N.D.Cal.: Medicare preempts state arbitration rules

A California federal district court held that the Medicare Act preempts a California statute imposing notice and disclosure requirements for contractual arbitration clauses, as applied to a Medicare Advantage (MA) plan. Clay v. Permanente Med. Group, Inc., 2007 WL 4354273 (N.D.Cal. Dec. 14, 2007) (No. 06-7926 SC).

                 The court held that the preemption provision of the Medicare Act, as amended in 2000 and 2003, expressly preempts regulations of Medicare Advantage plans, including plan agreements (like the one in this case) that are approved by the Centers for Medicare & Medicaid Services (“CMS”). Accordingly, the court enforced the plan agreement’s arbitration clause and stayed all the plaintiffs’ state tort and statutory claims pending arbitration.

 

                The plaintiffs were the widow and grown children of Rodney Clay. They alleged that the defendants, who administered a Medicare Advantage plan in which Mr. Clay was enrolled, caused his death by repeatedly delaying a kidney transplant. They alleged claims on behalf the estate and themselves based on fraud, negligence, breach of contract, infliction of emotional distress, and California business laws.

 

                    The defendants sought to enforce the plan agreement’s mandatory arbitration clause under California law, but the plaintiffs contended that the clause violated the notice and disclosure requirements of Cal. Health & Safety Code § 1363.1. The defendants removed to federal court under the Federal Arbitration Act, and argued that the California arbitration rules are expressly preempted by the Medicare Act, 42 U.S.C. § 1395w-26(b)(3) (stating standards under the Act “shall supersede any State law or regulation (other than State licensing laws or State laws relating to plan solvency) with respect to MA plans”).

 

                    The court first determined that the events giving rise to the suit, including the execution of the arbitration provision, took place in 2004, and therefore “the applicable version of the Medicaid Act is that which took effect in June of 2004,” including the above-cited preemption provision.

 

                    The court noted that among those standards set out by the Medicare Act for MA plans, and therefore having preemptive effect under § 1395w-26(b), are standards for “marketing materials and election forms” and for plan disclosures. Per 42 C.F.R. § 422.80, the plan agreement Mr. Clay received and signed is considered “marketing material” that must be approved by CMS, as occurred in this case.

 

                    Therefore, the court stated that any state law purporting to regulate the sufficiency of that agreement is invalid, including the California arbitration law as applied to MA plans. In addition to the preemption provision itself, the court cited the Conference Report accompanying the 2003 Medicare amendments, which it said showed that “Congress intended to broaden the preemptive effects of the Medicare statutory regimen, and that it intended to apply the new rules to all subsequent litigation.”

 

                    The plaintiffs relied on a 2002 state court decision that, “on very similar facts,” applied implied preemption principles and rejected preemption of the state California statute. See Pagarigan v. Sup.Ct. of Los Angeles Cty., 102 Cal.App. 4th 1121 (Ct.App. 2002). The district court distinguished this case, however, on the ground that it was decided before Congress enacted the express preemption provision invoked in this case.

 

                    The court went on to apply the arbitration clause, relying on California law to determine its scope. The court ultimately determined that the clause applied not only to the plaintiffs’ claims on behalf of Mr. Clay’s estate, but also to their claims on their own behalf. Accordingly, the court ordered the plaintiffs to submit all their claims to arbitration and stayed the federal action.