Arbitration: Refusing to Compel, Washington State's Top Court Says Insurer Can't (Web)

In Kruger Clinic Orthopaedics LLC v. Regence Blueshield, No. 7619-0,76886-2, 2006 WL 1971702 (Decided July 13, 2006)(avalable at www.courts.wa.gov/opinions/index.cfm?fa=opinions.opindisp&docid=767190MAJ), the Washington Supreme Court held that a statute and a regulation prohibiting health insurance carriers from requiring alternative dispute resolution were not preempted, and reversed lower courts’ enforcement of arbitration provisions in agreements between the insurer and providers.

The Washington state statute and regulation were not shielded from preemption by the Federal Arbitration Act, because, under the McCarran-Ferguson Act, they regulate “the business of insurance.”
Regence, a Washington insurance carrier, entered into a provider agreement with Kruger Clinic Orthopaedics and with Tacoma Orthopaedic Surgeons Inc. and others, referred to below as the Tacoma providers. Both medical provider companies are Washington corporations.

In early 2000, Regence notified Kruger that Kruger would have to accept a reduction in pay rates. Kruger objected, noting that Regence payed higher rates for the same services to other similarly situated providers. In addition, the opinion states, Regence refused to reimburse Kruger for the cost of implant materials essential in certain surgeries.

After Kruger's informal efforts to resolve the underpayment issues had failed, it brought a breach of contract action against Regence. Regence moved to compel arbitration pursuant to their agreement. The Snohomish County, Wash., Superior Court denied Regence's motion, and Regence appealed.

A state appellate court reversed, holding that the arbitration agreement was valid and enforceable. The Court determined that the FAA governed the arbitration provision's validity; that the provision was not procedurally unconscionable; and that despite “some substantively unconscionable terms” in the provision, those terms were severable, permitting enforceability of the remainder of the arbitration provision. Kruger Clinic Orthopaedics L.L.C. v. Regence Blueshield, 123 Wash.App. 355, 98 P.3d 66 (2004).

In a separate action, the Tacoma providers filed class action against Regence alleging breaches of agreements. A Pierce County, Wash., Superior Court granted Regence's motion to compel arbitration. The appeals court affirmed.

The Supreme Court granted review in each case and consolidated the cases.
The Washington regulation provides: “Carriers may not require alternative dispute resolution to the exclusion of judicial remedies; however, carriers may require alternative dispute resolution prior to judicial remedies.” WAC 284-43-322(4).

Kruger and the Tacoma providers contended that the arbitration provisions in their agreements with Regence violated the regulation because “they effectively eliminate ‘judicial remedies,’” according to the opinion.

Challenging the Washington appellate court's decision that the FAA preempted the regulation and state statute, Kruger drew on the McCarran-Ferguson Act. It provides that “no Act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance, . . .”

The Washington Supreme Court, in a unanimous opinion by Justice Susan Owens, held that the McCarran-Ferguson Act shielded the statute and regulation from FAA preemption. The WAC regulation and the statute, RCW 48.43.055, prohibit health insurance carriers to impose a binding form of dispute resolution on health care providers. The Regence provider agreement’s binding dispute resolution provision eliminated the providers' right to seek judicial remedies.

While the regulation provides that a carrier's contract cannot prohibit a party from judicial remedies, the contract may require the parties to initially attempt to resolve disputes through some form of ADR. But the arbitration provisions in the case violate the statute and regulation because they require binding arbitration and allow only the limited judicial review permitted under the Washington Arbitration Act.

-- Zoltan Elek, CPR Intern