Arbitration: An Alternative to Lawsuits

Published May 1, 2004

Few aspects of the health care debate seem to generate more vigorous discussion than the way medical malpractice and other legal disputes are resolved. This is not surprising, because the number of health care lawsuits has grown steadily over the years, and litigation costs have skyrocketed.

Lawsuit-induced premium increases and the costs of resolving legal disputes are passed on to consumers, furthering patient dissatisfaction with America’s health care system. The threat of being sued and the costs that accompany such lawsuits are major impediments to quality care. Medical errors are more likely to go unreported by care providers, because the threat of litigation inhibits open discussion of mistakes and errors.

Resolving Disputes

Arbitration can be a better vehicle for resolving health care disputes. Through a pre-dispute arbitration agreement, patients and providers agree to shift future legal disputes out of the lawsuit system into a fair, inexpensive, and more efficient system. Arbitration does not limit a party’s right to seek redress but simply shifts the resolution of the dispute to a different forum.

Arbitration is good for both organizations and individuals. In the 1995 Allied-Bruce Terminix case, the U.S. Supreme Court noted arbitration’s benefits compared to litigation, including less expense, simpler procedural and evidence rules, less hostility between parties, less disruption of ongoing and future dealings among the parties, and more flexible scheduling of times and places for hearings and discovery.

Despite overwhelming support from the judiciary–and empirical evidence that shows arbitration is fair–some have doubted arbitration’s benefits, basing their views on long-held myths that individuals do not fare as well in arbitration as they do in court. Still others have attempted to prove arbitration is more costly to individuals than litigation.

These suspicions have not held up under reasonable scrutiny. Individuals are not at a disadvantage in arbitration. A number of commentators and researchers have concluded individuals fare at least as well, if not better, in arbitration than in court.

It is also well-settled that overall legal fees in arbitration are generally much lower than litigation. Courts and commentators who have thoughtfully compared overall litigation costs to overall arbitration costs have repeatedly reached this conclusion.

Federal and State Arbitration Law

Most states have enacted laws to govern arbitration in the health care arena. Many state statutes set out specific requirements for arbitration agreements in health care. The Federal Arbitration Act (FAA), however, preempts state laws that are inconsistent with its guidelines.

The FAA was passed to reverse the courts’ bias against arbitration. The Supreme Court has expressly held that the FAA applies to all disputes involving interstate commerce, and that the FAA should be read broadly to require arbitration where the contract contains an arbitration clause. Underlying this policy is Congress’s view that arbitration constitutes a more efficient dispute resolution process than litigation. Federal preemption limits the ability of a state to place onerous requirements on arbitration agreements.

In Doctor’s Associates v. Casarotto, the Supreme Court ruled the FAA preempted a Montana statute that placed state requirements on an otherwise-valid arbitration clause. The Montana statute declared an arbitration clause unenforceable unless the clause was printed in a certain format. Subsequently, other courts have interpreted the FAA as preempting state restrictions regarding either the format or the nature of the arbitration agreement.

Courts have determined that activities in the health care industry constitute interstate commerce because shipping medical supplies, performance of certain laboratory tests, and recruitment of physicians often take place across state lines. Therefore, all arbitration agreements in the industry are subject to FAA guidelines.

Legal Precedent

Courts have repeatedly reaffirmed the role of arbitration in all areas of business and consumer transactions, including health care. In Madden v. Kaiser Foundation Hospitals, the claimant agreed his health plan stipulated that malpractice and all other claims against the hospital would be arbitrated. However, when problems arose, he sued. The California Supreme Court, like courts across the country, dismissed the suit and ordered the claimant to arbitrate the claims.

The Madden court listed several benefits of arbitration, including speed and economy, less-strenuous evidence rules, and simplified procedures. The court specifically noted the cost of medical malpractice arbitration would be considerably less than a similar lawsuit.

In Buraczynski v. Eyring, the Tennessee Supreme Court held arbitration can be as beneficial in the health care industry as in any other industry. The court also found that “arbitration agreements between physicians and patients are not per se void as against public policy.”

Elements of Successful Arbitration

Arbitration agreements have been found to be unconscionable when the agreements are not mutual. Courts will refuse to enforce an agreement, for example, that permits a patient to use only arbitration for dispute resolution while the patient’s physician can sue in a court of law.

Courts also will scrutinize a patient’s prospective costs to determine whether arbitration is fair or unconscionable. Under appropriate circumstances, a portion of the patient’s costs of arbitration must be borne by the health care provider, and in appropriate cases, arbitration must be available without cost to indigent patients. The fee schedules of most major providers of arbitration services, including the National Arbitration Forum (NAF), reflect the guidelines set forth by the courts. The U.S. Supreme Court has recognized the NAF’s Code of Procedure as “a model of fair cost and fee allocation.”

Arbitration providers should not have affiliation with any party to an arbitration. In Engalla v. Permanente Medical Group, Inc., the California Supreme Court held an arbitration process administered by one of the parties leaves that party open to lawsuits alleging misconduct or misrepresentation related to the process, regardless of the neutrality of the arbitrator.

The real importance of Engalla‘s remand for fact-finding on “procedural unfairness” or “fraud” is that susceptibility to such collateral lawsuits obviates much of the value of efficient and rational arbitration. The Engalla opinion itself makes clear that arbitration administered by independent third parties such as the NAF are immune from these attacks.


Arbitration agreements are welcomed in the health care industry. They can serve as the vehicle toward a more rational, efficient, and cost-effective forum in which to resolve health care disputes. After all, we can’t sue our way to better health care.

Keith Maurer is assistant general counsel for the National Arbitration Forum. His email address is [email protected].

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