Arbitrate, not litigate: A growing and popular alternative to lawsuits

More doctors and insurers are looking to binding arbitration in lieu of the costly court system. But will the contracts stand judicial scrutiny?

By Amy Lynn Sorrel — Posted Aug. 27, 2007

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After being sued three times -- fortunately winning each case -- Ridgewood, N.J., ob-gyn Ruth J. Schulze, MD, searched for another way to prevent the threat of what could be that one career-ending lawsuit. She also wanted a way to temper unaffordable medical liability insurance premiums that forced her nearly two years ago to cut her practice to just gynecology.

Her answer: In January, she began using binding arbitration contracts with her patients. "[It] says, 'Here, let's talk honestly, let's say you and I can agree we are entering into a contract together. And if something goes wrong, instead of running down the road to an attorney, let's discuss what went on,' " Dr. Schulze said.

Ninety percent of her patients have no problem signing the contracts, which her staff present along with other routine paperwork, she said. Dr. Schulze continues to treat those who do not agree to sign, but won't perform surgery, unless it's an emergency situation. Instead, she refers those patients to a colleague.

Dr. Schulze is not alone. Insurance industry and legal experts say physicians' use of binding arbitration agreements is becoming a popular alternative to the costly court system, particularly in states where tort reform efforts have not been successful.

In addition to some insurers promoting the idea, the North Carolina Legislature in July passed a $1 million cap on noneconomic damage awards in medical liability cases that would apply only if the parties agree to binding arbitration. At press time, Gov. Mike Easley had not signed the measure, supported by the North Carolina Medical Society and the North Carolina Academy of Trial Lawyers. But he was expected to sign it by the end of August. In Florida, where excessive jury awards drive up rates, many doctors have chosen to go without insurance, and frequently use arbitration contracts, experts say.

Efficiency and open dialogue

Proponents tout arbitration agreements primarily because they save time and money, and give both parties more control over the process. While a typical jury trial takes an average of two weeks, arbitration can resolve a dispute in an average of three to five days, experts say. That means less-expensive legal fees, which translate to lower premiums for doctors and a higher percentage of an award for patients.

"It's simply a more rational forum," said Keith Maurer, director of health care and insurance alternative dispute resolution services for the National Arbitration Forum, a Minneapolis-based private organization that provides dispute resolution services.

Arbitrators tend to be more knowledgeable than a jury, and the proceedings are private and the results confidential, away from the media's eye, Maurer said. Parties also have the flexibility to schedule a hearing, choose a venue, add discovery provisions, and decide whether to use a panel of three arbitrators or one neutral one appointed by an impartial service.

Some insurers give their members the option to use arbitration with their patients. Others require it.

Dr. Schulze said she has seen a 50% drop in her liability insurance rates since she switched to Obstetricians & Gynecologists Risk Retention Group of America earlier this year. The Montana company mandates that its insured doctors, in most circumstances, use binding arbitration with their patients before treating them beyond the first visit. Industry experts say that trend is catching on among risk-retention groups as a way to reduce premiums for their members.

OGRRGA President Eugene Rosov said the agreements, yet to be invoked, do more than just that. They also help open the lines of communication with patients, and better address the complexity of medical liability cases, he said. The proceedings tend to be less emotional than those in a courtroom, Rosov added.

Meanwhile, the Calif.-based Cooperative of American Physicians Inc.-Mutual Protection Trust has offered binding arbitration to its members for 20 years, and 47% of its 9,400 members use it voluntarily, said Gordon Ownby, company general counsel. The physician-owned professional liability company saves 30% in defense costs on claims that are arbitrated versus those that go through trial, he said. Patients agree to sign the agreement about 90% of the time. Still, "many physicians are hesitant to introduce the idea of future litigation when bringing in a brand-new patient," Ownby said.

That was the initial reaction for Utah family physician Marshall F. Willis, MD. Now he's using the contracts. "When we started, I was hesitant, because I thought that started the patient relationship on the wrong foot," he said. And 97% of Dr. Willis' patients have agreed to arbitrate disputes, though he continues to treat those that have not signed the contract. His insurer, Utah Medical Insurance Assn., offers him a discount for using arbitration agreements, though Dr. Willis has yet to enforce one.

A question of fairness?

Not everyone is sold on the fact that binding arbitration is a proven way to reduce costs and hassle.

Duke University School of Law Professor Thomas B. Metzloff said that insurers are concerned because experienced arbitrators generally understand the true cost of medical care and tend not to be scared of large dollar awards. Some physicians and insurers also like that doctors have a good track record in the courts, with juries generally favorable to physician defendants, said Metzloff, who specializes in alternative dispute resolution in medical liability cases.

"The concern is arbitrators are going to come up with a compromise decision, in part because they have to get hired in the next case. ... And in medical malpractice cases, you can't make everybody happy," he said.

Some say that while arbitration can be a good alternative to litigation, mandatory, binding contracts unfairly take away due process rights because patients are forced to sign on the dotted line without fully understanding the ramifications.

John Bowman, a lobbyist for the American Assn. for Justice, a trade group for trial lawyers, said the contracts are appropriate if entered into freely after a dispute occurs. Instead, he said patients often aren't given a choice when they first want to see a certain doctor, and have no say in the predetermined contract.

Zachary H. Thomas, a Georgia plaintiff lawyer, said that's why his state's law precludes parties in medical liability cases from agreeing to binding arbitration until after a claim arises. It also requires a patient have legal representation before signing.

"The whole idea is, let's just have both sides understand what they are getting into," he said. "It's likely a doctor consulted a lawyer when he drafted the agreement. But if a patient comes in who may not know ... next thing you know, they've given up their rights."

Bowman added that the process can be more of a burden on patients because they have to pay upfront for experts, a lawyer and half of the arbitrators' fees, which can quickly add up to as much as $30,000.

There are other downsides for both parties, warned Jeffrey Segal, MD, founder and CEO of Greensboro, N.C.-based Medical Justice, which provides legal insurance policies to protect doctors from frivolous suits.

Discovery is more limited than in court. Also, rulings are typically final, with no right to appeal. "So a decision is a decision," Dr. Segal said.

Courts weigh in

While binding arbitration is intended to keep doctors out of court, whether the contracts will survive judicial scrutiny is another question.

The Federal Arbitration Act supports the validity of contractual arbitration, trumping any state laws that restrict it, and the U.S. Supreme Court has endorsed the federal statute. But states have the authority to govern the overall fairness and operation of the process, some with specific requirements. That can make it a tricky area, Duke University's Metzloff said.

State courts have both upheld and rejected arbitration contracts, with rulings typically based on how agreements are drafted and presented to patients.

Dr. Segal noted that patients should receive contracts in an elective setting, not in a pressured or emergency situation. The language also should be clear and evident, not buried in the depths of the paperwork. And doctors should be careful about making treatment contingent upon signing an arbitration agreement, he warned.

CAP-MPT's Ownby said, "The courts will look at any efforts to take advantage from the contract or put parties in a different position than without it," such as restricting damages that normally would not be limited in court.

The company's contract allows patients 30 days to review and revoke it, and in 10-point, bold, red type, states that they are waiving the right to a jury trial. Both provisions are required under state law, and arbitration claims also are subject to California's $250,000 statutory cap on noneconomic damages.

Ownby said the California courts have enforced their contracts 90% of the time and, in rare cases, rejected them typically because of language comprehension issues.

Eric S. Poe, a lawyer and spokesman for New Jersey physician-owned insurer NJ Pure, said one reason arbitration may work well in California is because it has a cap and a law regulating contract use. Elsewhere, "if you leave it to each doctor to come up with different forms or different ways to phrase things, giving patients different parameters, it becomes useless," and courts will likely strike the agreements down, he said.

But OGRRGA's Rosov disagrees and believes their contracts will hold up. The company practices "full disclosure," he said. For example, patients can call the company or visit its Web site with questions that a doctor or his or her staff cannot answer. OGRRGA's contract also gives patients 15 days to cancel it. The agreements include a $250,000 cap on noneconomic damages, with no limit on economic damages.

Dr. Schulze said arbitration is a way of doing business like any other, and she made the switch "to feel as if I can regain control of my own practice."

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Writing a good agreement

In addition to seeking legal counsel, experts say physicians using binding arbitration agreements with patients should:

  • Check with medical liability insurance carriers to see if they support binding arbitration agreements.
  • Draft a contract that clearly spells out that the patient is waiving the right to a jury trial; explains under what circumstances arbitration will apply; and outlines well-defined rules as to how the process will go, such as selecting arbitrators and a venue, and setting discovery rules.
  • Avoid contracts that make treatment contingent upon signing an arbitration agreement.
  • Know whether state laws allow parties to enter into a binding arbitration agreement before or after a dispute arises.
  • Give patients ample time to read the contract, ask questions and revoke it within a set time in accordance with state laws.
  • Make sure damage limitations follow state laws.

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Cases at a glance

Are binding arbitration agreements enforceable?

State supreme courts have weighed in with varying opinions on when binding arbitration agreements are enforceable. Here's a look at what some have said.

California Supreme Court, 2007: Agreement upheld. The high court held that an agreement the patient entered into during an initial visit with a chiropractor still applied to a medical liability claim that arose from treatment given two years later for a different condition.

Terry Reigelsperger v. James M. Siller

Mississippi Supreme Court, 2006: Agreement upheld. Justices concluded that the contract at issue in a wrongful death suit gave the patient "a fair opportunity and a proper forum in which to dispute his claims," without limiting his legal rights or potential damages, or the doctor's liability. The court also said the agreement was binding on the deceased patient's beneficiaries.

Kenneth Cleveland, MD and Central Surgical Associates PLLC v. John Mann

Utah Supreme Court, 1996: Agreement rejected. The high court found the arbitration agreement unconscionable because the patient was not given the contract until right before surgery and did not have time to read and discuss it with her physician.

Doncene Sosa v. Lonnie E. Paulos, MD

Tennessee Supreme Court, 1996: Agreement upheld. Justices affirmed that a physician-patient arbitration agreement is not against public policy and "is as advantageous in this relationship as in any other." But the court cautioned that arbitration agreements, in general, must be "closely scrutinized" to determine if they impose oppressive terms on patients.

Beverly Buraczynski v. Edward J. Eyring, MD

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Another alternative

Although Florida voters in 2004 passed a constitutional amendment that caps plaintiff attorneys' fees in medical liability cases, the Florida Supreme Court in 2006 ruled that patients could waive that limit. In response, the Florida Medical Assn. has circulated an alternative legal waiver for doctors to use with their patients, asking them to limit physicians' liability risk if a dispute arises. The document may be used by doctors who are members of both the FMA and their county medical society. The FMA waiver includes clauses that:

  • Ask patients to limit pain and suffering damages against physicians to $250,000, but put no limit on economic damages.
  • Allow patients to cancel the waiver within three business days of signing it.
  • Advise patients that they can seek legal counsel before signing the form.

Source: Florida Medical Assn.

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