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Based on federal law providing for state regulation of insurance, the Washington Supreme Court held that the Federal Arbitration Act (“FAA”) does not preempt a Washington regulation that precludes health care providers and insurers from resolving their disputes through mandatory and binding arbitration.
In Kruger Clinic Orthopaedics, LLC v. Regence Blueshield, 138 P.3d 936 (Wash. 2006), Kruger and Regence entered into an agreement whereby Kruger would provide health care services to Regence’s insureds on a fee-for-service basis. The agreement provided for mandatory arbitration with a binding result. When Regence reduced Kruger’s rates, Kruger sued for breach of contract. Regence moved to compel arbitration.
The arbitrability question revolved around the interplay of three laws: (i) a Washington regulation that prohibits insurers from requiring health care providers to use ADR “to the exclusion of judicial remedies,” Wash. Admin. Code 284-43-322(4); (ii) the FAA; and (iii) the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), which provides: “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 . . . unless such Act specifically relates to the business of insurance.” According to the Court’s interpretation, the Washington regulations “were intended to authorize some preliminary form of nonbinding ADR.”
In deciding whether McCarran-Ferguson applied, the Court concluded that the regulation and underlying statute were enacted “for the purpose of regulating the business of insurance” because “[i]n regulating the carrier-provider relationship, [they] protect, at least indirectly, the promises that carriers make to their insureds.” Accordingly, the Court held that the McCarran-Ferguson Act shielded the regulation from FAA preemption.
Turning to the issue of whether the parties’ arbitration clause could be enforced, the Court found that the clause violated the regulation by excluding judicial remedies. The limited judicial review available under the Washington Arbitration Act, the Court concluded, was not a “judicial remedy” within the meaning of the regulation. Had the agreement called for nonbinding arbitration, however, it would have survived.
Washington’s regulation represents an approach that has been rejected by states that are embracing ADR as a means of resolving disputes between health care providers and insurers. California just passed a bill providing that “[e]ach contract between a health insurer and a provider shall contain provisions requiring a fast, fair, and cost-effective dispute resolution mechanism under which providers may submit disputes to the insurer.” S.B. 367, 2005-06 Reg. Sess. (Cal. 2005).
Last January, a member of the New Jersey Senate introduced a bill that would require “every contract for the provision of health care services between a hospital and a health insurance carrier” to provide for binding arbitration of “any contractual dispute arising between the hospital and the carrier.” See S.B. 686, 212 Leg., 1st Ann. Sess. (N.J. 2006).
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