary and capricious” under the APA, 5
U.S.C. § 706(2)(A); and (iv) was promulgated in compliance with the RFA, 5 U.S.C.
§ 605(b). Northport now appeals, and we have granted a stay of the Revised Rule’s
enforcement pending resolution of this appeal.
II. Discussion
Northport revives its four challenges to the Revised Rule on appeal. “We
review de novo a district court’s decision on whether an agency action violates the
APA.” Simmons v. Smith, 888 F.3d 994, 998 (8th Cir. 2018) (quoting Friends of the
Norbeck v. U.S. Forest Serv., 661 F.3d 969, 975 (8th Cir. 2011)); see also 5 U.S.C.
§ 706 (“[T]he reviewing court shall decide all relevant questions of law, interpret
constitutional and statutory provisions, and determine the meaning or applicability
of the terms of an agency action.”). We may set aside agency action under the APA
if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance
with law”; “in excess of statutory jurisdiction, authority, or limitations, or short of
statutory right”; or “without observance of procedure required by law.” 5 U.S.C.
§ 706(2)(A), (C)–(D).
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A. Conflict with the Federal Arbitration Act
Northport first argues that the Revised Rule violates the FAA and is therefore
“not in accordance with law,” id. § 706(2)(A), because it subjects arbitration
agreements to “disfavored treatment.” Enacted in 1925 “in response to widespread
judicial hostility to arbitration agreements,” AT&T Mobility LLC v. Concepcion, 563
U.S. 333, 339 (2011), the FAA provides that the terms of a written arbitration
agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. As
described by the Supreme Court, this provision “establishes an equal-treatment
principle,” requiring “courts to place arbitration agreements ‘on equal footing with
all other contracts.’” Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421,
1424, 1426 (2017) (quoting DIRECTV, Inc. v. Imburgia, 577 U.S. 47, 48 (2015)).
Northport argues that the Revised Rule contravenes the equal-treatment
principle because it “singles out” arbitration agreements, including by regulating LTC
facilities’ ability to enter into them with residents. For example, Northport reasons
that prohibiting LTC facilities from requiring residents to sign arbitration agreements
as a condition for admission, 53 C.F.R. § 483.70(n)(1), “restricts the use of arbitration
agreements” and violates the FAA. We disagree. Such a construction of the FAA
ignores the statute’s plain language and interpreting precedent and would signifi-
cantly expand the scope of the FAA to manufacture a conflict with the Revised Rule
where none exists. Simply put, the Revised Rule does not come up against the FAA
because it does not limit or frustrate the enforceability of valid arbitration agreements.
As noted above, the “savings clause” of the FAA “permits arbitration
agreements to be declared unenforceable ‘upon such grounds as exist at law or in
equity for the revocation of any contract.’” Concepcion, 563 U.S. at 339 (emphasis
added) (quoting 9 U.S.C. § 2). That is, an agreement to arbitrate a dispute may “be
invalidated by ‘generally applicable contract defenses, such as fraud, duress, or
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unconscionability,’ but not by defenses that apply only to arbitration or that derive
their meaning from the fact that an agreement to arbitrate is at issue.” Id. (emphasis
added) (quoting Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).
Thus, in AT&T Mobility LLC v. Concepcion, the Supreme Court held that a
California rule that treated class-action waivers in arbitration agreements as per se
unconscionable was preempted by the FAA. See id. at 340, 352. Although
unconscionability typically is a “generally applicable contract defense,” the Court
reasoned that California was applying the doctrine discriminately to arbitration
agreements by finding class-action waivers particularly unconscionable when
included therein. See id. at 341–44, 346–48. And under the FAA, California courts
could not avoid enforcing arbitration agreements, including their class-action
waivers, “according to their terms.” Id. at 344 (quoting Volt Info. Scis., Inc. v. Bd.
of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989)).
In our reading, the Supreme Court has never applied the FAA to prohibit a
federal agency from generally regulating the use of arbitration agreements as CMS
does here. Rather, it has construed the FAA simply to limit the circumstances in
which arbitration agreements, once entered into, can be rendered invalid or
unenforceable. So, for example, in Kindred Nursing Centers Ltd. Partnership v.
Clark, the Court held that the FAA preempted a Kentucky rule that would have
rendered invalid (and thereby unenforceable) arbitration agreements entered into by
a principal’s legal representative if the governing power of attorney did not
specifically state that the representative was entitled to enter into arbitration
agreements on the principal’s behalf. See 137 S. Ct. at 1425–27; see also id. at 1428
(“A rule selectively finding arbitration contracts invalid because improperly formed
fares no better under the Act than a rule selectively refusing to enforce those
agreements once properly made.”). Likewise, in Preston v. Ferrer, the Court held that
the FAA preempted a California rule that required exhaustion of state administrative
remedies before arbitration, despite the fact that the parties had “agree[d] to arbitrate
all questions arising under [the] contract.” 552 U.S. 346, 359 (2008). Because
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requiring parties to initially refer their disputes to a state administrative body would
frustrate the benefits of utilizing arbitration in the first instance, see id. at 357–58 (“A
prime objective of an agreement to arbitrate is to achieve streamlined proceedings and
expeditious results.” (cleaned up)), the rule effectively rendered valid arbitration
agreements unenforceable and violated the FAA. See id. at 359. And in Epic
Systems Corp. v. Lewis, the Supreme Court considered whether the National Labor
Relations Act (NLRA) rendered certain agreements requiring individualized (as
opposed to classwide) arbitration unenforceable. See 138 S. Ct. 1612, 1620 (2018);
see also id. at 1622 (discussing the contract defenses that are preempted by the FAA:
“defenses that target arbitration by name or by more subtle methods, such as by
interfering with fundamental attributes of arbitration” (cleaned up)). Assuming the
NLRA rendered class and collective action waivers in arbitration agreements illegal,
the Court concluded that such a rule would violate the FAA because it would operate
as a defense applicable to arbitration agreements only. See id. at 1622–23.
The Revised Rule, in comparison to the rules challenged in the above cases,
does not invalidate or render unenforceable any arbitration agreement. See 84 Fed.
Reg. at 34,718 (“This final rule does not purport to regulate the enforcement of any
arbitration agreement . . . .”); id. at 34,729 (“CMS does not have the power to annul
valid contracts.”); see also id. at 34,732 (“This rule in no way would prohibit two
willing and informed parties from entering voluntarily into an arbitration agree-
ment.”). Instead, it establishes the conditions for receipt of federal funding through
the Medicare and Medicaid programs. See id. at 34,733 (noting that LTC facilities
may enter into arbitration agreements “so long as they comply with the requirements”
finalized in the Revised Rule). So, for example, if an LTC facility entered into an
arbitration agreement with a resident without complying with the Revised Rule by
requiring the resident to sign as a condition of admission to the facility, see 42 C.F.R.
§ 483.70(n)(1), the arbitration agreement would nonetheless be enforceable, absent
a showing of “generally applicable contract defenses, such as fraud, duress, or
unconscionability,” Concepcion, 563 U.S. at 339; see 9 U.S.C. § 2. CMS would
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simply enforce the regulation through a combination of administrative remedies,
including denial of payment and civil monetary penalties. See 42 C.F.R. § 488.406;
84 Fed. Reg. at 34,733.
In summary, Northport expansively argues that the FAA established “a liberal
federal policy favoring arbitration agreements,” Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24 (1983), that is frustrated by the Revised Rule’s
regulation of nursing homes’ use of arbitration agreements.4 However, “courts do not
apply federal policies; they apply federal statutes, and the FAA speaks only to the
validity, irrevocability and enforceability of arbitration agreements.” Cal. Ass’n of
Priv. Postsecondary Schs. v. DeVos, 436 F. Supp. 3d 333, 344 (D.D.C. 2020), vacated
as moot, No. 20-5080, 2020 WL 9171125 (D.C. Cir. Oct. 14, 2020). Because the
Revised Rule does not, in words or effect, render arbitration agreements entered into
in violation thereof invalid or unenforceable, it does not conflict with the FAA.5
4
Northport largely ignores the extent to which the Revised Rule favors
arbitration as “an appropriate forum to resolve disputes.” 84 Fed. Reg. at 34,729; see
also id. at 34,732 (“We acknowledge the[] advantages and disadvantages to
arbitration and believe that the requirements in this final rule provide the transparency
and opportunity for the resident and his or her representative to evaluate those
advantages and disadvantages and make a choice that is best for them. This rule in
no way would prohibit two willing and informed parties from entering voluntarily
into an arbitration agreement.”).
5
Because we find no conflict between the FAA and the Revised Rule, we need
not address Northport’s argument that Congress has not evinced a “clear and
manifest” intention to empower CMS to promulgate rules overriding the FAA. See
Epic Sys., 138 S. Ct. at 1624 (“A party seeking to suggest that two statutes cannot be
harmonized, and that one displaces the other, bears the heavy burden of showing a
clearly expressed congressional intention that such a result should follow.” (cleaned
up)). Such an intention is unnecessary where there is “no conflict at all.” Id. at 1625.
Nor do we address Northport’s argument that the Revised Rule engages in “economic
dragooning,” leaving LTC facilities “no real option but to acquiesce” to its
regulations of arbitration agreements. Nat’l Fed. of Indep. Bus. v. Sebelius, 567 U.S.
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B. HHS’s Statutory Authority Under the Medicare and Medicaid Statutes
Next, Northport argues that the Revised Rule should be set aside because it
exceeds HHS’s statutory authority under the Medicare and Medicaid statutes to
promulgate regulations (i.e., that it is ultra vires). See 5 U.S.C. § 706(2)(C); see also
U.S. ex rel. O’Keefe v. McDonnell Douglas Corp., 132 F.3d 1252, 1257 (8th Cir.
1998) (“An agency’s promulgation of rules without valid statutory authority
implicates core notions of the separation of powers, and we are required by Congress
to set these regulations aside.”). We review such a claim using the familiar Chevron
framework. See Iowa League of Cities v. E.P.A., 711 F.3d 844, 876 (8th Cir. 2013).
“Under that framework, we ask whether the statute is ambiguous and, if so, whether
the agency’s interpretation is reasonable.” King v. Burwell, 576 U.S. 473, 485 (2015)
(citing Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842–43
(1984)). The two-step Chevron framework “is premised on the theory that a statute’s
ambiguity constitutes an implicit delegation from Congress to the agency to fill in the
statutory gaps.” Id. (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S.
120, 159 (2000)).
519, 582 (2012) (plurality opinion). For one, a plurality of the Supreme Court used
that language to describe the federal government’s limited constitutional authority
under the Spending Clause to regulate the states, see id. at 575–85, not a federal
agency’s ability to regulate LTC facilities’ use of federal funding, as in this case.
Indeed, it is irrelevant for the purposes of the FAA whether LTC facilities—private
businesses that voluntarily participate in the Medicare and Medicaid programs, see
Minn. Ass’n of Health Care Facilities, Inc. v. Minn. Dep’t of Pub. Health, 742 F.2d
442, 446 (8th Cir. 1984); Livingston Care Ctr., Inc. v. United States, 934 F.2d 719,
720–21 (6th Cir. 1991)—must comply with the Revised Rule as the price of
admission to obtain federal funding. The Revised Rule’s regulations do not affect the
validity or enforceability of LTC facilities’ arbitration agreements, and they therefore
do not conflict with the FAA.
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The government relied on three sections of the Medicare and Medicaid statutes
as the bases for its statutory authority to promulgate the Revised Rule. See 84 Fed.
Reg. at 34,718, 34,725.
It is the duty and responsibility of the Secretary to assure that require-
ments which govern the provision of care in [participating LTC
facilities], and the enforcement of such requirements, are adequate to
protect the health, safety, welfare, and rights of residents and to promote
the effective and efficient use of public moneys.
42 U.S.C. §§ 1395i-3(f)(1), 1396r(f)(1).
A [participating LTC facility] must meet such other requirements
relating to the health, safety, and well-being of residents or relating to
the physical facilities thereof as the Secretary may find necessary.
Id. § 1395i-3(d)(4)(B); cf. id. § 1396r(d)(4)(B).
A [participating LTC facility] must protect and promote the rights of
each resident, including . . . [a]ny other right established by the
Secretary.
Id. §§ 1395i-3(c)(1)(A)(xi), 1396r(c)(1)(A)(xi).6
6
Northport argues that the government “disclaimed reliance” on this last pair
of provisions because it was not cited in the section titled “Statutory Authority” of the
Revised Rule. See 84 Fed. Reg. at 34,718; see also Michigan v. E.P.A., 576 U.S. 743,
758 (2015) (noting “the foundational principle of administrative law that a court may
uphold agency action only on the grounds that the agency invoked when it took the
action”). However, the Revised Rule did cite these provisions as statutory authorities
for promulgating the Original Rule, which was “designed to accomplish the same
goals” as the Revised Rule, 84 Fed. Reg. at 34,725; see also 82 Fed. Reg. at 26,651
(claiming statutory authority to issue the Revised Rule under these three provisions),
and we consider all three statutory bases proffered by the government, see Union Pac.
R.R. Co. v. Surface Transp. Bd., 863 F.3d 816, 824 (8th Cir. 2017).
-16-
To determine whether a statute is ambiguous, we start with its plain language.
See Ark. AFL-CIO v. F.C.C., 11 F.3d 1430, 1440 (8th Cir. 1993) (en banc). “If
congressional intent is clearly discernable, the agency must act in accordance with
that intent and the court need not defer to the agency’s interpretation of its mandate.”
Id. Thus, we must determine whether Congress intended HHS to have the authority
to regulate LTC facilities’ use of arbitration agreements. See Friends of the Boundary
Waters Wilderness v. Bosworth, 437 F.3d 815, 823 (8th Cir. 2006).
Looking to the above statutory provisions, we conclude that the Medicare and
Medicaid statutes are ambiguous as to whether HHS has the authority to regulate the
use of arbitration agreements. The statutes are broadly worded to give HHS
significant leeway in deciding how best to safeguard LTC residents’ health and safety
and protect their dignity and rights. For example, the statutes delegate authority to
the Secretary to promulgate regulations ensuring the “provision of care” at LTC
facilities is adequate to “protect the health, safety, welfare, and rights of residents and
to promote the effective and efficient use of public moneys.” 42 U.S.C. §§
1395i-3(f)(1), 1396r(f)(1). More capaciously, the statutes confer authority to the
Secretary to promulgate regulations “relating to the health, safety, and well-being of
residents” as deemed “necessary.” Id. § 1395i-3(d)(4)(B); cf. id. § 1396r(d)(4)(B).
And most expansively, the Secretary is empowered to “protect and promote” the
rights of residents he or she may deem important. Id. §§ 1395i-3(c)(1)(A)(xi),
1396r(c)(1)(A)(xi).
We disagree with Northport’s arguments that the statutes are sufficiently
unambiguous to conclude that Congress did not intend for HHS to have the authority
to regulate the use of arbitration agreements. First, Northport contends that
arbitration is not “meaningful[ly] connect[ed]” to residents’ “healthy, safety, and
well-being,” e.g., id. § 1395i-3(d)(4)(B), and falls outside HHS’s wheelhouse—the
“provision of care,” id. §§ 1395i-3(f)(1), 1396r(f)(1). In effect, Northport implies that
although HHS is empowered to regulate the terms of residents’ medical, palliative,
-17-
or residential care, HHS does not have the authority to regulate the administrative
side of LTC facilities. Looking to the “text and context” of the statute, Union Pac.
R.R. Co., 863 F.3d at 825, we reject such a narrow reading of HHS’s authority. In
addition to conferring the general responsibility to promulgate regulations governing
the “provision of care . . . adequate to protect the health, safety, welfare, and rights
of residents,” 42 U.S.C. §§ 1395i-3(f)(1), 1396r(f)(1), Congress gave HHS the power
to develop standards for the qualification of LTC facility administrators, id. §§ 1395i-
3(f)(4), 1396r(f)(4), to establish criteria for the administration of LTC facilities, id.
§§ 1395i-3(f)(5), 1396r(f)(5), and to specify data to be collected by LTC facilities, id.
§§ 1395i-3(f)(6), 1396r(f)(6). These provisions, though not themselves the statutory
bases of the Revised Rule, demonstrate that HHS is not restricted to regulating only
matters concerning residents’ standard of medical care.
Next, relying on the interpretive canon that expressing some items of a group
excludes the omitted items, see N.L.R.B. v. SW General, Inc., 137 S. Ct. 929, 940
(2017) (defining expressio unius est exclusio alterius), Northport argues that
Congress did not intend HHS to regulate LTC facilities’ ability to condition residents’
admission on signing arbitration agreements. In Northport’s view, by enacting
express provisions governing LTC facilities’ admissions practices without mention-
ing arbitration agreements, see 42 U.S.C. §§ 1395i-3(c)(5), 1396r(c)(5), Congress
intentionally withheld authority from HHS to promulgate regulations on that issue.
“But that canon [is] a feeble helper in an administrative setting,” Child.’s Hosp. Ass’n
of Tex. v. Azar, 933 F.3d 764, 770–71 (D.C. Cir. 2019) (cleaned up), particularly
when, as here, Northport points to no evidence suggesting that “Congress considered
the unnamed possibility and meant to say no to it,” Barnhart v. Peabody Coal Co.,
537 U.S. 149, 168 (2003). Moreover, Northport’s argument would suggest that HHS
lacks the authority to regulate admissions practices beyond that specified in the
pertinent statutory provisions, a claim undermined by other HHS regulations that do
just that. See, e.g., 42 C.F.R. § 483.15(a)(2)(iii), (6).
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Finally, Northport infers from the fact that HHS had not tried to promulgate
regulations governing the use of arbitration agreements until 2016, when it published
the Original Rule, that HHS had implicitly recognized it lacked the statutory authority
to do so. Northport points to no authority suggesting that an agency’s inaction
defines the boundaries of that agency’s statutory authority. Indeed, we do not draw
comparable inferences from legislative inaction. See Pension Benefit Guar. Corp. v.
LTV Corp., 496 U.S. 633, 650 (1990) (“Congressional inaction lacks persuasive
significance because several equally tenable inferences may be drawn from such
inaction.” (cleaned up)). But more directly, whether or not an agency has previously
attempted to exercise statutory authority it may or may not have does not answer the
question before us—whether the statute is ambiguous, thereby implicitly leaving a
gap in the statute to be filled. See Iowa League of Cities, 711 F.3d at 877.
Having determined that the Medicare and Medicaid statutes are ambiguous, we
look to whether the agency’s interpretation “is based on a permissible construction
of the statute[s].” Andrade-Zamora v. Lynch, 814 F.3d 945, 951 (8th Cir. 2016)
(quoting City of Arlington v. F.C.C., 569 U.S. 290, 296 (2013)); see Ark. AFL-CIO,
11 F.3d at 1441 (noting “the agency’s construction of [a] statute must be reason-
able”). An agency’s reasonable interpretation of a statute is entitled to “substantial
deference.” Bosworth, 437 F.3d at 821. In conducting our analysis, we need not
identify the interpretation we would have taken had the question been presented to
us initially in a judicial proceeding, as “a court may not substitute its own construc-
tion of a statutory provision for a reasonable interpretation made by the administrator
of an agency.” Simmons, 888 F.3d at 998 (quoting Chevron, 467 U.S. at 844); see
also Unity Healthcare v. Azar, 918 F.3d 571, 578 (8th Cir. 2019) (“[T]he question
before us is not whether an agency interpretation represents the best interpretation of
the statute, but whether it represents a reasonable one.” (quoting Smiley v. Citibank
(S.D.), N.A., 517 U.S. 735, 744–45 (1996))). Rather, we will uphold the agency’s
interpretation “so long as we can reasonably conclude that the grants of authority in
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the statutory provisions cited by the government contemplate the issuance.” Iowa
League of Cities, 711 F.3d at 877 (cleaned up).
Reviewing the provisions of the Revised Rule, we conclude that they are
reasonable interpretations of the Medicare and Medicaid statutes. As noted by CMS,
the Revised Rule reflects the agency’s belief that “arbitration has both advantages and
disadvantages” and permits LTC facilities “to ask their residents to sign arbitration
agreements so long as they comply with the [Revised Rule’s] requirements.” 84 Fed.
Reg. at 34,732–33. Generally, these requirements ensure that residents who enter into
arbitration agreements with LTC facilities do so knowingly and voluntarily, without
the specter that the facility will deny care should they refuse. For example, LTC
facilities may not require a resident to sign an arbitration agreement either as a
condition of admission or as a requirement to continue receiving care. See 42 C.F.R.
§ 483.70(n)(1); see also id. § 483.70(n)(4). LTC facilities must explain the function
of the arbitration agreement before a resident signs it, and they must afford residents
the right to rescind the agreement within 30 days of signing it. See id. §
483.70(n)(2)(i), (3). And to assist CMS in monitoring the efficacy of arbitration in
resolving disputes between residents and LTC facilities, the Revised Rule requires
LTC facilities to keep for five years the applicable arbitration agreement and the
arbitrator’s final decision if ever a dispute is resolved. See id. § 483.70(n)(6).
In our view, it is reasonable for CMS to conclude that regulating the use of
arbitration agreements in LTC facilities furthers the health, safety, and well-being of
residents, particularly during the critical stage when a resident is first admitted to a
facility. See 42 U.S.C. § 1395i-3(d)(4)(B), (f)(1); id. § 1396r(d)(4)(B), (f)(1). We
can appreciate how conditioning care on entering into a binding arbitration agreement
may frustrate residents’ access to treatment or jeopardize their health and well-being.
See 84 Fed. Reg. at 34,726 (noting that the Revised Rule “holds the [LTC] facility
accountable by ensuring that [it] cannot coerce or apply unreasonable pressure on a
resident . . . by implying the resident would not receive the care he or she needs
-20-
without signing the agreement”); see also id. at 32,727 (noting that “residents are
frequently admitted during a time of stress and often after a decline in their health or
directly from the hospital . . . mak[ing] it extremely difficult for LTC residents . . . to
make an informed decision about arbitration”). Likewise, we think the Revised Rule
is a reasonable exercise of CMS’s authority to protect residents’ rights. See 42
U.S.C. §§ 1395i-3(c)(1)(A)(xi), 1396r(c)(1)(A)(xi).
In summary, the Revised Rule “represents a reasonable accommodation of
manifestly competing interests and is entitled to deference.” Chevron, 467 U.S. at
865. We affirm the district court’s conclusion that it is not ultra vires.
C. Northport’s Challenge to the Rule as Arbitrary and Capricious
Next, Northport argues that the Revised Rule should be set aside because it is
“arbitrary, capricious, [and] an abuse of discretion.” See 5 U.S.C. § 706(2)(A).
When promulgating a rule, an agency “must examine the relevant data and articulate
a satisfactory explanation for its action including a ‘rational connection between the
facts found and the choice made.’” Motor Vehicles Mfrs. Ass’n of U.S., Inc. v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines
v. United States, 371 U.S. 156, 168 (1962)). “Normally, an agency rule would be
arbitrary and capricious if the agency has relied on factors which Congress has not
intended it to consider, entirely failed to consider an important aspect of the problem,
offered an explanation for its decision that runs counter to the evidence before the
agency, or is so implausible that it could not be ascribed to a difference in view or the
product of agency expertise.” Id.; see also F.C.C. v. Fox Television Stations, Inc.,
556 U.S. 502, 536 (2009) (Kennedy, J., concurring in the judgment) (“The question
in each case is whether the agency’s reasons for the change, when viewed in light of
the data available to it, and when informed by the experience and expertise of the
agency, suffice to demonstrate that the new policy rests upon principles that are
rational, neutral, and in accord with the agency’s proper understanding of its
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authority.”). Our scope of review is narrow, and we are “not to substitute [our]
judgment for that of the agency.” State Farm, 463 U.S. at 43. Although “[w]e may
not supply a reasoned basis for the agency’s action that the agency itself has not
given,” id. (quoting SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)), we will
“uphold a decision of less than ideal clarity if the agency’s path may reasonably be
discerned,” id. (quoting Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419
U.S. 281, 286 (1974)).
Northport raises two arguments as to why the Revised Rule is arbitrary and
capricious. First, it suggests that the rule was “based on sheer speculation” because
CMS relied principally on anecdotal evidence rather than quantitative social science
evidence to support the rule. See, e.g., 84 Fed. Reg. at 34,722, 34,726 (noting that
CMS believed the Revised Rule was “the best way to strike a balance” between “a
great deal of anecdotal evidence and reportage” critical of LTC facilities’ use of
arbitration agreements and the “lack of statistical data” showing “that arbitration
agreements necessarily have a negative effect on quality of care”). But “[t]he APA
imposes no general obligation on agencies to produce empirical evidence,” Stilwell
v. Office of Thrift Supervision, 569 F.3d 514, 519 (D.C. Cir. 2009), and CMS was
entitled to justify the rule using the available anecdotal evidence so long as it
provided a rational, reasoned explanation for doing so. See id.; see also Sacora v.
Thomas, 628 F.3d 1059, 1069 (9th Cir. 2010) (noting that although “[i]t may have
been preferable for the [agency] to support its conclusions with empirical research,”
“it was reasonable for the [agency] to rely on its experience, even without having
quantified it in the form of a study”).
Having reviewed the regulatory record of both the Original Rule and the
Revised Rule, we are satisfied that the evidence CMS relied upon is sufficient to
support the Revised Rule. See 84 Fed. Reg. at 34,722 (noting that CMS relied on the
evidence and comments gathered during the Original Rule’s rulemaking process to
justify the Revised Rule). For example, CMS took into consideration commenters’
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stated beliefs that arbitration agreements in some instances permitted LTC facilities
“to avoid responsibility for providing poor or substandard care to their residents,”
jeopardizing residents’ health and safety. 81 Fed. Reg. at 68,793; see also id. (noting
that some commenters “had personally witnessed resident neglect and attributed it to
facilities believing that they were immune to any legal consequences for their
mistreatment because of the likelihood that they would prevail in binding arbitra-
tion”). Furthermore, CMS conducted a review of academic literature and court
opinions, which “provided evidence that pre-dispute arbitration agreements were
detrimental to the health and safety of LTC facility residents.” Id. (noting various
evidence-based critiques of LTC facilities’ use of arbitration agreements, including
“the unequal bargaining power between the resident and the LTC facilities;
inadequate explanations of the arbitration agreement; the inappropriateness of
presenting the agreement upon admission, an extremely stressful time for the
residents and their families; negative incentives on staffing and care as a result of not
having the threat of a substantial jury verdict for sub-standard care; and the unfairness
of the arbitration process for the resident”). Although these observations were not
supported by statistical data that quantified their aggregate effect, they were sufficient
to justify CMS “implement[ing] a regulation that accommodates arbitration while also
protecting LTC facility residents from unfairly coerced agreements.” 84 Fed. Reg.
at 34,726. Likewise, it was not arbitrary or capricious for CMS to have adopted a rule
recognizing the importance of amassing data going forward to continue monitoring
the propriety of the rule, see id. at 34,723 (“[T]he requirement to retain copies of the
arbitration agreement and the arbitrator’s final decision will allow us to learn how
arbitration is being used by LTC facilities and how this is affecting the residents.”),
as agencies are empowered to “adopt prophylactic rules to prevent potential problems
before they arise,” see Stilwell, 569 F.3d at 519.
Second, Northport argues that CMS did not adequately explain the rule’s
alleged departure from the agency’s historical support for the use of arbitration
agreements by LTC facilities. Northport relies on two documents that supposedly
-23-
reflect HHS and CMS’s prior policy toward arbitration agreements: a January 2003
memorandum from Steven Pelovitz, the former Director of the Survey and
Certification Group of CMS, Dist. Ct. Dkt. 25-5 at 2–3 (the Pelovitz Memo), and a
July 2008 letter from Michael Leavitt, the former Secretary of HHS, to the House
Judiciary Committee, Dist. Ct. Dkt. 24-25 at 691–93 (the Leavitt Letter). In the
Pelovitz Memo, CMS set forth its policy regarding LTC facilities that conditioned
residents’ admission to or ability to remain in an LTC facility on their signing of a
pre-dispute, binding arbitration agreement. Noting that the agency’s “primary focus
should be on the quality of care actually received by nursing home residents that may
be compromised by such agreements,” CMS declared that it would enforce existing
federal regulations to prevent LTC facilities from discharging, transferring, or
retaliating against current residents who refused to enter into binding arbitration
agreements. Dist. Ct. Dkt. 25-2 at 2–3. And in the Leavitt Letter, HHS articulated
its general support for pre-dispute arbitration agreements as “an excellent way for
patients and providers to control costs, resolve disputes, and speed resolution of
conflicts.” Dist. Ct. Dkt. 24-25 at 691. The agency noted its opposition to legislation
that would “deprive patients and providers of the opportunity to agree voluntarily to
resolve their disputes through arbitration,” id., and suggested along similar lines as
the Pelovitz Memo that existing regulations “provide[d] ample safeguards to ensure
that nursing home residents are protected from harm,” id. at 692.
To the extent the Revised Rule departs from these prior policies,7 we find that
CMS has provided a sufficiently reasonable explanation for doing so. When an
agency reverses its prior policy, “it need not demonstrate . . . that the reasons for the
7
Although Northport argues that the Revised Rule departs from CMS’s
historical position on arbitration agreements by being more restrictive of the use of
arbitration agreements, the Revised Rule is in fact less restrictive than CMS’s
immediately preceding policy: the Original Rule’s per se ban on pre-dispute, binding
arbitration agreements. See 84 Fed. Reg. at 34,719, 34,722 (noting that the
“overwhelming majority of commenters” opposed the Revised Rule because it
“revers[ed] course” on the Original Rule).
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new policy are better than the reasons for the old one.” Fox Television, 556 U.S. at
515. “[I]t suffices that the new policy is permissible under the statute, that there are
good reasons for it, and that the agency believes it to be better, which the conscious
change of course adequately indicates.” Id. At the outset, we note that the Revised
Rule is generally in harmony with the Pelovitz Memo and the Leavitt Letter. Indeed,
the rule appreciates the advantages of arbitration and expressly permits LTC facilities
and their residents to enter into arbitration agreements transparently and voluntarily.
See 84 Fed. Reg. at 34,722. But even if the Revised Rule changed direction slightly
by deciding that existing federal and state regulations are insufficient to protect
residents’ quality of care vis-á-vis arbitration agreements, CMS has provided a
rational justification for that change. As noted above, CMS relied on evidence
suggesting that LTC facilities’ use of arbitration agreements had a larger impact on
residents’ health and safety than had previously been realized. CMS noted comments
“rais[ing] a number of concerns that convinced us that [existing federal and state]
protections are limited and do not protect the unique needs of Medicare and Medicaid
beneficiaries.” Id. at 34,720 (noting that “state laws differ . . . offer[ing] varying
levels of protection” and that residents may not be financially capable of challenging
unconscionable arbitration agreements in court, requiring CMS to step in to further
safeguard residents). Relatedly, CMS determined that the five-year recordkeeping
requirement was necessary to “evaluate quality of care complaints . . . and assess the
overall impact of these agreements on the safety and quality of care provided in LTC
facilities.” Id. at 34,730.
Finally, Northport argues that the change of policy was arbitrary and capricious
because it did not consider LTC facilities’ “substantial reliance interests” on CMS’s
historical arbitration agreement policy. See Fox Television, 556 U.S. at 515 (noting
that an agency may need to provide greater explanation “when its prior policy has
engendered serious reliance interests that must be taken into account”). Specifically,
it argues that LTC facilities have “built their economic and pricing models in reliance
on the prior policy” and that the Revised Rule will require LTC facilities to
-25-
henceforth allocate more money to cover their dispute resolution costs. To begin, we
echo the district court’s reasonable skepticism of Northport’s claimed reliance
interests. Under the Revised Rule, existing arbitration agreements will continue to
be enforceable, and LTC facilities can still enter into arbitration agreements with their
residents and obtain federal funding so long as they comport with the rule’s
requirements. Therefore, the availability of arbitration and any associated cost
savings are largely unaffected by the Revised Rule, and LTC facilities can continue
to rely on historical economic models. But even setting that aside, we find that CMS
reasonably explained the departure from CMS’s prior policy in spite of those reliance
interests. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016)
(noting that an agency need only provide “a reasoned explanation . . . for disregarding
facts and circumstances that underlay or were engendered by the prior policy”
(quoting Fox Television, 556 U.S. at 515–16)). As noted above, the Revised Rule
continues to recognize the advantage of permitting LTC facilities to rely on
arbitration as a fast and economic means to resolve disputes with residents. See 84
Fed. Reg. at 34,722. But CMS also explained that the cost-efficiency and expediency
of arbitration had to be counter-balanced by the need to protect residents by ensuring
that they enter into arbitration agreements voluntarily and in a transparent way. See
id.
We conclude that the Revised Rule reflects CMS’s reasoned judgment in light
of competing considerations, see State Farm, 463 U.S. at 43, and we affirm the
district court’s conclusion that the Revised Rule is not arbitrary or capricious.
D. Compliance with the Regulatory Flexibility Act
Finally, Northport argues that the promulgation of the Revised Rule violated
the RFA. Enacted in 1980 as a “response to the complaints of small business about
the burdens of federal regulation,” see Paul R. Verkuil, A Critical Guide to the
Regulatory Flexibility Act, 1982 Duke L.J. 213, 226 (1982), the RFA requires an
-26-
agency undergoing informal rulemaking to prepare and publish a regulatory
flexibility analysis that details, among other things, the rule’s “significant economic
impact on small entities” and the steps the agency has taken to minimize that impact.
See 5 U.S.C. § 604; see also id. § 601(6) (defining “small entities” to include small
businesses, certain non-profit organizations, and small governmental jurisdictions).
However, an agency may forego the regulatory flexibility analysis “if the head of the
agency certifies that the rule will not, if promulgated, have a significant impact on a
substantial number of small entities.” Id. § 605(b). And central to this appeal, the
certification must be published in the Federal Register “along with a statement
providing the factual basis for such certification.” Id. In reviewing a party’s claim
that an agency violated the “[p]urely procedural” requirements of the RFA, Nat’l Tel.
Coop. Ass’n v. F.C.C., 563 F.3d 536, 540 (D.C. Cir. 2009), we consider whether the
agency made a “reasonable, good-faith effort to carry out the RFA’s mandate.” Zero
Zone, Inc. v. U.S. Dep’t of Energy, 832 F.3d 654, 683 (7th Cir. 2016) (cleaned up)
(quoting U.S. Cellular Corp. v. F.C.C., 254 F.3d 78, 88 (D.C. Cir. 2001)); see Alenco
Commcn’s, Inc. v. F.C.C., 201 F.3d 608, 625 (5th Cir. 2000)); Associated Fisheries
of Maine, Inc. v. Daley, 127 F.3d 104, 114 (1st Cir. 1997); see also 5 U.S.C.
§ 611(a)(1) (permitting judicial review of a claim that an agency failed to comply
with the requirements of, among other provisions of the RFA, 5 U.S.C. § 605(b)).
The parties agree that the Secretary of HHS certified that the Revised Rule
would not have a significant economic impact on a substantial number of small
entities. See 84 Fed. Reg. at 34,734. But Northport argues that CMS failed to
provide the requisite factual basis for that certification. At first blush, it appears that
Northport is correct; CMS seemingly did not provide any evidence or reasoning to
support the certification, let alone make a “reasonable, good-faith effort” to do so.
In publishing the final Revised Rule, CMS provided the following, cursory
explanation of its decision to certify:
The RFA requires agencies to analyze options for regulatory relief of
small entities. For purposes of the RFA, small entities include small
-27-
businesses, nonprofit organizations, and small government jurisdictions.
Most hospitals and most other providers and suppliers [subject to the
Revised Rule] are small entities, either by nonprofit status or by having
revenues of less than $7.5 million to $38.5 million in any 1 year. . . . We
are not preparing an analysis for the RFA because we have determined,
and the Secretary certifies, that this final rule will not have a significant
economic impact on a substantial number of small entities.
Id. Considered alone, this paragraph falls short of other certifications that have
passed muster. See, e.g., Carpenter, Chartered v. Sec’y of Veterans Affs., 343 F.3d
1347, 1356–57 (Fed. Cir. 2003) (upholding § 605(b) certification that clarified that
the rule would not affect small businesses because it “would affect only the
processing of claims by VA” (cleaned up)); Sw. Penn. Growth All. v. Browner, 121
F.3d 106, 123 (3d Cir. 1997) (upholding § 605(b) certification that explained that the
rule “d[id] not affect any existing requirements applicable to small entities nor d[id]
it impose new requirements”).
In response, CMS argues that the required factual basis was provided in the
prefatory statement to the agency’s RFA certification. See 84 Fed. Reg. at
34,733–34. There, the agency noted that the Revised Rule “will increase transpar-
ency in LTC facilities that cho[o]se to use arbitration while, at the same time,
allowing facilities to use arbitral forums as a means of resolving disputes.” Id. at
34,734. It also explained the Revised Rule’s “Overall Impact,” noting that it will
“ensure[] that no resident will be required to sign a pre-dispute, binding arbitration
agreement as a condition for receiving the care he or she needs.” Id. We struggle to
see how these statements provide a factual basis for certifying that the rule will not
have a significant economic impact on a substantial number of small entities.
Although they might describe the Revised Rule’s intended effects, these statements
do not even purport to consider which entities the rule will affect or to what degree.
CMS also argues that the required factual basis for the RFA certification was
provided earlier in the rulemaking process. In the Original Rule, which covered
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significantly more than LTC facilities’ use of arbitration agreements, CMS estimated
that the rule in its entirety would impact less than one percent of LTC facilities’
annual revenues, an insignificant economic impact. See 81 Fed. Reg. at 68,846.
Similarly, in the notice of proposed rulemaking of the Revised Rule, CMS noted that
one of its proposals (ultimately amended for the final rule) would not impose
significant costs or burdens on LTC facilities because it required what was already
a standard business practice. See 82 Fed. Reg. at 26,652 (“We are proposing that
LTC facilities post a notice regarding the use of arbitration agreements in an area that
is visible to residents and visitors. . . . We believe that notices concerning facility
practices are periodically developed, reviewed, and updated as a standard business
practice. We also believe that facilities that are already using arbitration agreements
post some type of notice. Thus, there is no burden associated with the posting of this
notice.”).
Yet CMS has not provided any convincing authority to suggest that an agency
may satisfy its requirements under § 605(b) by relying on factual bases sprinkled
throughout the Federal Register. Indeed, the plain language of the statute suggests
that the certification and corresponding factual basis should be supplied by the
agency in tandem. See 5 U.S.C. § 605(b) (“If the head of the agency makes a
certification . . . , the agency shall publish such certification in the Federal Register
. . . along with a statement providing the factual basis for such certification.”
(emphasis added)). And the cases cited by CMS do not establish that we may
consider the “entire administrative record,” expansively defined to include the record
of a precedent rule, to determine that CMS satisfied its procedural obligations under
the RFA.
For example, CMS relies upon Michigan v. Thomas to argue that we must
analyze Northport’s RFA claim in “the context of [CMS’s] overall rulemaking
analysis.” 805 F.2d 176, 188 (6th Cir. 1986). But in Thomas, the Environmental
Protection Agency (EPA) expressly cited in its challenged rule a previous notice that
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categorically certified that rules of that type (i.e., approvals of State Implementation
Plans) would not affect small entities because they stood only to approve state
regulations already in place. Id. at 187–88; see also Council for Urological Interests
v. Burwell, 790 F.3d 212, 227 (D.C. Cir. 2015) (upholding certification as sufficient
where HHS expressly incorporated the rule’s preamble into its RFA analysis).
Similarly, CMS relies upon Carpenter, Chartered v. Secretary of Veterans Affairs to
argue we must assess compliance with the RFA “in view of the record as a whole,”
including the administrative record of the Original Rule. 343 F.3d at 1357. But
there, the Federal Circuit found that the Department of Veterans Affairs (DVA)
satisfied § 605(b) because it expressly noted, when certifying that a regulatory
flexibility analysis was unwarranted, that the rule would “affect only the processing
of claims.” See id. at 1356 (quoting 67 Fed. Reg. at 36,104). Moreover, the court
looked to the record as a whole not to find whether the DVA provided a factual basis
at all but rather to assess whether the DVA’s certification was reasonable in light of
the factual basis it provided. See id. at 1357. California Farm Bureau Federation v.
U.S. E.P.A. is similarly not on point. 72 F. App’x 540 (9th Cir. 2003). There,
although the court mentioned in passing that the EPA’s certification “was supported
by [the] EPA’s earlier impact analysis,” it more importantly noted that the EPA
provided a factual basis along with its certification that the rule would not have a
significant economic impact on a substantial number of small entities. Id. at 541
(noting that the “EPA reasoned that few agricultural operations that qualify as a small
business for purposes of the Act will also qualify as a major source of pollution,” the
subject of the challenged regulation).
Thus, looking to the Revised Rule and the certification provided therein, we
conclude that CMS failed to comply with the procedural requirements of the RFA.
However, we conclude that such an error is harmless. See Env’t Def. Ctr. v. U.S.
E.P.A., 344 F.3d 832, 879 (9th Cir. 2003); cf. Nat’l Mining Ass’n v. Mine Safety &
Health Admin., 512 F.3d 696, 701 (D.C. Cir. 2008) (finding that the agency did not
need to certify under § 605(b) that an alternative method of compliance did not create
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a significant economic burden on small businesses because the agency had already
determined that the primary method of compliance did not). “Failure to comply with
the RFA may be, but does not have to be, grounds for overturning a rule.” Cement
Kiln Recycling Coalition v. E.P.A., 255 F.3d 855, 868 (D.C. Cir. 2001) (cleaned up).
In granting relief for a violation of the RFA, we may take corrective actions,
including “remanding the rule to the agency” to conduct a regulatory flexibility
analysis under § 604(a) or to properly certify that such an analysis is unwarranted
under § 605(b). 5 U.S.C. § 611(a)(4)(A). But such a remedy is unnecessary because,
as a factual matter, the Revised Rule unquestionably has less of an economic impact
than the Original Rule had.
Recall that the Original Rule entirely prohibited LTC facilities from entering
into pre-dispute, binding arbitration agreements with residents. See 81 Fed. Reg. at
68,690. In promulgating the Original Rule and pursuant to the RFA, CMS certified
that the entire rule—encompassing not only the arbitration prohibition but also
regulations impacting, among other things, resident rights, nursing services, food and
nutrition services, and infection control—would not result in a significant economic
impact to LTC facilities, costing them less than one percent of their annual revenue.
See 81 Fed. Reg. at 68,846; see also id. at 68,844 tbl.5 (breaking out by category the
estimated costs to LTC facilities attributable to the Original Rule’s regulations). In
contrast, the Revised Rule permits LTC facilities to enter into arbitration agreements
with residents so long as they meet the rule’s other requirements, allowing facilities
to reduce their overall costs by using arbitration as a means of dispute resolution. See
84 Fed. Reg. at 34,733–34. Accordingly, the Revised Rule lessens whatever financial
burden was placed on LTC facilities by the Original Rule, an obvious factual basis
for CMS’s certification that the rule will not have a significant economic impact on
a substantial number of small entities. See 5 U.S.C. § 605(b).
Therefore, although CMS failed to provide a factual basis in support of its
§ 605(b) certification in the Revised Rule, we conclude that failing to do so was
harmless error.
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III. Conclusion
For the foregoing reasons, we affirm the district court’s grant of summary
judgment in favor of HHS and CMS.
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