July 01, 2011
7 min read

Arbitration clauses: Beware of wolves in sheep’s clothing

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B. Sonny Bal, MD, JD, MBA
B. Sonny Bal
Lawrence H. Brenner, JD
Lawrence H. Brenner

Alternative dispute resolution refers to legal techniques designed to resolve conflicts between parties, particularly in scenarios where traditional litigation may not be an optimal means for such. One form of alternative dispute resolution (ADR), namely arbitration, is of interest to physicians and insurance companies as a means of reducing costs and avoiding jury trials.

According to the U.S. Department of Justice, Bureau of Justice Statistics, the average judgment in medical malpractice cases ($400,000 as of 2005) was far higher than in other tort cases. The U.S. Department of Health and Human Services reported that in 2006, there were almost 300,000 active medical malpractice cases, with 16,000 new cases filed per year. Medical malpractice litigation costs have grown, contributing an estimated $246 billion to the legal industry every year.

Tort reform

Tort reform is a hot button issue at the federal and state level, specifically as a way to cap noneconomic damages. Some parties strongly favor passage of tort reform; others are just as strongly opposed to it. Given the vagaries of politics and unpredictability of the implementation of meaningful tort reform, physicians, insurers and hospital systems are increasingly attracted to ADR as a tool to curb the rising costs of dealing with medical malpractice allegations.

David H. Sohn, JD, MD

“Physicians, insurers and hospital systems are increasingly attracted to ADR as a tool to curb the rising costs of dealing with medical malpractice allegations.”
— David H. Sohn, JD MD

Pretreatment arbitration clauses are especially of interest in health care. Essentially, these are contractual documents that patients have to sign, as a condition of obtaining elective care. The patient agrees to forego litigation, and instead arbitrate any future malpractice claims. Such clauses may be constructed by the physician, but are more likely to be pushed by either the hospital or insurance companies. For example, many HMOs in California include pretreatment arbitration clauses when patients sign up to be covered by a plan.

Benefits of arbitration

Discuss in OrthoMind
Discuss in OrthoMind

The benefits of arbitration over litigation are noteworthy. During arbitration, disputants argue their respective positions before an arbitrator, or arbitration panel instead of a judge and jury. The arbitrator issues judgment and that judgment is binding upon both parties. Mediation of conflicts is a somewhat different technique, in which the judgment of the mediator is not binding on the parties. Arbitration is not as formal as a jury trial. Rules of procedure are streamlined, and the attorney fees are much less than those associated with a court trial. It has been estimated that attorneys spent only 3.5 hours on average when preparing for mediation vs. 36 hours when preparing for trial.

Jury trials can be frustrating for physicians who view them with skepticism, in terms of the perceived limitations of lay jurors to understand the nuances of medical practice and proportionately determine the damages that flow from medical injuries. Arbitration takes the matter out of a jury’s hands. The arbitrator is likely to be someone with a scientific background, who can presumably understand the allegations and facts and come up with a predictable outcome.

Monetary saving from ADR can add up. While the average award for a jury verdict in favor of a plaintiff in a medical malpractice case is $400,000, the claim paid by one Colorado/Nebraska insurer after switching to an ADR program was $5,293 per claim. When the Children’s Hospital in Atlanta switched from a litigation model to ADR, an average saving of $52,000 was realized per case. The University of Pittsburgh Medical Center instituted a formal mediation program in 2004, and to date, has realized more than $1 million in savings.

Is it time for ADR?

While arbitration clauses have been attacked by consumer groups as antithetical to the otherwise collaborative physician-patient relationship, they have generally been upheld in court. Courts view contracts between parties favorably, and arbitration clauses are usually viewed as such. California, which faced a malpractice crisis in the 1970s, has allowed arbitration clauses with health care providers for the past 30 years. Michigan has similarly instituted arbitration in medical malpractice since the 1980s, and its statutes have survived appeal. In Estate of Ruszala v. Brookdale Living Communities, the New Jersey court said that arbitration agreements may be upheld even though a 2003 New Jersey Statute specifically barred such agreements. The court reasoned that conflicting state law was preempted by the Federal Arbitration Act. Similar court rulings have been made by the Supreme Courts of Illinois and Missouri.

Is arbitration the answer?

Arbitration clauses are not the entire answer though. Although it might appear that doctors would always favor arbitration over litigation, this is not always true. One particular reason is related to the point that this column has raised many times; namely, the very difficult distinction between the concepts of negligence vs. adverse outcomes. A successful plaintiff in a medical malpractice case has to show that the doctor fell outside the standard of care, and not simply that something untoward happened. All doctors know that while falls, death, infection, bleeding and nerve injury can be related to professional negligence, these things can also occur because of patient body habitus, comorbidities, social habits and noncompliance.

As such, physicians view lawsuits as a means by which unhappy patients seek money whenever something goes wrong. It has been estimated that only about 15% of all medical malpractice lawsuits filed actually contain evidence of physician negligence.

As an example, infections occur despite the exercise of due diligence; they are what our profession calls an “expected complication” and they can result in serious morbidity. The injured patient may seek money for wages lost, medical bills, and increased pain and suffering, even though there is no negligence on the part of the physician. Cases like this stand little chance of success, but still clutter the court dockets. More than 80% of all medical malpractice cases are found to contain no negligence on the part of physicians, and 61% are summarily dismissed by the courts prior to actual trial.

Mandatory arbitration clauses

The problem for doctors bound by mandatory arbitration clauses is that the insurance carrier may compel settlement of relatively meritless cases, even though the doctor is confident of his or her innocence. Recall that unlike mediation, arbitration is mandatory and binding on both plaintiff and defendant. The benefit for the malpractice insurance company expediency and financial savings; these goals may not always be congruent with the physician’s best interest as a defendant. The insurance company faces no stigma and could even use the settlement as excuse to bump up the malpractice premiums.

For the hapless defendant physician in the above scenario, while conflict resolution may be expedient, a settlement is still akin to an adverse judgment. To wit, all arbitration awards become part of the physician’s permanent record in the National Practitioners Data Bank (NPDB). This record impacts the physician’s ability to seek privileges at new hospitals, obtain medical licenses in new states, and negotiate or even obtain insurance coverage in the future. While arbitration leads to lower monetary rewards to the plaintiff, interestingly, it is also associated with higher rates of culpability for the physician defendant. Physician skepticism of jury trials aside, it is a fact that jurors are extremely deferential to physicians; the court system may in fact be a protective mechanism for the innocent and wrongly accused physician.

Mediation as ADR

Mediation is another ADR tool. It differs from arbitration in that medication is non-binding. A neutral, third-party mediator attempts to douse the fire before disputants resort to litigation. In mediation, neither the patient nor the doctor gives up the claim to a jury trial. Mediation avoids the adversarial environment, promotes communication, fosters peace of mind, and is generally more satisfying to parties since all issues can be vented.

Mediation allows the doctor to get a feel of the relative merits and related nuances of the allegations, to avoid the stigma of a report to the NPDB and to see if the patient is confusing negligent conduct with an adverse event that was unavoidable. Another twist on mediation is to use a group of mock jurors and use the views of this group to get a sense of how things might go at trial, if parties were to choose that route.

Mediation is formatted such that a neutral third party hears both sides of the story. More importantly, both parties have an opportunity to listen to the other sides’ perspective. Many forms of mediation do not even use attorneys. Arbitration, on the other hand, is a step removed from a trial, with a judge hearing arguments from each side’s attorney.

Arbitration is more hostile in this sense, more expensive than mediation, and probably more corrosive to the physician-patient relationship. Accordingly, most experts promote mediation in cases where parties want to preserve the doctor-patient relationship. Also, mediation allows more flexible, customized settlement solutions.

A relative disadvantage of jury trials as well as arbitration is that both forums offer monetary award as the only form of restitution. But, many injured parties do not sue for money. Research has shown that money, in fact, ranks third among plaintiffs’ interests in medical malpractice, behind an explanation for what happened, an apology and the assurance that system changes are made to avoid future errors. Mediation is the perfect venue for a range of settlement options; parties are much more likely to gain internal satisfaction at the outcome, since mediation can properly address multiple needs.

Encourage options

Alternative dispute resolution may offer encouraging options to address medical malpractice costs and foster efficiency, while addressing the underlying needs of disputants. But, binding arbitration cuts both ways. Even if the physician defendant is confident that no negligence was involved, an adverse report to the NPDB may be triggered. Physicians should exercise caution before embracing binding arbitration clauses – mediation may be the preferable alternative. The ability to opt out and have the option to resort to litigation may well out in favor of the physician, and mediation leaves the door open.

What do you think? Join your partners in the discussion of these questions on www.OrthoMind.com.


1. Would you be more willing to use ADR if settlements were not reported on the NPDB?

2. Would you prefer binding arbitration or nonbinding mediation clauses between you and your patients?

3. How about between you and your malpractice insurance carrier?

  • B. Sonny Bal, MD, JD, MBA, is associate professor of hip and knee replacement in the department of orthopedic surgery, University of Missouri School of Medicine.
  • Lawrence H. Brenner, JD, is on the faculties of orthopedics at Yale University and the University of Southern California and practices in Chapel Hill, N.C. Address all correspondence to Brenner at lb@lawrencebrennerlaw.com.
  • David H. Sohn, JD, MD, is assistant professor in the department of orthopedic surgery, division of sports medicine at the University of Toldeo College of Medicine.