When the DeVos Department of Education (ED) released its proposed regulation reversing a litany of consumer protections for student loan borrowers from the Obama-era borrower defense rule, one of the critical protections it proposed to remove was the ban on pre-dispute forced arbitration in college enrollment contracts. ED’s arguments for doing so, all deeply flawed, hinge on claims that the Federal Arbitration Act (FAA) precludes such bans; that students would be better off with mandatory arbitration, because it is faster and cheaper; and that it was too much to even ask schools to submit records on arbitral proceedings to the department. Such arguments were unsupported by, and in conflict with, evidence on arbitration clauses in consumer contracts.
Outside of ED, other corners of the Trump administration seem to agree with those critiques. This past week, officials just a few doors down at the Department of Health and Human Services (HHS) finalized a rule on an arbitration-related regulation that reaches a conclusion contradictory to ED’s. The latter rule received sign-off from White House officials at the Office of Management and Budget (OMB), where it went through the same final review process that ED’s proposed regulation is receiving this month—the last step before it, too, can be finalized.
The reasoning that OMB relied on in finalizing the HHS rule contradicts the DeVos department’s proposal.
A Disunified Front
Last week, HHS finalized its plans to water down a parallel Obama-era provision that prohibits long-term care facilities (nursing homes) that accept Medicare and Medicaid dollars from including arbitration provisions when people sign contracts to be admitted to the facility. The new HHS regulation removes critical consumer protections by allowing for “voluntary” arbitration provisions. This reduces the protection to a reliance on transparency in informing future residents about such agreements, which leaves the door open for coercive treatment. But HHS didn’t completely roll back this Obama-era rule, as it had initially proposed to do: the final rule explicitly does not allow for admittance to, or continued enrollment in, the facilities to be conditioned on agreeing to pre-dispute arbitration provisions.
In other words, this new rule maintains HHS’ Obama-era ban on requiring patients to agree to arbitration before a dispute arises. HHS logic in maintaining “voluntary” provisions is flawed; however, at the same time, their reasoning behind retaining the prohibition on required pre-dispute arbitration clauses severely undercuts statements made by ED in their proposal to reverse the arbitration ban in college enrollment contracts.
Rejecting DeVos’ Arguments
The legal and policy questions in each regulation are similar. In both cases, a federal agency is providing the dollars for usage at certain service providers—in one case, health care services, and in others, educational services—and creating rules in the agreements with those providers around how they must treat consumers participating in the program. However, the final HHS regulation comes down on the exact opposite side from ED on several key legal and policy considerations. The Department of Education, and OMB—where the rule now resides for review by White House officials—should take notice.
However, the final HHS regulation comes down on the exact opposite side from ED on several key legal and policy considerations.
First, HHS acknowledges that an agency effort to include specific regulations around voluntary participation in a federal program is not in conflict with FAA rules around disfavoring arbitration in commercial contracts. Specifically, they state that “the FAA is concerned with general commercial contracts, whereas these rules arise under the Medicare and Medicaid statutes. The Medicare and Medicaid statutes explicitly grant the Secretary authority to ensure the protection of Medicare and Medicaid beneficiaries. Thus, this rule addresses a set of concerns that are unrelated to the reasons behind the FAA, as well as the statutory provisions contained within the FAA.” The Obama-era borrower defense regulations similarly point to the broad authority that the Higher Education Act gives to “impose conditions on schools that wish to participate in a Federal benefits program.” The DeVos Department of Education, in contrast, makes broad statements in its proposed reversal about the FAA, citing a vague “reexamination of the legal landscape” since publication of the 2016 rule to try and excuse their reversal.
Next, HHS acknowledges the potential harm of such clauses, stating that while their rule modifies the original provisions regarding pre-dispute, binding arbitration clauses, that they “remain mindful of the comments claiming that these agreements potentially harm residents,” and that “there are also disadvantages to arbitration,” including the fact that it “is not always faster or less expensive … In some cases, the costs associated with settling a dispute through arbitration could exceed those if the dispute was settled through judicial proceedings, especially for the resident or his or her representative.”
The Department of Education makes conclusory statements stating the opposite. In their proposed regulation, they claimed that “[arbitration] may also allow borrowers to obtain greater relief than they would in a consumer class action case,” but provided no evidence to back up that claim, or to refute the research to which the original ban cited. Consumers obtain relief in just 9 percent of disputes in arbitration, and when they lose, they pay for more of the costs. Research does not support the Department of Education’s claims, and their colleagues over at the Department of Health and Human Services realize that.
Finally, HHS also acknowledged the importance of record-keeping when arbitration is utilized. In this case, HHS defended its requirement that long-term care facilities keep any signed agreement resulting from arbitration for inspection by the agency, arguing that because “there are no public records when a dispute is settled through arbitration,” the records would be important to allow them to evaluate the quality of the facility and “assess the overall impact of these agreements on safety and quality of care.”
The DeVos Department of Education did away with the requirement to keep arbital records, a rule created by the Obama administration for similar reasons cited by the Trump HHS, simply by declaring that it would be “burdensome to schools and the Department to require submission of arbitration documentation.”
The DeVos Education Department provides no evidence to support its change in policy from banning pre-dispute arbitration provisions. And HHS similarly relied on conclusory reasoning in removing its own ban on voluntary pre-dispute arbitration clauses in long-term care contracts. But it is notable that even while watering down consumer protections, regulators at HHS, and White House officials who did the final review of the rule, felt that entirely removing such a ban went too far, and their reasoning as to why undermine claims made by the DeVos team.
Perhaps it has become too much to expect that this administration retain any sort of consistency in its regulatory arguments, but it should not be.
Perhaps it has become too much to expect that this administration retain any sort of consistency in its regulatory arguments, but it should not be. OMB should reject the DeVos department’s initial proposal and maintain Obama-era protections.